11-51-501. Fraud and other prohibited conduct.

Statute text

(1) It is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly:

(a) To employ any device, scheme, or artifice to defraud;

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

(2) It is unlawful for a custodian of the funds or securities of a local government investment pool trust fund organized under the provisions of part 7 of article 75 of title 24, C.R.S., to effect any transaction to relinquish possession of, distribute, expend, or transfer any of the assets of the trust fund without the prior written authorization of the board, except for:

(a) The purchase or sale of authorized investments or the exchange of such assets for other assets of equal or greater value if such sale, purchase, or exchange is solely in the accounts of the trust fund;

(b) Distributions to participating local governments; or

(c) The payment of routine fees and expenses that have been authorized by the board of trustees in the annual budget of the trust fund.

(3) It is unlawful for any investment adviser of a local government investment pool trust fund organized under the provisions of part 7 of article 75 of title 24, C.R.S., to:

(a) Take custody or possession of the funds or securities of the trust fund;

(b) Act as a principal in any transaction in securities with the trust fund unless the express prior written authorization of the board of trustees is obtained with regard to each such transaction and unless the transaction is effected without mark-up and at the fair market price of the securities purchased or sold; or

(c) Deposit, convey, or maintain the funds or securities of the trust fund in any account that is in any other name than that of the trust fund.

(4) It is unlawful for any broker-dealer or financial institution acting in an advisory capacity to a local government investment pool trust fund organized under the provisions of part 7 of article 75 of title 24, C.R.S., or any person employed by or directly associated with such broker-dealer or financial institution to:

(a) Act as a principal in any transaction in securities with the trust fund unless the express prior written authorization of the board of trustees is obtained with regard to each such transaction and unless the transaction is effected without mark-up and at the fair market price of the securities purchased or sold; or

(b) Deposit, convey, or maintain the funds or securities of the trust fund in any account that is in any other name than that of the trust fund.

(5) It is unlawful for any person who receives, directly or indirectly, any consideration from another person for advising the other person as to the value of securities or of any purchase or sale thereof, whether through the issuance of analyses or reports or otherwise to:

(a) Employ any device, scheme, or artifice to defraud any client or prospective client;

(b) Make an untrue statement of a material fact to any client or prospective client or to omit to state to any client or prospective client any material fact necessary to make the statements made, in light of the circumstances under which they are made, not misleading, in the disclosure statement delivered to any client or prospective client pursuant to section 11-51-409.5 or a similar document under the federal "Investment Advisers Act of 1940" or during the solicitation of any such client or otherwise in connection with providing investment advisory services; or

(c) Engage in any transaction, act, practice, or course of business that operates or would operate as a fraud or deceit upon any client or prospective client or that is fraudulent, deceptive, or manipulative.

(6) It is unlawful for an investment adviser or investment adviser representative acting as principal for such person's own account or on behalf of a third party to:

(a) Sell a security to a client without disclosing in writing pursuant to section 11-51-409.5 the capacity in which the investment adviser or investment adviser representative is acting before the completion of the transaction; or

(b) Fail to obtain the written consent of the client to such transaction after disclosure has been made and before completion of the transaction.

(7) Nothing in subsection (5) or (6) of this section shall relieve an investment adviser, federal covered adviser, or investment adviser representative of liability under any other subsection of this section.

History

Source: L. 90: Entire article R&RE, p. 728, 1, effective July 1. L. 93: (2) to (4) added, p. 326, 2, effective July 1. L. 98: (5) to (7) added, p. 562, 16, effective January 1, 1999.

Annotations

Editor's note: This section is similar to former 11-51-123 (1) as it existed prior to 1990.

Annotations

Cross references: For the applicability of this section, see 11-51-102 (1), (2), and (9); for the "Investment Advisers Act of 1940", see Pub.L. 76-768, codified at 15 U.S.C. 80b-1 et seq.

Annotations

 

ANNOTATION

Annotations

Law reviews. For article, "Criminal Prosecutions under the Colorado Securities Act", see 47 U. Colo. L. Rev. 233 (1976). For article, "Federal Practice and Procedure", see 58 Den. L.J. 371 (1981). For article, "A Comparison of Rule 10b-5 and the Colorado Securities Act of 1990", see 20 Colo. Law. 41 (1991).

Annotator's note. The following annotations include cases decided under former provisions similar to this section.

