Securities Law Violations
By Richard R. Hammar, J.D., LL.M., CPA
© Copyright 1991, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m29
The subject of church securities is discussed in detail elsewhere.1 In this article, only the potential legal liability of a minister under federal and state securities laws will be considered.
Clergy may expose themselves to legal liability under state or federal securities law in two principal ways: through the sale of church securities without registration under state law as salesmen or agents, and through the use of any fraudulent or deceptive practice in the sale of church securities. These two grounds will be considered in turn.
1. SALESMAN REGISTRATION
The Uniform Securities Act, which has been adopted by a majority of the fifty states, provides that “it is unlawful for any person to transact business in this state as a broker--dealer or agent unless he is registered under this act.”2 Registration typically involves the filing of a detailed application with the state securities commission, payment of the prescribed fee, and, in many states, the successful completion of a securities law examination. The “Church Bond Guidelines,” prepared by the North American Securities Administrators Association (NASAA) and adopted by several states, specify that the Uniform Securities Act requires that:
any person, including an officer or director of the issuer, who wishes to offer or sell church bonds must either be a registered representative of a licensed securities broker--dealer, or alternatively must file for registration as an agent with the administrators of the states in which he intends to sell securities pursuant to section 201 of the Act. This is true even if the church bonds themselves are exempt from registration under . . . the Act. Any person who sells church bonds without compliance with the agent registration provisions of the Act could also be liable under both the civil and criminal sections of the Act.3
Some states exempt the sellers of church securities from the salesman registration requirements.4 The majority, however, require registration—and only a few of these states waive the examination requirement. The NASAA church bond guidelines specify that “an administrator may waive the testing requirements for a securities agent's license, provided, however, that the offering is substantially in compliance with” the church bond guidelines .
Clergy who contemplate making offers or sales of securities should assume that they must register as a salesman until they receive adequate assurance that they are exempt. Even those clergy who do not plan on offering or selling securities directly should note that virtually any promotion of church securities, no matter how indirect, may trigger the salesman registration requirements.
Section 410 of the Uniform Securities Act provides that any person who offers or sells a security in violation of the salesman registration requirement is:
liable to the person buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at the rate of six percent per year from the date of payment, costs, and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security.
Section 410 further provides that the employer of an unregistered salesman is also liable. Thus, both a minister and his employing church will be liable under this section if the minister sells church securities in violation of a salesman registration provision.
Section 409 imposes criminal penalties ranging up to a fine of $5,000 or imprisonment of three years upon any person who “willfully violates” the salesman registration requirement.
2. FRAUDULENT PRACTICES
Section 101 of the Uniform Securities Act and section 17 of the federal Securities Act of 1933 provide that it is unlawful for any person in connection with the offer, sale, or purchase of any security, directly or indirectly
a. to employ any device, scheme, or artifice to defraud,
b. to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or
c. to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Neither the federal Securities Act of 1933 nor the Uniform Securities Act exempts ministers or religious organizations from this provision. Ministers may violate these antifraud provisions by making false or misleading statements about church securities; failing to disclose material risks associated with church securities; manipulating the church's financial records in order to facilitate the sale of church securities; failing to establish a debt service or sinking fund out of which church securities will be retired; making false predictions; recommending securities transactions to investors without regard to their financial situation; inducing transactions that are excessive in view of an investor's financial resources; borrowing money from an investor; commingling investors' funds with one's own personal funds; deliberately failing to follow an investor's instructions; making unfounded guarantees; misrepresenting to investors the true status of their funds; or stating that securities are insured or secured when they are not.
To illustrate, one minister was found guilty of engaging in fraudulent practices when it was established that he failed to disclose to investors of church securities that he had $116,000 in unsatisfied debts; he had incurred $700,000 in unsatisfied debts on behalf of a previous church through the sale of securities; and church financial statements were in error.5
Although a minister may not have intended to defraud investors, that is no defense. A defrauded investor need not prove intent to defraud in order to recover.
Section 410 of the Uniform Securities Act permits a defrauded investor to recover the purchase price of any security purchased plus interest, costs, and attorneys' fees, less the amount of income received on the security. Defrauded investors who no longer own their securities may sue for general damages.
Section 409 imposes criminal penalties ranging up to a $5,000 fine and three years imprisonment for willful violations of the antifraud provisions. In addition, the federal Securities Act of 1933 provides civil remedies for defrauded investors and imposes criminal penalties ranging up to a $10,000 fine and five years imprisonment for willful violations.6
For related information on this topic see the following articles: