SECURITIES LITIGATION:
THE 1977 MODERNIZATION OF SECTION 33
OF THE TEXAS SECURITIES ACTo
Hal M. BatemanOO
In the last fifteen years securities litigation has developed dramatically
to become a major part of both securities law practice and litigation practice nationwide. Most of the e""plosion of securities litigation over this
period has been based on federal securities litigation rights,l and principally
on SEC rule lOb-5,2 while litigation rights under state law have played a
relatively minor role. Today the balance between federal and state litigation
rights in the field of securities litigation may be in the process of changing
due to the trend of United States Supreme Court decisions since June 19i5
toward limiting the e""panding scope of federal securities litigation rlghts.3
If this proves to be the case, state securities litigation rights and remedies
may play an increasingly important role in securities litigation in the future.
Against this background it is particularly noteworthy that the 1977
Texas legislature substantially revised and modernized section 33 of the
Texas Securities Act to provide all securities litigants in Texas with a substantially more comprehensive and better balanced set of statutory litigation
rights and remedies.4 It is the purpose of this article to review and .malyze
the 1977 revision of section 33 of the Texas Securities Act.
I.
THE BACKGROUND AND CONTE.'\."T OF SECTION
33
In many respects the Texas Securities Acts (Act) is typical of securities
laws found in most of the states today. It provides for registration of
o The author is Q.eeply indebted to the members of the drafting subcommittee
and particularly to its draftsman and reporter, Professor Alan R. Bromberg, of Dallas,
and its chairman, Sam Rosen, Esquire, of Fort Worth, for the e:uensive and pcneb'nting
analyses and memoranda reported to the Securities and Investment Banking Committee on which much of this article is based.
00
Professor of Law, Texas Tech University. B.A., Rice University; J.D., SOUU1ern Methodist University.
The author was a member of the Securities and Investment Banking Committee
of the section on Corporation, Banking and Business Law of tbe State Bar of Texas
throughout the period in which the legislation to revise section 33 was drafted and
enacted, but was not a member of the drafting subcommittee.
1. See Securities Act of 1933. 15 U.S.C. §§ 77a-77aa (1970); Securities E:I:change Act of 1934, 15 U.S.C. §§ 78a-78hb-1 (1970).
2. 17 C.F.R. § 240.10b-5 (1977).
3. See, e.g., Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977); Piper v.
Chris-Craft Indus., Inc., 430 U.S. 1 (1977); Ernst & Ernst v. Hockhelder. 42.5 U.S.
185 (1976); Roundeau v. Mosinee Paper Corp., 422 U.S. 49 (1975); Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723 (1975); United Hous. Foundation v.
Forman, 421 U.S. 837 (1975).
4. See TEX. REv. Cw. STAT. ANN. art. 581, § 33 (Vernon Supp. 1978).
5. TEX. REv. Cw. STAT. ANN. art. 581, §§ 1-39 (Vernon 1964).
839
HeinOnline -- 15 Hous. L. Rev. 839 1977-1978
HOUSTON LAW REVIEW
840
[Vo). 15:839
securities offerings and sales,6 regulation of dealers,7 prohibition of fraudulent activities 8 and both civilD and criminapo sanctions for violations.
Within this statutory framework section 33 of the Act contains all of the
express civil actions created for persons injured by violations of the Act.
Unlike section 410 of the Uniform Securities Act,l1 section 33 of the Act
does not purport to be exclusive and does not prohibit judicial creation
of implied civil actions for violations of the anti-fraud provisions of the
ACt. 12 It is conceivable, for example, that the courts might create implied
private rights of action for violations of section 29C of the Act 13 which
parallels SEC rule 10b-5 in many respects, much as the federal courts
have done with SEC rule 10b-5. H It is commonly believed, however, that
the Texas courts would be far less likely to do so than the federal courts
have been, and no such development has occurred in Texas to date.
The non-exclusive character of section 33 of the Act is considerably
more important with respect to section 27.01 of the Texas Business and
Commerce Code. 1s Section 27.01 creates statutory liability for fraudulent
stock transactions in corporations where the fraud consists of false representations of past or existing material facts or false promises and where
the plaintiff is injured by relying on the false representation or promise. 10
There are several differences between a plaintiffs rights under section
27.01 as compared to those rights under section 33 of the Act, but perhaps
the most important is the fact that the plaintiff under section 27.01 may
be permitted to recover both actual and punitive damages in twice the
amount of the actual damages if the defendant's conduct is willfu),17
A limited form of section 33 was first added to the Texas Securities
Act in 1941. 18 It was amended in 1955 to expand the remedies provided, 10
and in 1963 section 33 was generally revised by legislation sponsored by
the State Bar of Texas which followed in most respects the model of the
6.
7.
ld. § 7.
ld. § 12.
8. ld. § 32.
9. ld. § 33 (Vernon Supp. 1978).
10. ld. § 29.
11. UNIFORM SECURITIES Ac:r § 410.
12.
13.
TEX. REv. ClV. STAT. ANN. art. 581, § 33M (Vernon Supp. 1978).
15.
16.
TEX. Bus. & COM. CODE ANN. § 27.01 (Vernon 1968).
ld. § 29C.
14. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).
ld.
17. ld. § 27.01 ( c). See Bordwine, Civil Remedies Under the Texas Securities
Laws, 8 Hous. L. REv. 657, 670-71 (1971) [hereinafter cited as Bordwinol.
18. 1941 Tex. Gen. Laws, ch. 363, § 1, at 593. The 1941 legislation added
a civil remedy provision which stated that a contract to sell or a sale of securities
in violation of the Act was voidable at the election of the purchaser. Bordwine, supra
note 17, at 659.
19. 1955 Tex. Gen. Laws, ch. 67, § 34, at 344 (repealed 1957); 1955 Tex. Gen.
Laws, ch. 269, § 33, at 600.
HeinOnline -- 15 Hous. L. Rev. 840 1977-1978
1978]
TEXAS SECURITIES LITIGATION
841
Uniform Securities Act section 410.20 However, the legislation proposed by
the State Bar omitted several provisions of section 410 of the Unifonn
Securities Act, and the 1963 legislature in handling the proposal made a
number of significant changes.21 Consequently, the 1963 revision of section
33 as actually enacted contained a number of deficiencies.
During the years between 1963 and 1977 the deficiencies in tbe 1963
version of section 33 were noted by commentators on several occasioos.22
Ultimately it was the combined effect of these shortcomings whielt led to
the 1977 revision. Five primary problems Witll tbe 1963 version of section 33
were central in the development of the legislation which led to the 1977
revision. First, the right of action created by a section 33A(2) for defrauded
buyers of securities contained unusually severe standards for both the plaintiff and the defendant In order to establish a case under section 33A (2) the
plaintiff had to prove not only that he did not know of the untruth or omission allegedly made by the defendant, but also that he had exercised reasonable care in not discovering the untruth or omission.23 Thus the plaintiff
had the burden of proving due diligence, a requirement apparently unique
to section 33A(2).24 On the other hand, the defendant in a suit under
section 33A(2) could only defend by proving either that no material misstatement or omission was made or that the plaintiff did in fact know
of the untruth or omission involved. The defendant was not allowed to
defend himself in a suit under section 33A(2) by proving that he had
used reasonable care and was unaware of tlle untruth or omission. Thus
the defendant had no due diligence defense in a suit under section 33A(2),
but the plaintiff had the burden of proving his own due diligence. Both
standards seem extraordinarily high in the general field of securities fraud
litigation.25
The second major problem \vith section 33 after 1963 related to the
three-year statute of limitations as it applied to suits under section 33A(2).20
20.
1963 Tex. Gen. Laws, ch. 170, § 12, at 473. See TEX. REv. ClY. STAT. tUm.
art. 581, § 33, comment ( Vernon Supp. 1978). The 1963 legislation imposed liability
for violations of the securities registration, prospectus and dealer registration provisions and for material misrepresentations or omissions~. ~owed recovery of damages
if the buyer no longer owned the security; and set limitations at three years from
sale for technical violations and three years from actual or constructive discovery for
misrepresentation or omission. TEX. REv. ClY. STAT. M"N. art. 581-33, comment (1964).
21. 1963 Tex. Gen. Laws, ch. 170, § 12, at 473.
22. See generaUy 2 A. BROllmERG, SECUlUTIES LAw: FRAUD § 8.210-220 (1970);
Bord\vine, supra note 17, at 672-75.
23. 1963 Tex. Gen. Laws, ch. 170, § 12, at 473.
24. See 2 A. BROllmERG, SECURITIES LAw: FRAUD, § 8.4(220) (1970).
25. Compare TEX. REv. Ctv. STAT. ANN. art. 581, § 33A(2) (Vemon 1964)
with the "due diligence" defense found in § 12(2) of the 1933 Act. 15 U.S.C. § 771(2)
(1970).
26. 1963 Tex. Gen Laws, ch. 170/. § 12, at 473. See also TEX. Bus. & CoM. CoDE
M"N. § 27.01 (1968) (two years atter the violation); UNIFORM S£Ct1lUTIES Acr
§ 410( e) (two years from sale, which may be shortened by rescission offer); Securities
Act § 13, 15 U.S.C. § 77m (1970) (one year from violation for registration and
related violations; one year from actual or constructive knowledge of untruth or
omission, with a cutoff at three years from sale).
HeinOnline -- 15 Hous. L. Rev. 841 1977-1978
842
HOUSTON LAW REVIEW
[Vol. 15:839
Section 33 simply provided that the period of limitations was to be three
years from the time of the sale or the time when the plaintiff should have
discovered the untruth or omission in the exercise of ordinary careP As
interpreted this meant that the actual running of limitations might never
commence if the plaintiff, in the exercise of ordinary care, never discovered
the untruth or omission. 28 Thus a defendant exposed to possible litigation
under section 33A(2) might have a contingent liability for an indefinite
period of time.
The third major problem with section 33 prior to the 1977 revision
was closely related to the first two. Section 33 provided that a potential
defendant in certain suits under section 33 might terminate the continuation
of contingent liability to a potential plaintiff by making a rescission offer to
the initial plaintiff pursuant to the terms of the statute.20 However, this
opportunity was not afforded to potential defendants in section 33A (2)
actions.3D Therefore, a potential defendant contingently liable under section
33A(2) for a material misstatement or omission in a sale of securities was
subject to an extremely high standard by being denied any possible due
diligence defense and, at the same time, was exposed to an open-ended
period of limitations and denied the opportunity of making a statutory
rescission offer to the potential plaintiff to curtail the continuation of
contingent liability. These problems ultimately became primary considerations in precipitating the 1977 revision. 3t
The fourth principal shortcoming of section 33 as it was revised in
1963 was the failure of section 33 to provide any statutory right of action
or protection for a defrauded seller of securities, although substantial
protections were provided for defrauded buyers of securities by section
33A(2).32 This imbalance was without apparent justification. A final problem was that section 33, as revised in 1963, failed to include any express
provision defining the liability standards for collateral defendants such as
aiders and abettors or persons in control of the defendant primarily liable
under section 33.33 The 1956 decision of the Texas Supreme Court in
Brown v. Cole 34 broadly interpreted the term "seller" as used in section 33
27. 1963 Tex. Cen. Laws, ch. 170, § 12, at 473.
