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31 UCLA L. Rev. 921 (1983-1984)


Section 12(2) of the Securities Act of 1933 provides a securities purchaser with an express cause of action against his seller if the purchaser can establish that the seller used interstate commerce or the mails to offer or sell a security by means of a written or oral communication which misstated or omitted to state a material fact of which the purchaser was unaware. Upon proof of the foregoing, the purchaser is entitled to rescind his purchase or, in the event he no longer owns the security, to recover equivalent damages unless the seller sustains the burden of proving that the seller did not know, and in the exercise of reasonable care could not have known, of the misstatement or omission.

Historically, section 12(2) has been little more than a weak stepsister to the private cause of action for securities fraud implied by federal courts under section 10(b)5 of the Securities Exchange Act of 1934 and rule 10b-5 promulgated thereunder. To the extent that a purchaser alleges misrepresentations or omissions in connection with acquisition of a security, section 12(2) and rule 10b-5 may both provide potential avenues of relief. For many years, however, the interpretative history of section 12(2) remained largely in a state of arrest, eclipsed by the ever-burgeoning volume of litigation brought under rule 10b-5. Lower federal courts became embroiled in the task of delineating the parameters of the private cause of action which they had judicially created under the rule. These courts expansively interpreted rule 10b-5, which became the premier weapon in a plaintiff's arsenal.

In the mid-1970s, however, the Supreme Court began to take a more restrictive approach towards interpretation of the scope of coverage and the protection afforded by the federal securities laws. In the wake of the Court's restrictive opinions on the scope of rule 10b-5, section 12(2) merits new attention.

The cases expanding the concept of who may be primarily liable as a section 12(2) seller and the cases embracing theories of secondary liability significantly broaden the potential reach of section 12(2). Both lines of authority circumvent the privity requirement and widen the circle of potential defendants in a section 12(2) action.

This Article examines the origin, development, and varying rationales of the expanded seller cases and the secondary liability opinions under section 12(2). It then analyzes these decisions under the principles of statutory interpretation used by the present Supreme Court. It concludes that while it may be tempting to relax the privity requirement of section 12(2) in order to recoup for purchasers some of the ground lost under the now tightened rule 10b-5, such an approach is an unwarranted extension of the statute.


Cited in Pinter v. Dahl, 486 U.S. 622, 648 n. 24 (1988)



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