Corporate & Securities Law

By Jim Hamilton

Class Members' Claims Did Not Require Proof of Reliance or Causation Under South Carolina Law

A federal district court (D.S.C.) has ruled that potential class members' claims under the South Carolina Securities Act (Act) did not require proof of causation or reliance in order for the plaintiffs to establish that the defendant's conduct predominantly involved questions of law or fact common to the class. In Brown v. Charles Schwab & Co., the plaintiffs sought class certification for their claims that the broker-dealer and custodian for the plaintiffs' Individual Retirement Accounts violated the Act by facilitating a Ponzi scheme operated by an investment adviser. Specifically, the plaintiffs alleged that the potential class members had the same claims against the defendant for materially aiding the adviser's fraudulent sales of unregistered securities and for directly or indirectly controlling a seller of such securities.

The court ruled that claims that the defendant materially aided and controlled the adviser's violations of Sec. 501 of the Act did not require proof of reliance or causation because the language of the statute does not contain the words "reliance" or "causation." Moreover, a prior decision by the South Carolina Supreme Court involving a predecessor statute had reached the same result, as did a Fourth Circuit decision that had addressed a similar provision in the Virginia securities laws. The court found unavailing the defendant's contention that the plaintiffs must prove reliance or causation because claims brought under federal Rule 10b-5, on which the South Carolina statute is modeled, require proof of reliance. The court rejected this argument, reasoning that federal court rulings involving private rights of action under Rule 10b-5 were distinguishable because the federal cause of action is judicially created. Accordingly, the court found that issues common to the potential class members predominated over individual questions of law and fact. As the plaintiffs established the other requirements for class certification under Federal Rule of Civil Procedure 23(a), the court granted the plaintiffs' motion and certified the class.

Full post as published by Jim Hamilton's World of Securities Regulation on December 19, 2009 (boomark / email).