28. Bordwine, supra note 17, at 672.
29. 1963 Tex. Cen. Laws, ch. 170, § 12, at 473.
30. Id.
31. See generally TEX. REv. CIY. STAT. ANN. art. 581, § 33, comment (Vernon
Supp. 1978).
32. Id. § 33A. Althoulili the Act merely states that "any 'person" who commits
a violation is subject to civil liability, decisions indicate that only sellers of securities
are potentially liable. Ham v. Blankenship, 194 F.2d 430, 431 (5th Cir. 1952)
(decided under the 1935 Act as amended in 1941); Brown v. Cole, 155 Tex. 625, 291
S.W.2d 704, 708 (1956) (decided under the 1935 Act as amended in 1941). SeQ
Bordwine, supra note 17, at 661-62.
33. Section 33A imposes liability on "any person who offers or sells a security,"
without any further elaboration. TEX. REv. CIY. STAT. ANN. art. 581, § 33A (Vernon
1964).
34. 155 Tex. 625, 291 S.W.2d 704 (1956).
HeinOnline -- 15 Hous. L. Rev. 842 1977-1978
1978]
TEXAS SECURITIES LITIGATION
and iDJplied that collateral defendants might be held liable,3!i but section 33
itself ~mained silent on the subject.
'hese shortcomings of section 33 were brought sharply to the attention
of te securities community in the 1974 decision by the United States
Diqi.ct Court for the Northern District of Texas in ClIerb o. Weber, Hall,
Cbb & Caudle, Inc.36 The jury found that the defendant in a suit under
sction 33A(2) had made material misstatements of fact and omitted to
1ake material statements of fact in sales of securities to the plaintiff, but
he jury also found that the defendant had used reasonable care and was
innocently unaware of the untrue statements and omissions.31 On this
verdict the court held that section 33A( 2) did not provide any due diligence
defense for a defendant, and that the defendant was therefore liable notwithstanding a favorable verdict on the due diligence question.:3S This case
precipitated action by the Securities Industry Association which proposed
legislation to create a due diligence defense for dealers in such cases.
Believing that limited piecemeal amendment of section 33 was inadvisable
and that a carefully drafted general revision was necessary, the Securities
and Investment Banking Committee of the Section on Corporation, Banking
and Business Law of the State Bar of Texas persuaded the Securities Industry Association to withhold its proposed legislation and work cooperatively with the committee in drafting a comprehensive revision of section
33, including a due diligence defense for defendants under section 33A(2),
for the 1977 legislature. This became the basis of a cooperative effort
between 1975 and 1977 during which the comprehensive revision of section
33 was drafted by a joint subcommittee with comments and suggestions
from the State Securities Board and the Securities Commissioner and members of his staff in order that the bill developed would not be opposed in
the legislature by the Securities Board. This major undertaking was highly
successful and ultimately produced a proposed bill which was included
in the legislative program of the State Bar of Texas for the 1977 legislature.
The proposed bill, ultimately enacted by the 1977 legislature and signed
by the Governor as Senate Bill 469, became effective on August 29, 1977.
The comprehensive revision of section 33 represents a substantial improvement in many aspects of section 33 and a solution to the five major problems
noted above. However, a number of compromises became necessary in the
course of the cooperative drafting effort which produced the bill. Unlike
the 1963 legislature, the 1977 legislature did not make any subsamtive
alterations in the bill proposed by the State Bar of Texas and developed
35. The court found the defendant, who was a co-purchaser of the ~lle
securities as the plaintiff, to be a seller under the Act because he was n "link in the
chain of the selling process." ld. at 708. See Bordwine, supra note 17, at 662.
36. [1971-1978 Transfer Binder] BLUE SKY L. REP. (CCH) 1.: 71,250, nt 67,865
(N.D. Tex. 1974).
37. ld.
38. ld.
HeinOnline -- 15 Hous. L. Rev. 843 1977-1978
844
HOUSTON LAW REVIEW
[Vol. 15:839
by the subcommittee.
In considering the revision of section 33 it is important to note briefly
the parallel securities litigation provisions in the Federal Securities Acts
and in the Uniform Securities Act. On the federal level the Securities Act
of 1933 creates three express civil actions. Section 12(1) creates liability
for violation of the registration and prospectus requirements of section 5
of the 1933 Act,39 and section 12(2) creates liability for sales by means
of a material misstatement of fact or omission of a material fact. 40 Actions
under both of these sections are subject to a privity limitation requiring
,the plaintiff to prove that he purchased from the defendant. 41 Section 11
of the 1933 Act creates liability for a material misstatement or omission in
a registration statement and contains elaborate provisions defining the
statutory defendants, possible due diligence defenses for certain defendants,
and the absence of a privity limitation on the potential plaintiffs.42 These
three statutory rights of action are subject to a statute of limitations, in
section 13, of one year after the transaction or the time the plaintiff should
reasonably have discovered the untruth or omission, but no more than
three years after the transaction. 43 The liability of persons who control n
defendant primarily liable under sections 11 and 12 is defined in section
15.44
The federal securities acts generally do not provide comparable protection for defrauded sellers of securities. This gave rise to the original judicial
development of implied private rights of action based on SEC rule 10b-5.4G
Although rule 10b-5 creates a broad range of implied liability, it is subject
to a great many uncertainties. 46
Private civil actions under the Uniform Securities Act are expressed
in section 410,47 which was drafted largely on the basis of the statutory
actions created in section 12 of the Securities Act of 1933.48 Section 410
of the Uniform Securities Act has been enacted in a great many states
and has been used as a model in the 1963 and 1977 revisions of section 33 of the Texas Act. Predictably, portions of section 33 of the Texas
Act, section 410 of the Uniform Securities Act, and section 12 of the
Securities Act of 1933 parallel considerably. It may, therefore, be helpful
in resolving questions which arise under the revised section 33 to refer
39. Securities Act of 1933,15 U.S.C. § 77l(1) (1970).
40. Id. § 771(2).
41. Id. § 77l; see Winter v. D.J. & M. lnv. & Constr. Corp'l 185 F. Supp. 943,
946 (S.D. Cal. 1960); 1 A. BROMBERG, SECURITIES LAw: FRAUD ~ 2.5(3), nt 43-44.2
(rev. ed. Supp. 1975).
42. Securities Act of 1933,15 U.S.C. § 77k (1970).
43. Id. § 77m.
44. Id. § 770.
45. 17 C.F.R. § 240.10b-5 (1977).
46. See generally A. BROMBERG, supra note 41.
47. UNIFORM SECURITIES Acr § 410.
48. Securities Act of 1933,15 U.S.C. § 77l (1970).
HeinOnline -- 15 Hous. L. Rev. 844 1977-1978
1978]
TEXAS SECURITIES LITIGATION
845
to decisions in other jurisdictions under either section 410 of the Uniform
Securities Act Or under section 12 of the Securities Act of 1933.
II. THE REvIsED SECTION 33
In analyzing the substance of the revised section 33,49 which is substantially longer and more complex than its predecessor,lio it is useful to
divide the section into three parts. First, five distinct provisions in the revised section 33 create liabilities for certain persons in certain circumstances.
Second, three major provisions deal \vith remedies and procedural aspects
of the liabilities created which should be considered separately. Finally,
several miscellaneous prOvisions are present
A.
Liabilities Under the Revised Section 33
Prior to the 1977 revision, section 33 contained only two eXllress civil
action liabilities. Section 33A(1) created liability for certain violations of
the ACt,51 and section 33A(2) created liability for misstatement or omission
in the sale of securities.52 As revised in 1977, section 33 contains five distinct
liability provisions. Four of these are primary liabilities including the two
previously found in section 33. The fifth liability provision relates to collateral defendants. Each of the five liability provisions in the revised section 33 \vill be considered separately.
1. Section 33A(1)-Registration and Related Violations. Section 33A(l}
creates civil liability for noncompliance \vith certain requirements of the
statute.53 This is Jile oldest liability prOvision in section 33. Although n few
stylistic clarifications were made, it was not substantially changed in the
1977 revision. Under the prOvisions of section 33A(l) any person who
offers or sells a security in violation of sections 7, 9, 12, 23A or 23B of
the Act is liable to the person who buys the security from him:~4 Liability
is also created in the event of a violation of a requirement or order of
the Commissioner under sections 9, 23A or 23B.lili The potential plaintiffs
under section 33A(1} are limited to buyers in privity with the defendant,:i1.l
but the basis of liability is solely violation of the indicated statutory previsions and not fraud or other wrongdoing.li7 The remedy is rescission,:iS
TEX. REv. CIv. STAT• .ANN. art. 581, § 33 (Vernon Supp. 1978).
TEX. REv. CIv. STAT• .ANN. art. 581, § 33 (1964) (repealed 1977).
Id. § 33A(1).
1963 Tex. Gen. Laws, ch. 170, § 12, at 473.
TEX. REv. CIv. STAT. .ANN. art. 581, § 33A(l) (Vernon Supp. 1978).
Id.
Id.
56. Id.
57. Compare TEX. REv. eIV. STAT. .ANN. art. 581, § 33A{l) (Vernon Supp.
1978) with the requirement of fraud in Id. § 33A(2).
58. Paragraph (1) of subsection D provides that, upon tender of the security,
a buyer may recover the consideration he paid for the security plus interest thercon
49.
50.
51.
52.
53.
54.
55.
HeinOnline -- 15 Hous. L. Rev. 845 1977-1978
HOUSTON LAW REVIEW
846
[Vol. 15:839
if the plaintiff still owns the security or damages 50 if he does not.
Liability under section 33A ( 1) may arise in the event of a failure to
register securities in a sale, if registration is required by section 1, or in
the event of a defective compliance with the registration provisions. GO The
frequent litigation generated by this section may involve interpretations
of the definitions of tenus in section 4 of the ActS1 or the exemptions in
sections 5 and 6.62 Section 9 of the Act,63 violation of which creates liability
under section 33A ( 1),64 relates to the securities registration process and
authorizes the Commissioner to require the escrow of proceeds of the sale,
to limit selling costs in a sale of the securities registered, and to require
the use of a prospectus. 65 Violation of any of these requirements may
create liability. Section 12 of the Act GG requires registration of dealers or
salesmen under the provisions of sections 13 through 21 of the Act. G7 A
violation of this requirement in the sale of a security may lead to liability
under section 33A ( 1).68 It may also involve interpretation of the definitions
in section 4 of the Act or the exempt transactions in section 5, which
do not require the use of a registered dealer.60 Section 23A7° generally
authorizes the Commissioner to issue cease and desist orders with respect
to any sale of securities if he finds that the sale tends to be fraudulent
or is not fair, just and equitable. 71 Section 23B72 authorizes the Commissioner to issue stop orders to dealers, agents or salesmen prohibiting the
use of false or misleading selling material,73 Violations of any of these orders
by the Commissioner may lead to liability under section 33A(1).
2.
Section 33A(2)-Protection for Defrauded Buyers of Securities.
from the date of his payment, less the amount of any income he received on UlO
security. ld. § 33D ( 1).
59. Paragraph (3) of subsection D provides that, in an action for damages,
a buyer may recover the consideration paid for the security plus interest, less the
value of the security at the time he disJ?osed of it and the amount of any incomo
he received on the security. ld. § 33D(3). Paragraphs (1) and (3) are essentially a
clarification and expansion of the damages measure for buyers under the former § 33A.
ld. § 33, comment. Refer to app. A infra (text of former § 33A).
60. ld. § 33A(1).
61. ld. § 4 (Vernon 1964).
62. ld. §§ 5 & 6.
63. ld. § 9.
64. ld. § 33A(1) (Vernon Supp. 1978).
65. ld. § 9 (Vernon 1964).
66. ld. § 12.
67. ld. §§ 13-21.
68. ld. § 33A( 1) (Vernon Supp. 1978).
69. ld. § 5 (Vernon 1964).
70. ld. § 23A.
71. ld.
72. ld. § 23B.
73. ld.
HeinOnline -- 15 Hous. L. Rev. 846 1977-1978
1978]
TEXAS SECURITIES LITIGATION
847
Section 33A(2) was the source of most of the problems which led to the
1977 revision. It creates a civil action in favor of a buyer of securities who
was the victim of a material misstatement of fact or a failure to state a
fact necessary to make what is stated not misleading.74 Under the revised
section 33A(2), any person who offers or sells a security by means of a
material misstatement of fact Or an omission of a material fact is liable
to the buyer of the security.T.; This liability arises whether Or not the
security is sold in an exempt transaction under section 5 of the Act11l Or
involves an exempt security under section 6 of the Act17 As in most
securities fraud liability provisions, the e.xemptions from registration are
irrelevant
The potential plaintiffs in an action under section 33A(2) are obviously
limited by a privity requirement that they buy from the defendant they are
entitled to sue.78 Although the phrase "by means of' a material misstatement of fact or omission of a material £act might be construed to impose
a burden on the plaintiff to prove reliance on the misstatement or omission,
such language in the previous version of section 33A(2) and in the parallel
statutes on the Federal and Uniform Act levels has generally been interpreted not to include such a requirement79 A plaintiff under section
33A(2) is entitled to rescission if the plaintiff still owns the security or to
damages if he does not 80
Under the revised section 33A(2) two defenses are available. First, the
defendant may show that the plaintiff actually lmew of the untruth or
omission involved in this suit.s1 Second, the defendant may prove that
he did not lmow of the untruth or omission and that he used reasonable
care.82 This due diligence defense, however, is denied to issuers of the
security involved (other than governmental issuers) with respect to (1) a
material misstatement or omission included in a prospectus required upon
registration under section 7 of the Act,83 or (2) any writing prepared
and delivered by the issuer in the sale of a security, such as a private
placement memorandum or other written selling material.S4
The revision of section 33A(2) solves the major problems that previously existed. The plaintiff is no longer required to prove that he used
reasonable care in order to establish a cause of action under section 33A
74. Id. § 33A(2) (Vernon Supp. 1978).
75. Id.
76. Id. § 5 (Vernon 1964).
77. Id. § 6.
78. Id. § 33.
79. See 3 L. Loss, SECURITlES REGULATION 1702 (2d ed. 1961).
80. TEX. REv. Crv. STAT. ANN. art. 581, § 33D(1), (3) (Vernon Supp. 1978).
Refer to notes 58 and 59 supra.
81. Id. § 33A(2).
82. Id.
83. Id. § 7 (Vernon 1964).
84. Id. § 33A(2) (Vernon Supp. 1978).
HeinOnline -- 15 Hous. L. Rev. 847 1977-1978
848
HOUSTON LAW REVIEW
[Vol. 15:839
(2).85 The defendant is now given a due diligence defense in most cnses,80
but this has been limited in certain instances. All defendants except issuers
will have the due diligence defense in all situations.87 Issuers are entitled
to the due diligence defense except as to the two specified types of written
material.88 This limitation on the due diligence defense resulted from extensive comments by and discussion with the Securities Commissioner
and his staff concerning the creation of a due diligence defense under
section 33A(2). The decision in Cherb v. Weber, Hall, Cobb & Caudle,
Inc. 89 clearly has been overruled as to future litigation.oo The Committee
considered the possibility of including a list of factors bearing on the
question of reasonable care in the statutory revision, but concluded that
such a list should not appear in the statute. It was, however, included in
the Committee comments published in the annotated statutes. 01
85. Id. The changes made in § 33A(2) bring the provision closer to the parallel
provisions in the Uniform Securities Act and the Securities Act of 1933. See UNIFOlIM
SECUlUTIES Am: § 410(a) (2); Securities Act of 1933 § 12(2), 15 U.S.C. § 771(2)
( 1970).
86. TEX. REv. CIV. STAT. ANN. art. 581, § 33A(2)(b) (Vernon Supp. 1978).
87. Id.
88. Id.
89. [1971-1978 Transfer Binding] BLUE SKY L. REP. (CCH) U 71,250, at 67,865
(N.D. Tex. 1974).
90. The Cherb decision placed a liability on persons who had made reasonable
efforts to convey accurate, trulliful information to prospective purchasers. Under tho
revised § 33A, such person would have an affirmative defense of due diligence.
91. The comment presentIy provides:
Factors in Reasonable Care. It is neither wise nor feasible to specify in
the statute exactIy what constitutes reasonable care for the defense in §§ 33A
(2), 33B or related parts of 33F(1). Reasonable care is a question of fact
to be determined by taking into account all the circumstances. Illustrative
of the factors which may be relevant are:
( 1 ) The relationshIp of the parties,
( 2) Their respective knowledge of information about tile security in
the transaction,
(3) Their relative sophistication and access to such information,
(~ Their respective expectations of benefit from the transaction,
(5
Whether the untruth or omission was in a document prepared for
use in e purchase or sale of the security, and
(6) Such other factors as whether the defendant:
(i) Was the issuer of the security
(ii) Was an underwriter of the security in tile transaction or in
the 40 days before the transaction
(ill) Was a dealer or salesman (as distinct from an ordinary
investor)
(iv) Was a principal or agent in the transaction
( v) Published a recommendation for the purchase or sale of the
security
(vi) Solicited the purchase or sale
( vii) Reasonably relied on an official offering statement of the
United States, District of Columbia, or a state or municipal corporation
or political subdivision thereof or a public agency or instrumentality of
any of the foregoing which was the issuer of the security
( viii) Reasonably relied on information purpprting to be made
on the authority of an expert (other than himself). (An expert, for
this purpose, is a person whose profession gives authority to a statement made by him.)
TEX. REv. CIV. STAT. ANN. art. 581, § 33, comment (Vernon Supp. 1978).
HeinOnline -- 15 Hous. L. Rev. 848 1977-1978
1978]
TEXAS SECURITIES LITIGATION
849
3. Section 33C-Liability of Non-Selling Issuers Which Register.
The extensive discussions with the Securities Commissioner and members
of his staff concerning the inclusion of a due diligence defense in section
S3A(2) ultimately led both to the qualification of the due diligence defense noted above92 and to the addition to section 33 of an entirely new
liability provision for issuers of securities in certain cases. This new liability
is created in section 33C.93 It is e:o..iraordinary in many respects and contains certain anomalies which will be noted below.
Section 33C applies only to issuers which register outstanding securities
for sale by owners under either section 7 of the Texas Securities ActlH
or section 6 of the Securities Act of 1933.95 This means that section 33C
will apply only to registered secondary offerings by persons other than the
issuer and will not apply in primary offerings by the issuer itself, although
the liability created is a special liability of the issuer.sa With respect to
registered secondary offerings, section 33C provides that the issuer of the
security is liable to any person who buys the registered security if, as of
the effective date, the prospectus required in connection \vith the registration contains a material misstatement of fact or £ails to state any material fact necessary to make what is stated not misleading.07 Liability
clearly will extend to any buyer of the registered security and no privity
limitation or requirement is included.93 Nor is it necessary for the plaintiff to prove reliance on the misstatement or omission in the prospectus.
The sole basis of liability of the issuer under section 33C is material misstatement or omission in the prospectus,99 and the only defense available
under section 3SC is proof that the plaintiff actually knew of the untruth
or omission.loo The plaintiff is entitled to rescission if the plaintiff still owns
the security or to damages if not. IOI
This liability is not only entirely new in the Texas Securities Act, but
is also quite unusual in state securities law. Although it bears close similarity to the liability created in section 11 of the Securities Act of 1933,102
substantial differences exist. Liability under section 33C only extends to
the prospectus, not to the entire registration statement, and it appUes only
in secondary and not in primary distributions. I03 The only defendant under
section 33C is the issuer, and no due diligence defense is available. 1M The
92.
93.
94.
95.
96.
97.
Refer to notes 87-90 supra and accompanying te.~
TEX. REv. Cxv. STAT. ANN. art. 581, § 33C (Vernon Supp. 1978).
Id. § 7 (Vernon 1964).
Securities Act of 1933, 15 U.S.C. § 77f (1970).
TEX. REv. Cxv. STAT. ANN. art. 581, § 33C (Vernon Supp. 1978).
Id.
98. Id.
99. Id. § 33.
100. Id. § 33C.
101. Id. § 33D(1), (3).
102. Securities Act of 1933, 15 U.S.C. § 17k (1970).
103. TEX. REv. Cxv. STAT. ANN. art. 581, § 33 (Vernon Supp. 1978).
104. Id. § 33C. Refer to note 100 supra and accompanying text.
HeinOnline -- 15 Hous. L. Rev. 849 1977-1978
850
HOUSTON LAW REVIEW
[Vol. 15:839
liability created by section 11 of the Securities Act of 19S3 seems entirely
appropriate since that stalute is premised on the disclosure philosophy of
securities registration rather than the merit standard philosophy. Under the
disclosure philosophy a strict liability in the event of a materially deficient
disclosure is both proper and necessary. lOS However, in securities registration matters, Texas, like most states, adheres to the merit standard philosophy under which the Securities Commissioner is principally concerned
with evaluating the merits of the securities offered to buyers in a registered
offering. lOG Under this philosophy strict liabilities, such as the one created
by section S3C, seem inconsistent and out of place.
In any event, the internal provisions of section S3C contain at least
two striking anomalies. First, where the issuer in a primary distribution
distributes a prospectus containing a material misstatement or omission,
liability does not arise under section 33C by its own limitations, but might
arise under section 33A(2) in which case liability of the issuer would
extend only to the immediate buyers in privity with the issuer and not to
remote buyers of the registered issue. 107 However, if the same prospectus
were used in a registered secondary distribution, the issuer would be
subject to liability under section 33C and would not have the benefit of
a privity limitation on the number of potential plaintiffs. 10s It seems quite
anomalous that the issuer potentially is exposed to broader liability in the
secondary distribution, when the proceeds go to others, than in the primary
distribution when the proceeds go to the issuer. In the not uncommon
situation of a registration covering both a primary and a secondary distribution, apparently both sections 33A(2) and 33C would apply, and a
hidden problem may involve the question of tracing by remote buyer
plaintiffs. "Whether the remote buyer may sue the issuer under section S3C
only if the securities purchased by him were part of the secondary offering, Or may sue the issuer under section 3SC as to all securities covered
by the registration statement is not clear.
The second anomaly created by section 33C is that its provision on
scope makes it applicable to registered secondary offerings under either
section 7 of the Texas Securities Act or section 6 of the Securities Act of
19S3. 109 This means that a secondary offering of an exempt security, such
as a listed security exempt under section 6F of the Act/ 10 might be entirely
exempt from registration under the Texas Act, but might be required to
be registered under the Securities Act of 1933. It seems curious to create
the fairly drastic liability for the issuer in such case where registration
itself is not required by the Texas Act, but this is apparently the plain
105. See Securities Act of 1933, 15 U.S.C. § 77k (1970).
106. See TEX. REv. CIV. STAT. ANN. art. 581, § 7 (1977).
107. Refer to note 78 supra and accompanying text.
108. Refer to note 96 supra and accompanying text.
109. TEX. REv. CIV. STAT. ANN. art. 581, § 33C (Vernon Supp. 1978).
110. Id. § 6F (Vernon 1964).
HeinOnline -- 15 Hous. L. Rev. 850 1977-1978
1978]
TEXAS SECURITIES LITIGATION
851
meaning of section 33C. It is probable that such liability was not the
intent of the Committee but the result of oversight.
4. Section 33B-Protection for Defrauded Sellers of Securities. One
of the shortcomings of section 33 prior to the 1977 revision was that it
did not include any civil action for defrauded sellers of securities. TItis
deficiency has been remedied by the 1977 revision which added an entirely
new liability provision in section 33Blll to provide a cause of action for
defrauded sellers of securities which is substantially parallel to the C'.luse
of action available to defrauded buyers of securities under section 3.3A ( 2 ) .112
The new section 33B provides that any person who offers to buy or
buys a security by means of an untrue statement of material fact or an
omission of a material fact necessary in order to make the statements
made, in the light of the circumstances under which they are made, not misleading, is liable to the person selling the security to him." 3 Liability arises
whether or not the security is exempt under section 6 of the Act or handled
in an exempt transaction under section 5 of the Act. l14 As in section 33A (2),
potential plaintiffs bringing an action under section 33B are limited to those
in privity ,vith the defendant,115 and, as noted \vith respect to section
33A(2), the plaintiff presumably does not have the burden of proving
actual reliance on the untruth or omission in the sale." 1l The plaintiff is
entitled to rescission if the defendant buyer still owns the security at the
time of suit or to damages if not. 117
Section 33B continues to parallel section 33A(2) by prOviding that
the defendant may prove as a defense either that the plaintiff actually
lmew of the untruth or omission in entering into the transaction, or that
the defendant buyer did not lmow of the untruth or omission and used
reasonable care.llS Again the several factors bearing on the question of
reasonable care noted in the Committee's comments should be considered.ll9
The civil action available to defrauded sellers of securities created by
section 33B is not only entirely new in the Texas Act, it is somewhat unusual in state securities law generally and it is unusual in statutory
form.120 However, such civil action seems entirely desirable and consistent
with the original development of implied private rights of action in federal
law based on SEC rule 10b-5.l21 Obviously, civil fraud liabilities should
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
§ 33B (Vernon Supp. 1978).
§ 33A(2).
§ 33B.
§ 5 (Vernon 1964).
§ 33B (Vernon Supp. 1978).
§ 33A(2).
§ 33B.
comment.
17 C.F.R. § 240.10b-5 (1977).
HeinOnline -- 15 Hous. L. Rev. 851 1977-1978
852
HOUSTON LAW REVIEW
[Vol. 15:839
apply equally in securities transactions to both fraudulent sales and fraudulent purchases, and it was the belief of the Committee that a statutory
definition of the right of action is generally preferable to the judicial
development in the common law tradition which has occurred in the federnl
cases under SEC rule 10b-5. Section 33B will be applicable to privately
negotiated purchases of securities, since neither the exempt transactions
under section 5 of the Act nOr the exempt securities under section 6 of the
Act are beyond the purview of section 33B.122 Section 33B liability will
also apply in public tender offers and in various purchases of securities in
"going private" transactions. It appears likely that a comparable provision
creating statutory liability in favor of defrauded sellers of securities will
evolve as part of the proposed federal securities code.
5. Section 33F-Liability of Certain Collateral Defendants. Another
of the major deficiencies in section 33 prior to the 1977 revision was the
fact that the statute contained no provision defining the liabilities or the
standards of responsibility of collateral defendants in suits under section 33
against a distinct primary defendant.123 The typical collateral defendants
who might be joined by a plaintiff in a suit under section 33 against a
primary defendant include two categories: (1) those persons who control
the primary defendant wrongdoer,124 and (2) other persons, frequently
described as aiders and abettors, who materially assist the primary defendant. 125 In 1956 the Texas Supreme Court, in deciding Brown v. Cole,120
held that the term "seller," as used in section 33, included anyone who
is a c1ink in the chain" leading to the "sale" involved in the litigation. 127
In Brown the defendant was held liable as a "seller" notwithstanding
the fact that he was not the principal wrongdoer, was innocently unaware
of the wrongdoing by the primary culprits, and indeed, had himself
been duped by them in the financing. 128 This decision has extremely
broad implications for potential liability of collateral defendants. In order
to deal with these problems the 1977 revision of section 33 includes an
entirely new provision in section 33Fl29 which defines the basis of liability
of control persons and of aiders.
122. Unlike 10b-5 actions, suits under § 33B will not require proof of tho
use of "jurisdictional means" in the transaction (the mails, instrumentalities of intorstate commerce, the facilities of a national securities exchange), but suits undor
§ 33B will require proof that the transaction had sufficient contact with Texas. Compare Rio Grande Oil Co. v. State, 539 S.W.2d 917 (Tex. Civ. App.-Houston [1st
Dist.] 1976, writ rerd n.r.e.) with Shaffer v. Heitner, 433 U.S. 186 (1976).
123. See Bordwine, supra note 17, at 673-74.
124. See Securities Act of 1933, 15 U.S.C. § 770 (1970); UNIFORM SECURITIES
Ac:r § 410(b).
125. See TEX. REv. ClV. STAT. ANN. art. 581, § 33, comment (Vernon Supp.
1978).
126. 155 Tex. 625, 291 S.W.2d 704 (1956).
127. rd. at 708.
128. Id. at 708, 711.
129. TEX. REv. ClV. STAT. ANN. art. 581, § 33F (Vernon Supp. 1978).
HeinOnline -- 15 Hous. L. Rev. 852 1977-1978
1978]
TEXAS SECURITIES LITIGATION
853
Section 33F(1) defines the standard of liability of persons who control a principal defendant under section 33. Section 33F(1) provides that
any person who controls a primary defendant who is liable under sections
33A, 33B or 33C is also liable, jointly and severally, with the primary defendant under the section involved, unless the control person proves that
he did not know the facts which are alleged to create liability for the
primary defendant, and that he used reasonable care.130
Thus the plaintiff who is entitled to sue a primary defendant under
sections 33A, 33B or 33C may also sue any person who controls the primary
wrongdoer without being subject to a requirement of proving that the
control person was guilty of scienter or other standard of fault, but the
control person has the affirmative defense tlmt he was unaware of the
circumstances and used due diligence.
Section 33F(2) defines the liability of aiders and abettors other than
control persons. Under section 33F(2) any person who materially aids a
primary defendant, who is liable under sections 33A, 33B or 33C, with
intent to deceive or defraud or with reckless disregard for tlle truth or the
law, is jointly and severally liable with the primary defendant 131 Thus, the
plaintiff who is entitled to sue a primary defendant under section 33 may
also sue aiders and abettors other than controlled persons only if the
plaintiff can affirmatively prove scienter or reckless disregard for the
truth or the law. Section 33F( 3) provides for contribution as in contract
among all persons liable under section 33.132
Section 33F carefully defines a different standard of fault with respect
to control persons, on the one hand, and aiders and abettors on the other
hand. With respect to control persons, the plaintiff has no burden of proof
to establish fault, but the control person defendant has an affirmative
defense of due diligence. With respect to the aider and abettor the plaintiff has the affirmative burden of establishing either scienter or reckless
disregard for the truth or the law. The Committee drafting section 33F
as part of the 1977 revision intended that the provisions of section 33F
would control the broad implications of Brown v. Cole l33 regarding the
collateral defendants covered by section 33F.
B. Procedural and Remedial Provisions of the Revised Section 33
Having reviewed the five principal liability provisions of the revised
section 33, it is necessary to consider separately at tltis point the most important procedural and remedial aspects of the Act, which also include
significant improvements. The three principal procedural and remedial
aspects of section 33 which should be reviewed are: (1) the definition of
130. Id. § 33F{1).
131. Id. § 33F 2).
132. Id. § 33F 3).
133. 155 Tex. 625,291 S.W.2d 704 (1956).
HeinOnline -- 15 Hous. L. Rev. 853 1977-1978
854
HOUSTON LAW REVIEW
[Vol. 15:830
remedies available to a plaintiff in a suit under section 33; (2) the requisites
and scope of rescission offers by potential defendants under section 33 to
curtail continued contingent liability; and (3) the provisions defining tIll'
statutes of limitations applicable to the liability provisions.
Section 33D and 33E-Remedies Available to a Plaintiff Uncler
the Revised Section 33. Although no major change is involved, the revision
of section 33D defines the measure of damages and rescission rights of
plaintiffs in suits under section 33 with considerably greater precision and
detail. 134 It covers all of the liabilities created in the revised section 33. 13u
It is important to note at the outset that the clear implication of section 33D,
as well as that of the several liability provisions, is that the plaintiff in a suit
under section 33 may only sue for rescission if the security involved in the
transaction in litigation is still owned by the immediate parties, and the
plaintiff is only entitled to sue for damages if it is not. l3G If the plaintiff
is a buyer suing under sections 33A(1), 33A(2) or 33C and the plaintiff
still owns the security at the time of suit, the plaintiffs only remedy is
rescission and not damages. l37 If the plaintiff disposed of the security prior
to bringing suit, his only remedy is damages. l3S Similarly if the plaintiff is
a seller suing under section 33B, and the defendant buyer still owns the
security involved at the time the plaintiff sues, the plaintiff's only remedy
is rescission. The plaintiff may only seek damages if the defendant buyer
no longer owns the security when the plaintiff brings suit.laO Under section
33 the plaintiff does not have the option of suing for either rescission or
damages under any single set of facts.
With this principle in mind, section 33D first defines the plaintiff's
rescission rights in suits under section 33. If the plaintiff is a buyer of
securities suing under section 33, he is entitled to recover the consideration
he paid for the security together with legal interest on that sum from the
date of payment, less any income he received on the security, and the
plaintiff must make a tender of the security, or another security of the
same class Or series, to the defendant. 140 Conversely, if the plaintiff is a
seller suing for rescission, he is entitled to recover the securities sold, or
another security of the same class or series, and must tender to the defendant the consideration he received together with legal interest from
the date of receipt on that amount, less any income the defendant buyer
received on the security.l4l Since both rescission remedies depend on tlle
plaintiff making the proper tender, the definition of the amount or security
1.
134.
135.
136.
137.
138.
139.
140.
141.
TEX. REv. ClY. STAT. ANN. art. 581, § 33D (Vernon Supp. 1978).
ld.
ld.
ld.
ld.
ld.
ld.
ld.
§ 33D(l)-(7).
§§ 33A( 1) & 33B.
§ 33A(I).
§ 33B.
§ 33D(l).
§ 33D(2).
HeinOnline -- 15 Hous. L. Rev. 854 1977-1978
1978]
TEXAS SECURITIES LITIGATION
required to be tendered is important, and the time when the tender must
be made is significant. Section 33D carefully covers the former subject. H2
The problem of the time when tender must be made, which has caused
difficulty for plaintiffs in the past, 143 is now covered in section 33E, H-l
which provides that a tender required under section 33D may be made at
any time before the entry of judgment in the plaintiffs suit. lot:; Thus, the
plaintiff is no longer precluded from suing and making the tender as
part of the suit. 146
Section 33D also defines the measure of damages applicable to all
liabilities created under the revised section 33. Where the plaintiff is a
buyer entitled to sue under section 33, he is entitled to recover in damages
the consideration he paid, together \vith legal interest on tllat amount
from the date of payment, less the value of the security when the plaintiff disposed of it and any income he had received on the security. H7 1£
the plaintiff is a seller entitled to sue under section 33B, damages nrc
recoverable in the amount of the value of tlle security at the time of the
sale to the defendant plus any income the defendant buyer received
on it, less any consideration paid to the plaintiff and legal interest on that
amount from the date of payment. l4S The measure of damages provided
for in section 33 clearly parallels tlle rescission rights defined in section 33
and only includes out-of-pocket loss and not the benefit of the bargain or
the represented value of the security involved. Witll respect to the special
liability of issuers in registered secondary offerings under section 33C,149
the new section 33D adds a special provision to limit the amount for which
an issuer may be liable to the public offering price of the registered issue.I~1)
This is done by providing that the plaintiff in a suit under section 33C is
deemed to have paid the lesser of the price he actually paid for the
security or the price at which the security was offered to the public.l:;l
This limitation would apply whether the plaintiff is suing for a rescission
or for damages, and is necessary because the plaintiff under section 33C
may be a person who did not buy the security from the issuer or from
the selling shareholder in the registered secondary offering.
Anomalous difficulties seem to be involved in the remedies available
against issuers in suits under section 33C. On the one hand a plaintiff who
paid a price higher than the public offering price may be better advised
142. Id. § 33D.
143. See id. § 33 (Vernon 1964); Bordwine. supra note 17, at 673.
144. TEX. REv. ClV. STAT. ANN. art. 581, § 33E (Vemon Supp. 1978).
145. Id.
146. Id.
147.
§ 4l0(c).
148.
149.
150.
151.
The new section is substantially the same as
U:-'"IFOIU{
SECURlTlES Ac::r
TEX. REv. ClV. STAT. ANN. art. 581, § 33D(3) (Vernon Supp. 1978).
Id. § 33D( 4).
Id. § 33D(5).
Id.
HeinOnline -- 15 Hous. L. Rev. 855 1977-1978
HOUSTON LAW REVIEW
856
[Vol. 15:839
to sue his immediate seller under section 33A(2),t52 rather than the issuer
under section S3C where the plaintiff will not recover his full loss.103 On
the other hand the issuer may be involved in rescission actions, where the
issuer was not the seller of the security, and may conceivably become
liable for more than the public offering price. Since liability may extend
to any number of remote buyers, several of whom might be able to sue for
damages based on their purchases and sales of the same securities in a
fluctuating market, the aggregate amount of damages could be considerably greater than the public offering price for the securities involved. 1G4
Section S3D further provides that plaintiffs in suits under section 33
are entitled to recover costs of suit155 and may recover reasonable attorney's fees, if the court finds that the recovery would be equitable in
the circumstances.156 The provision for possible recovery of attorney's fees
is an important addition to the plaintiffs measure of recovery in suits under
section 33. In the same context it is noteworthy that section S3 no longer
includes any reference to the possible recovery of punitive or exemplary
damages, which was previously mentioned in section 33A(2).1G7 It is now
unambiguously clear that the plaintiff in a suit under section S3 may not
recover punitive damages, but may recover attorney's fees. The plaintiff
may, however, in appropriate cases sue under section 27.01 of the Texas
Business and Commerce Code 158 and seek recovery of exemplary Or punitive damages. 159 Presumably, in an appropriate case, the plnintiff might
join a cause of action under section 33 with a cause of action under section
27.01 and attempt to recover both attorney's fees under section 33 and
punitive or exemplary damages under section 27.0l.
2. Sections 331 and 33J-Rescission Offers by Potential Defendants
Under Revised Section 33. A frequently encountered provision in state
securities law, with respect to civil liabilities, is one which provides that
a potential defendant exposed to liability, or possible liability, may make
a rescission offer to the potential plaintiffs with the statutory assUrance that
the effect of a valid rescission offer will be to curtail the exposure to
liability, whether the offer is accepted or rejected, unless the potential
plaintiff in rejecting the offer expressly reserves the right to sue. In the
past section 33 of the Act has included a rescission offer provision of
this sort,160 but its scope was limited to liabilities under section 33A(1)
for statutory noncompliance, and its provisions were sketchy in several
152.
153.
154.
155.
156.
157.
158.
159.
160.
Refer to note 101 supra and accompanying text.
See TEX. REV. ClV. STAT. ANN. art. 581, § 330(5) (Vernon Supp. 1978).
See id.
Id. § 330(6).
Id. § 330(7).
1957 Tex. Gen. Laws, ch. 269, § 33, at 600.
TEX. Bus. & COM. CODE ANN. § 27.01 (Vernon 1968).
Id. § 27.01(C). See Bordwine, supra note 17, at 657, 670-711957 Tex. Gen. Laws, ch. 269, § 33, at 600-01.
HeinOnline -- 15 Hous. L. Rev. 856 1977-1978
1978]
TEXAS SECURITIES LITIGATION
&,
respects.l6l The limitations on the rescission offer provision in section
33 were a major source of difficulty which led to the revision of section
33. In the revised section 33 these problems generally have been solved by
comprehensive provisions in sections 33pt12 and 33J,163 which carefully define the requirements and effect of rescission offers by potential defendants
under section 33 and make the rescission offer remedy available with respect
to all of the liabilities created by section 33.
Section 331 states the requirements of a rescission offer to buyers who
may be able to sue under sections 33A(1), 33A(2) or 33C. A rescission
offer under section 331, in order to be valid, must include all financial and
other information material to the offeree's decision of whether to nccept
the rescission offer and must not include any untrue statement of a material
fact or omit any material fact necessary to make what is stated not misleading.l64 The rescission offeror must deposit the funds offered in escrow
in a bank either located in Texas or otherwise approved by the Commissioner or must obtain an unconditional guarantee by the bank of the
amount necessary.16S The amount which must be offered by the rescission
offer must correspond to the amount the potential plaintiff would be entitled to recover under section 33D less attorney's fees and costs. 1Cll The
rescission offer under section 331 must state: (1) tlle amount offered in terms
of a specific sum of dollars and a specific interest rate, if possible, or if not,
in terms of information known only to the offeree buyer, which is to be
furnished by him;167 (2) the name and address of the escrow bank where the
amount offered is to be paid;168 (3) the time when the offeree will receive
the amount offered, which must not be more than tllirty days after the
escrow bank receives the security and the required information from the
offeree buyer;169 (4) conspicuously that the offeree buyer may not sue under
section 33 unless either (a) he accepts the rescission offer and the rescission
offeror defaults, or (b) he rejects the rescission offer in writing within tltirty
days and expressly reserves the right to sue, in which case he may sue
within one year after his rejection;170 and (5) the nature of the violation
of the Act that occurred Or may have occurred, in reasonable detail with
any other information the offeror wants to include.l7l
Section 33J defines the requirements and effect of a rescission offer to
sellers who may be entitled to sue under section 33B in close parallel to the
161.
162.
163.
164.
165.
166.
167.
168.
169.
170.
171.
Refer to notes 29-31 supra and accompanying te.¢.
TEX. REv. CIv. STAT• .ANN. art. 581, § 331 (Vernon Supp. 1978).
Id. § 33J.
Id. § 331(1~.
Id. § 331(2 .
Id. § 331( 3 -(4).
Id. § 331(5)(a).
Id. § 331(5)(b).
Id. § 331(5)(c).
Id. § 331(5)(d).
Id. § 331(5)(e).
HeinOnline -- 15 Hous. L. Rev. 857 1977-1978
HOUSTON LAW REVIEW
858
[Vol. 15:839
provisions of section 331. A valid rescission offer under section 33J must
include all financial and other information material to the offeree's decision
as to whether to accept the offer, and must not include any untrue statement of a material fact Or omit a material fact necessary to assure what
is stated is not misleading. 172 The rescission offeror must deposit the securities offered to the offeree seller in escrow in a bank either located in Texas
or otherwise approved by the Securities Commissioner,173 and the terms of
the rescission offer should be the same as the offeree buyer would be entitled to recover under section 33D less attorney's fees and costS. 174 The
rescission offer under section 33J must state: (1) the terms of the rescission
offer, which must be in terms of a specified number and kind of securities
and a specified interest rate for a specified period insofar as practicable,
and, if necessary, in terms of specified elements known to tlle offeree, but
not to the offeror, which must be furnished by tlle offeree;17G (2) the name
and address of the escrow bank;176 (3) the time when the offeree will
receive the securities offered, which must not be more than thirty days
after the escrow bank receives the funds and necessary information to be
furnished by the offeree in accepting the offer;177 (4) conspicuously that the
offeree may not sue under section 33 unless either (a) he accepts the offer
and the offeror defaults, or (b) he rejects the offer in writing witllin thirty
days and expressly reserves the right to sue, in which case he may sue within one year after his rejection;178 and (5) the nature of the violation, or possible violation, of the Act in reasonable detail 179 and any other information the
offeror chooses. 18o The provisions of sections 331 and 33J represent a substantial improvement in the detail and care with which the statute now
defines tlle requisites for valid rescission offers and the consequences of the
offeree's acceptance or rejection of the offer. The rescission offer remedy
under the revised section 33 clearly is available to a potential defendant
with respect to all of the liabilities created by the revised section 33.
3. Section 33H-Statute of Limitations Under the Revised Section 33.
The last major problem area under section 33 prior to the 1977 revision
related to the statute of limitations applicable to certain actions under
section 33. Since the revised section 33 has added several new liabilities,
it is highly significant that section 33H now includes a comprehensive
and satisfactory definition of the statute of limitations applicable to each
of the liabilities created,181 hence resolving the major problem. Since the
172.
173.
174.
175.
176.
177.
178.
179.
180.
181.
33Jll).
Id. §
Id. § 33J 2 .
Id. § 33J 3 .
Id. § 33J
a).
Id. § 33](4) b).
Id. § 33](4) c).
Id.§33](4) d).
Id. § 33](4) e).
Id. § 33](4) f).
Id. § 33H.
4~
HeinOnline -- 15 Hous. L. Rev. 858 1977-1978
1978]
859
TEXAS SECURITIES LITIGATION
number of liabilities under section 33 has been enlarged, section 33H
neatly divides into three parts, each of which addresses certain of the
liabilities.
Section 33H(1) defines a period of limitations applicable to suits under
section 33A( 1) based on statutory noncompliance. l82 Under section 33H ( 1)
no person may sue under section 33A(1), or section 3.'3F insofar as it relates
to section 33A(1), either: (1) more than three years after the sale; or (2)
after receipt of a valid rescission offer under section 331'83 which was not
properly rejected ,vitllin tltirty days reserving the right to sue; or (3) more
than one year after so rejecting a valid rescission offer under section 3.'31.
The first of the three periods to mature under section 33H(l) clearly will bJ.r
the action by limitations. l84
Section 33H(2) defines the period of limitations applicable to suits
under sections 33A(2) and 33C. These sections involve suits by securities
buyers founded on a material misstatement or omission. Is:! Under sectio:}
33H(2) no person may sue under section 33A(2), 33C or 33F insofar as
it relates to those sections, either: (1) more than three years after he discovers the untruth or omission, or after he should have discovered the
untruth Or omission ,vith the use of reasonable care; or (2) more than
five years after the sale; or (3) after receipt of a valid rescission offer under
section 331, which was not rejected properly within thirty days reserving
the right to sue; or (4) more than one year after a proper rejection of a
valid rescission offer under section 331. 186 Again, the action is barred by
limitations upon the running of the first of the four periods specified in
the altemative. 187
Section 33H (3) defines the period of limitations applicable to suits
by defrauded sellers under section 33B.I88 Under section 33H(3) no person
may sue under section 33B, or section 33F insofar as it relates to section
33B, either: (1) more than three years after he discovers the untruth or
omission involved, Or after he should have discovered the untruth or omission ,vith the use of reasonable care; or (2) more than five years after
the purchase; or (3) after receipt of a valid rescission offer under section
33J, which he failed to reject properly witllin tllirty days reserving the right
to sue; or (4) more than one year after a proper rejection of a valid
rescission offer under section 33J.189 Again, the first of the four periods to
-------182. Refer to notes 26-31 supra and accompanying text.
183. TEX. REv. Cw. STAT. ANN. art. 581, § 33H(l) (Vernon Supp. 19181.
184. Id. § 33H. Compare the statutory language in § 33H \\ith Comment-1911
Amendment (Vernon Supp. 1978) (Comment by the Committee on Securities ar,d Investment Banking of the Section of Corporation Banking and Business Law of the St.lte
Bar of Texas) [hereinafter referred to as Committee Comment].
185. Refer to notes 26-31 supra and accompanying te.'\t.
186. TEX. REv. Cw. STAT. ANN. art. 581, § 33H(2) (Vernon Supp. 19i8).
187. Id.
188.
189.
Refer to notes 111-121 supra and accompanying te.xt.
TEX. REv. CIV. STAT. ANN. art. 581, § 33H(3) (Veroon Supp. 1978).
HeinOnline -- 15 Hous. L. Rev. 859 1977-1978
860
HOUSTON LAW REVIEW
[Vol. 15:839
mature will bar the plaintiffs suit under section 33B.loO
The provisions of section 33H represent two major improvements in
section 33 but, unfortunately, leave one difficulty. The first major improvement is that in sections 33H (2) and 33H ( 3) an outer limit is now
specified on the running of limitations with respect to suits by defrauded
buyers of securities or defrauded sellers of securities under sections 33A(2),
33B and 33G.191 The lack of such a provision previously was one of the
major difficulties in section 33,192 although such a provision is common in
the federal securities statutes where express civil remedies are created. loa In
drafting the revision of section 33 with respect to defining the limitations
periods, the Committee consistently sought the inclusion of an outer limit
after which a plaintiff could not sue in the fraud actions. lM The Committee would have preferred to shorten the periods of limitations to at
least a basic period of two years, rather than three195 with an outer limit
of four years, rather than five,t9s since these seemed more appropriate in
securities litigation generally and corresponded ,vith other limitation periods
in Texas.197 However, strong objections to this approach were voiced by
the State Securities Board, which opposed any reduction in a plaintiffs
rights under section 33. The matter was ultimately compromised on the
basis of leaving the basic period of limitations at three years and adding
an outer period of limitations of five years. As a result the limitation
periods are lengthy, but an outer limit in all actions is now available.
The second major improvement is that section 33H clearly defines the
limitations applicable when a potential plaintiff properly rejects a valid
rescission offer and reserves the right to sue. Previously, section 33 was
silent with respect to this question. Now section 33H provides that, upon
proper rejection of a valid rescission offer reserving the right to sue, the
potential plaintiff may sue within one year after rejection of the rescission
offer. 19S However, the structure of section 33H makes it equally clear that
the plaintiff in such case may not sue later than the running of limitations
under the other prOvisions in section 33H.199 At this point an internal
conflict and ambiguity crept into the drafting of the revised section 33.
The difficulty arises in the hypothetical situation where a potential de-
190. Id.
,
191. [d. § 33H(2)(b).
192. See Berry Petrol. Co. v. Adams & Peck, 518 F.2d 402 (2d Cir. 1975);
Richardson v. Salinas, 336 F. Supp. 997 (N.D. Tex. 1972); Stone v. Enstam, 541
S.W.2d 473 (Tex. Civ. App.-DaIlas 1976, no writ); Ladd v. Knowles, 505 S.W.2d
662 (Tex. Civ. App.-Amarillo 1974, writ refd n.r.e.); Taylor v. Walston & Co. 502
S.W.2d 613 (Tex. Civ. App.-Dallas 1973, writ refd n.r.e.).
193. Securities Act of 1933, 15 U.S.C. § 77m (1971).
194. Compare Committee Comment, supra note 184, at 40-41.
195. Compare id. at 41.
196. Compare id.
197. See generally 37 TEX. Jun. 2d Limitations of Actions §§ 32-55 (1962).
198. TEX. REv. ClY. STAT. ANN. art. 581, § 33H (Vernon Supp. 1978).
199. Compare Committee Comment, supra note 184, at 41.
HeinOnline -- 15 Hous. L. Rev. 860 1977-1978
1978]
TEXAS SECURITIES LITIGATION
861
fendant makes a valid rescission offer in the third year of potential liability
under section 33A(I), Or in the fifth year of potential liability under
section 33A(2), 33C or 33B, and the rescission offer is properly rejected
by the offeree who reserves the right to sue. Under section 33H the plaintiffs right to sue will be barred by limitations in less than a year upon the
running of the three-year period under section 33H(l), or the running
of the five-year period under sections 33H(2) or 333H(3). Section 33H
clearly provides that the first period to run will bar the action.2'j) However, the provisions of sections 331 and 33J, in defining the requisites of
valid rescission offers and specifying what must be conspicuously stated in
the offer to the offeree concerning the offeree's rights to sue under section
33, state simply that, if the offeree properly rejects the rescission offer
reserving the right to sue, he may sue within one year.201 No qualification
or reference to the other period in section 33H is found in section 331 and
33}, which leave the impression that the rescission offeree who properly
rejects the offer reserving the right to sue will in all cases have a full year
within which to file suit. The committee drafting the revision of section
33 intended that section 33H be the controlling section defining periods
of limitations for all purposes202 and should control over any inferences
from the rescission offer provisions in sections 331 and 33J.::ro Nevertheless,
a rescission offeror in one of the hypothetical situations is confronted by a
dilemma. In order for the rescission offer to be valid it presumably must
conspicuously state what is required by sections 331 and 33}, including
the statement that, if the offeree properly rejects the offer reserving the
right to sue, he may sue within one year after rejection.2M However, this
statement alone would either be misleading to the plaintiff if the court
should apply an earlier limitation period under section 33H, or would
operate as a waiver or extension of limitations by the defendant offeror to
at least the full year. This dilemma might successfully be resolved by a
defendant offeror by adding to the statutorily required language an additional statement to the effect that the suit might be barred earlier by the
running of limitations under the appropriate provisiOns of section 33H,2'l:i
200. Compare id.
201. TEX. REv. Crv. STAT. ANN. art. 581, §§ 33I(5)(d)(ii) & 33J(4)(d)(ii)
(Vernon Supp. 1978).
202. Refer to notes 181-83 supra and accompanying tc.n.
203. ld.
204. TEX. REv. elY. STAT. ANN. art. 581, §§ 33I(5)(d)(ii) & 33J(4)(d){ii)
(VernonSupp.1978). Section 33J(4)(d)(ii) states:
The offer shall state: . . . conspicuously that the offeree may not sue on
his sale [purchase] under Section 33 unless: . . . he rejects the offer in
writing within 30 days of its receipt and c.~ressl)' reserves in the rejection
his right to sue, in which cases lie may sue witllin one year after 1Ie so
Teiects.
ld. (emphasis added).
205. Refer to notes 181-83 supra and accompanying tc.n.
HeinOnline -- 15 Hous. L. Rev. 861 1977-1978
862
HOUSTON LAW REVIEW
[Vol. 15:839
since additional matters may be included in the rescission offer under sections 331 and 33J.20G
C.
Miscellaneous Provisions in the Revised Section 33
The remaining portions of the revised section 33 consist of four essentially
formal provisions which were previously found in section 33, and have
not been significantly changed by the 1977 revision. First, section 33G
provides that every cause of action under section 33 survives the death
of the plaintiff.207 This was previously section 33B and is unchanged. 208
Second, section 33K provides that no person who has made or engaged
in the performance of any contract in violation of the Act, or of any rule
or order under the Act, or who has acquired any right under such contract
with knowledge of the facts by which it violates the Act, may base any
suit on the contract.209 This provision, previously in section 33D, has not
been changed.210
Third, section 33L provides that any condition, stipulation or provision
binding a buyer or seller to waive compliance with the Act, or with any
rule, order or requirement under the Act, is void. 211 This provision was
previously section 33E and had been modified only to include sellers
entitled to sue under section 33B.212 This section clearly is not intended
to apply to a valid rescission offer under sections 331 or 33J213 Fourth,
section 33M provides that the rights and remedies under the Texas
Securities Act are in addition to any other rights or remedies which the
plaintiff may have at law or in equity, including any right to recover
exemplary or punitive damages. 2H This provision, previously found in
section 33F, has not been materially altered.215 The reference to the possible
recovery of the exemplary or punitive damages has been added at this
point in section 33 to preserve any rights of the plaintiff to sue under
section 27.01 of the Texas Business and Commerce Code and, in that suit,
to recover exemplary or punitive damages.216 As noted above, recovery
206. TEX. REV. CIV. STAT. ANN. art. 581, §§ 331(5)(£), 331(4)(£) (Vernon Supp.
1978). 'The offer shall state: . . . any offer information the offeror wants to inclUde."
ld.
207. ld. § 33G.
208. See 1963 Tex. Gen. Laws, ch. 170, § 12, at 473.
209. TEX. REV. CIV. STAT. ANN. art. 581, § 33K (Vernon Supp. 1978).
210. See 1963 Tex. Gen. Laws, ch. 170, § 12, at 476.
211. TEX. REV. CIV. STAT. ANN. art. 581 § 33L (Vernon Supp. 1978).
212. Compare 1963 Tex. Gen. Laws, cit. 170, § 12, at 476 with TE.". REV. CIV.
STAT. ANN. art. 581, § 33L (Vernon Supp. 1978).
213. Compare Committee Comment, supra note 184, at 42-43.
214. TEX. REV. CIV. STAT. ANN. art. 581, § 33M (Vernon Supp. 1978).
215. See 1963 Tex. Gen. Laws, ch. 170, § 12, at 476.
216. See TEX. Bus & COM. CODE ANN. § 27.01 (Vernon 1968).
HeinOnline -- 15 Hous. L. Rev. 862 1977-1978
1978]
TEXAS SECURITIES LITIGATION
863
under section 33 does not include the possible recovery of punitive or
exemplary damages.217
III.
CONCLUSION
The 1977 revision of section 33 represents extensive moderniz,,'ltion and
improvement in the statutory rights of action under the Tex<'lS Securities
Act. The five major problem areas previously discussed ,vith respect to
section 33 have been successfully resolved. The number of liabilities has
been substantially enlarged, and the rights of parties have been far more
comprehensively defined and more evenly balanced <'lS between plaintiffs
and defendants. In total, the revised section 33 should provide a superior
securities litigation vehicle with more even-handed provisions for both
sides of the docket.
Due to the complex drafting process which led to the 1977 revision
including the several compromises that became necessary along the wa}',2IS
a few problems remain in the revised section 33. These tend to fall into
two groups. On the one hand, there are a few substantive provisions which
cause concern, such as the provisions in section 33C for issuer liability in
registered secondary offerings,219 and the lengthy limitation periods in section
33H,220 which became necessary at the insistence of the State Securities
Board to obtain their acquiescence in important improvements in section 33
in other respects. On the other hand, a very limited number of accidental
drafting oversights by the Committee occurred. The latter may be dealt
,vith in a subsequent revision of section 33, but it seems less likely that
the former ,vill be as susceptible to modification. Notwithstanding these
few remaining problems, the large number of improvements in the rights
of securities litigants in Texas securities litigation effected by the 1977
revision of section 33 make the revision on balance a major step forward
in improving the quality of Texas securities litigation law.
217.
218.
219.
220.
Refer to note 157 supra and accompanying te.xt.
Refer to notes 38-39 supra and accompanying te.xt.
TEX:. REv. C1Y. STAT. ANN. art. 581, § 33C (Vernon Supp. 1978).
Id. § 33H. Refer to notes 195-97 supra.
HeinOnline -- 15 Hous. L. Rev. 863 1977-1978
APPENDIX A
TEX. REv. CIV. STAT. ANN. art. 581, § 33 (Vernon 1964)
Sec. 33. Civil Liabilities
A. Any person who
(1) Offers or sells a security in violation of Sections 7, 9 (or any
requirement of the Commissioner thereunder), 12, 23B or any order
under 23A of this Act, or
(2) Offers or sells a security (whether or not the security or transaction is exempt under Section 5 or 6 of this Act) by means of any untrue
statement of a material fact or any omission to state a material fact necessary in order to make the statements made not misleading (when the
person buying the security does not know of the untruth or omission,
and who in the exercise of reasonable care could not have known of
the untruth or omission) 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 six per cent (6%) perlear
from the date of payment, less the amount of any income receive on
the security upon the tender of the security, or for damages if he no
longer owns the security. Damages are the amount that would be recoverable upon a tender less (a) the value of the security when the buyer disposed of it and (b) interest at six per cent (6%) per year on such value
from the date of disposition. Nothing herein shall prevent the award of
punitive or exemplary damages in an amount not to exceed twice the
actual damages, as found by the jury, when such false representation or
omission is proven to be willfully made.
B. Every cause of action under this Act survives the death of any
person who might have been a plaintiff or defendant.
C. No person may sue under Subsection A(l) of this Section 33 more
than three (3) years after the contract of sale. No person may sue under
said Subsection A(l) if the buyer received a written offer accompanied
by reasonable financial information before suit and at a time when he
owned the security, to refund the consideration paid together with interest
at six per cent (6%) per year from the date of payment, less the amount
of any income received on the security, and he failed to accept the offer
within thirty (30) days of its receipt; or if the buyer received such an
offer in the amount specified above .less the value of the security when the
buyer disposed of it, and less interest at six per cent (6%) per year on
such value from date of disposition, before suit and at a time when he
did not own the security, unless he rejected the offer in writing within
thirty (30) days of its receipt. In connection with any such offer, the
seller shall deposit funds in escrow in a state or national bank doing
business in the State of Texas, or receive an unqualified commitment
from such bank to furnish funds, sufficient to provide for the refund on
all securities covered by the offer. The notice accompanying such offer
shall state (1) the name of such bank where the refund may be obtained
upon surrender of the security, or if the buyer has disposed of such
security upon satisfactory proof of such disposition and of the value
received therefor and (2) that buyer, upon receipt of the refund, may not
sue to recover the consideration paid plus interest or for damages under
Subsection A(l) of this Section 33, and (3) that the buyer, in the event
of failure to accept the offer within thirty (30) days of its receipt, may
864
HeinOnline -- 15 Hous. L. Rev. 864 1977-1978
1978]
TEXAS SECURITIES LITIGATION
865
not sue to recover the consideration paid plus interest or for damages
under Subsection A(l) of this Section 33. No person may sue under Subsection A(2) more than three (3) years after the contract of sale or more
than three (3) years after the buyer in the exercise of ordinary care
should have discovered that such sale was made in violation of said
Subsection A(2). Nothing in this Subsection C shall affect or restrict the
periods of limitation or other rights applicable to causes of action based
on fraud brought pursuant to Article 4004 of the Revised Civil Statutes.
D. No person who has made Or eng~~~~ in the performance of
any contract in violation of any provision of . Act 'or any rule or order
or requirement hereunder, or who has acquired any purported right
under any such contract ,vith knowledge of the facts by reason of which
its making or performance was in violation, may base any suit on the
contract.
E. Any condition, stipulation or provision binding any person acquir~
ing any security to waive compliance ,vith any prOvision of this Act or
any rule or order or requirement hereunder is void.
F. The rights and remedies prOvided by this Act are in addition
to any other rights or remedies that may exist at law or in equity.
HeinOnline -- 15 Hous. L. Rev. 865 1977-1978
APPENDIX B
TEX. REv. Crv. STAT. ANN. art. 581, § 33 (Vernon Supp.1978)
Sec. 33. Civil Liabilities
A. Liability of Sellers.
(1) Registration and Related Violations. A person who offers or
sells a security in violation of Section 7, 9 (or a requirement of the Commissioner thereunder), 12, 23B, or an order under 23A of this Act is
liable to the person buying the security from him, who may sue either
at law or in equity for rescission or for damages if the buyer no longer
owns the security.