This section appears to be the analogue of 10(b) of the federal securities and exchange act. Kerby v. Commodity Res. Inc., 395 F. Supp. 786 (D. Colo. 1975); Ohio v. Peterson, Lowry, Rall, Barber & Ross, 472 F. Supp. 402 (D. Colo. 1979), aff'd, 651 F.2d 687 (10th Cir.), cert. denied, 454 U.S. 895, 102 S. Ct. 392, 70 L. Ed. 2d 209 (1981); People v. Riley, 708 P.2d 1359 (Colo. 1985); Western-Realco Ltd. v. Harrison, 791 P.2d 1139 (Colo. App. 1989); Rosenthal v. Dean Witter Reynolds, Inc., 883 P.2d 522 (Colo. App. 1994).

Federal authorities are highly persuasive when, as here, the Colorado Securities Act parallels federal enactments. Lowery v. Ford Hill Inv. Co., 192 Colo. 125, 556 P.2d 1201 (1976); Rosenthal v. Dean Witter Reynolds, Inc., 883 P.2d 522 (Colo. App. 1994).

This section is identical to section 101 of the uniform securities act, which act this state has adopted. People v. Terranova, 38 Colo. App. 476, 563 P.2d 363 (1976); Ohio v. Peterson, Lowry, Rall, Barber & Ross, 472 F. Supp. 402 (D. Colo. 1979), aff'd, 651 F.2d 687 (10th Cir.), cert. denied, 454 U.S. 895, 102 S. Ct. 392, 70 L. Ed. 2d 209 (1981); People v. Riley, 708 P.2d 1359 (Colo. 1985).

Subsection (1) is sufficiently explicit in its terms to inform persons of ordinary intelligence of the conduct that is criminally proscribed and thus passes constitutional muster in the face of a void-for-vagueness challenge. People v. Riley, 708 P.2d 1359 (Colo. 1985).

The circumstances constituting fraud under subsection (1) must be stated with particularity, as required by rule 9(b) of the Colorado and federal rules of civil procedure. Rome v. Reyes, 2017 COA 84, 401 P.3d 75.

Section 18-5-301(1)(f) deals with matters not included within the ambit of this section, and so there is no violation of equal protection in the differing sanctions imposed by the sections as the classification made by the legislature in enacting the sections is not arbitrary or unreasonable. People v. Blair, 195 Colo. 462, 579 P.2d 1133 (1978).

Like proscriptions and no explicit private cause of action. This section and 10(b) of the federal securities and exchange act are alike in their proscriptions of fraudulent conduct and in the fact that neither statute explicitly creates a private cause of action. Kerby v. Commodity Res. Inc., 395 F. Supp. 786 (D. Colo. 1975).

There is no private right of action under this section and 11-51-125. Philbosian v. First Fin. Sec. Corp., 550 F. Supp. 61 (D. Colo. 1982).

Section 11-51-125 (2) provides for a private right of action for violations of this section. Noland v. Gurley, 566 F. Supp. 210 (D. Colo. 1983).

Jury may find that trust arrangements are "securities", and thus subject to sanction under this section. People v. Blair, 195 Colo. 462, 579 P.2d 1133 (1978).

Nonmanagerial interest in partnership may be a security; and, therefore, a person may be convicted of securities fraud for the sale thereof. People v. Robb, 215 P.3d 1253 (Colo. App. 2009).

If the prosecution in a criminal securities case relies on the theory that the relevant instrument is a note, the jury must be instructed that not all notes are securities and must be instructed to use the test in Reves v. Ernst & Young, 494 U.S. 56, 110 S. Ct. 945, 108 L. Ed. 2d 47 (1990), to determine whether the relevant instrument is a security. People v. Mendenhall, 2015 COA 107M, 363 P.3d 758.

But the statutory language including the term "note" in the definition of "security" makes for a presumption that a note is a security. People v. Thompson, 2018 COA 83, 474 P.3d 79, aff'd, 2020 CO 72, 471 P.3d 1045.

The note in this case is held to be a security because it meets three of the four factors under Reves v. Ernst & Young and People v. Mendenhall, which is annotated above. People v. Thompson, 2018 COA 83, 474 P.3d 79, aff'd, 2020 CO 72, 471 P.3d 1045.

Court did not err in allowing jury to determine whether a joint operating agreement involved a security in a criminal securities fraud case. There was sufficient evidence to support a determination that the form 610 agreement was an investment contract and, therefore, a security. People v. Pahl, 169 P.3d 169 (Colo. App. 2006).

The required mental state for securities fraud is "willful". People v. Hoover, 165 P.3d 784 (Colo. App. 2006).

