Oregon is a beautiful state and its people among the friendliest and most caffeinated in the country. But watch out for its securities laws.
A New York law firm found out the hard way in a case called Houston v. Seward Kissel, LLP. The firm prepared offering documents for a company that was later sued by an Oregon investor claiming fraud. The unhappy investor sued the law firm under ORS 59.115(3), which imposes liability on anyone who “participates or materially aids” in the sale of a security. The judge allowed the case to go forward without even requiring the plaintiff to show the law firm knew about the alleged fraud.
In another case under the same statute, Ainslie v. Spolyar, the court granted summary judgment against a junior associate in a law firm that prepared offering documents, where the issuer allegedly violated the terms of the offering documents.
How dare they sue lawyers!
But lawyers aren’t the only ones potentially on the hook. Other potential targets include finders, agents, funding portals, accountants, financial advisors, employees of the issuer, even banks that extend financing to investors. If you touch the offering, you’re potentially liable. And under the statute, everyone is “jointly and severally” liable, meaning everyone, even the lowly associate in Ainslie v. Spolyar is liable for 100% of the damages.
The only defense is to show that you didn’t know of the facts underlying the claim (e.g., the fraud or violations of Oregon’s securities laws) and couldn’t have known of them “in the exercise of reasonable care.” That’s a very tough burden for two reasons:
- Suppose the issuer has committed fraud. Proving that you didn’t know about it is one thing. Proving that you couldn’t have discovered it is extremely difficult because there it is, in broad daylight today.
- Because the burden is on the defendant, these cases will rarely be dismissed on summary judgment. That means you’re in for a long, expensive fight.
The Oregon statute doesn’t matter too much for issuers because issuers are always liable for fraud and other wrongdoing and know all the facts. But for third parties, including websites and funding portals, at least consider excluding Oregon investors from your offerings, if possible.
Questions? Let me know.