(2) Untruth or Omission. A person who offers or sells a security
(whether or not the security or transaction is exempt under Section 5
or 6 of this Act) by means of an untrue statement of a material fact or
an omission 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, is liable to the person buying the security from him, who
may sue either at law or in equity for rescission, or for damages if the
buyer no longer owns the security. However, a person is not liable if he
sustains the burden of proof that either (a) the buyer knew of the untruth
or omission or (b) he (the offeror or seller) did not know, and in the
exercise of reasonable care could not have known, of the untruth or
omission. The issuer of the security (other than a government issuer identified in Section 6A) is not entitled to the defense in clause (b) with respect
to an untruth or omission (i) in a prospectus required in connection with
a registration statement under Section 7A, 7B, or 7C, or (ii) in a writing
prepared and delivered by the issuer in the sale of a security.
B. Liability of Buyers. A person who offers to buy or buys a security
(whether or not the security or transaction is exeml?t under Section 5
or 6 of this Act) by means of an untrue statement of a material fact or
an omission 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, is liable to the person selling the security to him, who
may sue either at law or in equity for rescission or for damages if the
buyer no longer owns the security. However, a person is not liable if he
sustains the burden of proof that either (a) the seller knew of the untruth
or omission, or (b) he (the offeror or buyer) did not know, and in the
exercise of reasonable care could not have known, of the untruth or
omission.
C. Liability of Nonselling Issuers Which Register.
(1) This Section 33C applies only to an issuer which registers under
Section 7A, 7B, or 7C of this Act, or under Section 6 of the U.S. Securities
Act of 1933, its outstanding securities for offer and sale by or for the
owner of the securities.
(2) If the prospectus required in connection witll the registration
contains, as of its effective date, an untrue statement of the material fact
or an omission 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, the issuer is liable to a person buying the registered security,
who may sue either at law or in equity for rescission or for damages if
the buyer no longer owns the securities. However, an issuer is not liable
866
HeinOnline -- 15 Hous. L. Rev. 866 1977-1978
1978]
TEXAS SECUR11 IES LITIGATION
861
if it sustains the burden of proof that the buyer knew of the untruth or
omission.
D. Rescission and Damages. For this Section 33:
(1) On rescission. a buyer shall recover (a) the consideration he
paid for the security plus interest thereon at the legal rate from the date
of payment by him) less (b) the amount of any income he received on the
security) upon tender of the security (or a security of the same class
and series).
(2) On rescission) a seller shall recover the security (or a security
of the same class and series) upon tender of (a) the consideration he
received for the security plus interest thereon at the legal rate from the
date of receipt by him) less (b) the amount of any income the buyer
received on the security.
(3) In damages) a buyer shall recover (a) the consideration he paid
for the security plus interest thereon at the legal rate from the date of
payment by him. less (b) the value of the security at the time he disposed
of it plus the amount of any income he received on the security.
(4) In damages) a seller shall recover (a) the value of the security
at the time of sale plus the amount of any income the buyer received on
the security; less (b) the consideration paid the seller for the security plus
interest thereon at the legal rate from the date of payment to the seUer.
(5) For a buyer suing under Section 33C) the consideration he paid
shall be deemed the lesser of (a) the price he paid and (b) the price at
which the security was offered to the public.
(6) On rescission or as a part of damages) a buyer or a seller shall
also recover costs.
(7) On rescission or as a part of damages, a buyer or a seUer may
also recover reasonable attorney's fees if the court finds that the recovery
would be equitable in the circumstances.
E. Time of Tender. Any tender specified in Section 33D may be
made at any time before entry of judgment.
F. Liability of Control Persons and Aiders.
(1) A person who directly or indirectly controls a seller, buyer, or
issuer of a security is liable under Section 33A, 33B, or 33C jointly and
severally with the seller) buyer, or issuer) and to the same extent as if
he were the seller. buyer) or issuer) unless the controlling 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 the liability is alleged to exist
(2) A person who Clirectly or indirectly Witll intent to deceive or
defraud or with reckless disregard for the trutll or the law materially aids
a seller. buyer. or issuer of a security is liable under Section 33A. 33B, or
33C jointly and severally with the seller, buyer. or issuer, and to tlle same
exi:ent as if he were the seller) buyer) or issuer.
(3) There is contribution as in cases of contract among tlle several
persons so liable.
G. Survivability of Actions. Every cause of action under tllis Act
survives the death of any person who might have been a plaintiff or
defendant.
H. Statute of Limitations.
(1) No person may sue under Section 33A(1) or 33F so far as it
relates to Section 33A(1):
(a) more than three years after the sale; or
HeinOnline -- 15 Hous. L. Rev. 867 1977-1978
868
HOUSTON LAW REVIEW
[Vol. 15:839
(b) if he received a rescission offer (meeting the requirements of
Section 33I) before suit unless he (i) rejected the offer in writing within
30 days of its receipt and (ii) expressly reserved in the rejection his right
to sue; or
(c) more than one year after he so rejected a rescission offer meeting
the requirements of Section 331.
(2) No person may sue under Section 33A(2), 33C, or 33F so far
as it relates to 33A(2) or 33C:
(a) more than three years after discovery of the untruth or omission
or after discovery should have been made by the exercise of reasonable
diligence; or
(b) more than five years after the sale; or
(c) if he received a rescission offer (meeting the requirements of
Section 331) before suit, unless he (i) rejected the offer in writing within
30 days of its receipt, and (ii) expressly reserved in the rejection his right
to sue; or
(d) more than one year after he so rejected a rescission offer meeting the requirements of Section 331.
(3) No person may sue under Section 33B or 33F so far as it relates
to Section 33B:
(a) more than three years after discovery of the untruth or omission,
or after discovery should have been made by the exercise of reasonablo
diligence; or
(b) more than five years after the purchase; or
(c) if he received a rescission offer (meeting the requirements of Section 33J) before suit unless he (i) rejected the offer in writing within 30
days of its receipt, and (ii) expressly reserved in the rejection his right
to sue; or
(d) more than one year after he so rejected a rescission offer meeting
the requirements of Section 33J.
1. Requirements of a Rescission Offer to Buyers. A rescission offer
under Section 33H(1) or (2) shall meet the follOwing requirements:
(1) The offer shall include financial and other information material
to the offeree's decision whether to accept the offer, and shall not contain
an untrue statement of a material fact or an omission 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.
(2) The offeror shall deposit funds in escrow in a state or national
bank doing business in Texas (or in another bank approved by the COmmissioner) or receive an unqualified commitment from such a bank to
furnish funds sufficient to pay the amount offered.
(3) The amount of the offer to a buyer who still owns the security
shall be the amount (excluding costs and attorney's fees) he would recover
on rescission under Section 33D(1).
(4) The amount of the offer to a buyer who no longer owns the
security shall be the amount (excluding costs and attorney's fees) he would
recover in damages under Section 33D(3).
(5) The offer shall state:
(a) the amount of the offer, as determined pursuant to Paragraph (3)
or (4) above, which shall be given (i) so far as practicable in terms of n
specified number of dollars and a specified rate of interest for a period
starting at a specified date, and (ii) so far as necessary, in terms of specified
HeinOnline -- 15 Hous. L. Rev. 868 1977-1978
1978]
TEXAS SECURITIES LITIGATION
869
elements (such as the value of the security when it was disposed of by
the offeree) known to the offeree but not to the offeror, whicli are subject
to the furnishing of reasonable evidence by the offeree.
(b) The name and address of the bank where the amount of the offer
will be paid.
(c) that the offeree will receive the amount of the offer within a
specified number of days (not more than 30) after receipt by the bank,
in form reasonably acceptable to the offeror, and in compliance with the
instructions in the offer, of:
(i) the security, if the offeree still owns it, or evidence of the fact
and date of disposition if he no longer owns it; and
(ii) evidence, if necessary, of elements referred to in Paragraph (a)
(ii) above.
(d) conspicuously that the offeree may not sue on his purchase
under Section 33 unless:
(i) he accepts the offer but does not receive the amount of the offer,
in which case he may sue within the time allowed by Section 33H{l) (a)
or 33H(2)(a) or (b), as applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt and
expressly reserves in the rejection his right to sue, in which case he may
sue ,vithin one year after he so rejects.
(e) in reasonable detail the nature of the violation of this Act that
occurred or may have occurred.
(f) any other information the offeror wants to include.
J. Requirements of a Rescission Offer to Sellers. A rescission offer
under Section 33H(3) shall meet the following requirements:
(1) The offer shall include financial and other information material
to the offeree's decision whether to accept the offer, and shall not contain
an untrue statement of a material fact or an omission 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.
(2) The offeror shall deposit the securities in escrow in a state or
national bank doing business in Texas (or in another bank approved by
the Commissioner).
(3) The terms of the offer shall be the same (excluding costs and
attorney's fees) as the seller would recover on rescission under Section
33D(2).
(4) The offer stall state:
(a) the terms of the offer, as determined pursuant to Paragraph (3)
above, which shall be given (i) so far as practicable in terms of a specified
number and kind of securities and a specified rate of interest for a period
starting at a specified date, and (ii) so far as necessary, in terms of specified elements known to the offeree but not the offeror, which are subject
to the furnishing of reasonable evidence by the offeree.
(b) the name and address of the bank where the terms of the offer
will be carried out.
(c) that the offeree will receive the securities within a specified
number of days (not more than 30) after receipt by the bank, in form
reasonably acceptable to the offeror, and in compliance with the instructions in the offer, of
(i) the amount required by the terms of the offer; and
(ii) evidence, if necessary, of elements referred to in Paragraph (n)
(ii) above.
HeinOnline -- 15 Hous. L. Rev. 869 1977-1978
870
HOUSTON LAW REVIEW
[Vol. 15:839
(d) conspicuously that the offeree may not sue on his sale under
Section 33 unless:
(i) he accepts the offer but does not receive the securities, in which
case he may sue within the time allowed by Section 33H(3)(a) or (b),
as applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt and
expressly reserves in the rejection his right to sue, in which case he may
sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act that
occurred or may have occurred.
(f) any other information the offeror wants to include.
K. Unenforceability of Illegal Contracts. No person who has made
or engaged in the performance of any contract in violation of any provision
of this Act or any rule or order or requirement hereunder, or who has
acquired any purported right under any such contract with knowledge of
the facts by reason of which its making or performance was in violation,
may base any suit on the contract.
L. Waivers Void. A condition, stipulation, or provision binding a
buyer or seller of a security to waive compliance with a provision of this
Act or a rule or order or requirement hereunder is void.
M. Saving of Existing Remedies. The rights and remedies provided
by this Act are in addition to any other rights (including exemplary or
punitive damages) or remedies that may exist at law or in equity.
HeinOnline -- 15 Hous. L. Rev. 870 1977-1978