Proof of knowledge that an investment is a security is not required to convict a defendant for "willful" securities fraud. People v. Rivera, 56 P.3d 1155 (Colo. App. 2002); People v. Hoover, 165 P.3d 784 (Colo. App. 2006); People v. Destro, 215 P.3d 1147 (Colo. App. 2008).

Thus, jury instruction stating that the prosecution does not have to prove defendant was aware that he or she was dealing with a security is permissible. People v. Rivera, 56 P.3d 1155 (Colo. App. 2002); People v. Hoover, 165 P.3d 784 (Colo. App. 2006); People v. Destro, 215 P.3d 1147 (Colo. App. 2008).

A violation of subsection (1)(b) does not require scienter, that is, intent to defraud. Proof of scienter is not required to support an administrative order proscribing violations of subsection (1)(b) where the commissioner issued only a cease and desist order under 11-51-606 (1.5)(d)(IV) and did not seek damages, restitution, or disgorgement. Section 11-51-602 (2) contains a separate and additional requirement of proof of "scienter" if the commissioner also seeks damages, restitution, or disgorgement as part of the proceeding. Black Diamond Fund, LLLP v. Joseph, 211 P.3d 727 (Colo. App. 2009).

Scienter is an element of the crime of fraudulent practices in connection with the sale of securities. People v. Terranova, 38 Colo. App. 476, 563 P.2d 363 (1976).

But instruction as to "specific intent" insufficient. With regard to securities law violations, the use of the term "specific intent" in jury instructions confuses matters and adds little or nothing productive or illuminating and thus, instructions given under this section are to be phrased only in terms of "knowingly", "willfully", and "aware". People v. Blair, 195 Colo. 462, 579 P.2d 1133 (1978); People v. Riley, 708 P.2d 1359 (Colo. 1985).

Instruction on the definition of materiality not error. Appellate court rejected defendant's argument that the definition was incorrect because it was a civil, objective standard and was inconsistent with subsection (1)(b). The structure of the Colorado Securities Act demonstrates the general assembly's intent to define general provisions applicable to both criminal and civil violations. Definitions derived from civil law may be applied to criminal statutes. Thus the definitions in part 2 apply generally to all parts of the Colorado Securities Act, whether those parts are at issue in a civil or criminal case. People v. Prendergast, 87 P.3d 175 (Colo. App. 2003).

Evidence in the record supports commissioner's determination that information not disclosed was material. Nondisclosure of finder's license revocation and permanent injunction constituted an omission of a material fact necessary in order to make statements in private placement memorandum not misleading. The issue is not whether the finder could continue to act as a finder for respondents after finder's license was revoked but rather whether respondents should have disclosed that information, when it became known to them, in order to make other information not misleading. Black Diamond Fund, LLLP v. Joseph, 211 P.3d 727 (Colo. App. 2009).

No exception to disclosure requirements for publicly available information. Black Diamond Fund, LLLP v. Joseph, 211 P.3d 727 (Colo. App. 2009).

Because the effect of instructing the jury that good faith is not a defense to a securities fraud prosecution was to create a substantial risk that the jury would find the defendant guilty of violating this section even if the defendant had acted in good faith, the instruction was thus irreconcilably at odds with the court's prior instruction on the culpability element of willfulness. People v. Riley, 708 P.2d 1359 (Colo. 1985); Heller v. People, 712 P.2d 1023 (Colo. 1986); Thornton v. People, 716 P.2d 1115 (Colo. 1986).

Simple negligence alone cannot be the basis of liability under a charge of fraudulent practices in connection with the sale of securities. People v. Terranova, 38 Colo. App. 476, 563 P.2d 363 (1976).

Submission of jury instruction was error. Submission of a jury instruction that made misrepresentation in connection with the sale of a security a strict liability offense was error. People v. Terranova, 38 Colo. App. 476, 563 P.2d 363 (1976).

Advice of counsel is relevant to a charge of fraudulent practices in connection with a sale of securities, and a defendant should be entitled to show, if he can, that he sold the securities based upon his good faith reliance on such advice that he could do so legally. People v. Terranova, 38 Colo. App. 476, 563 P.2d 363 (1976).

But is not absolute defense. Reliance on advice of counsel is not an absolute defense to the charge of fraudulent practices in connection with the sale of securities but rather merely a factor for the jury to consider. People v. Terranova, 38 Colo. App. 476, 563 P.2d 363 (1976).

A claim for misrepresentation under the Colorado Securities Act does not depend upon the exempt or nonexempt status of the security. The misrepresentation may occur in the context of the registration statement for a nonexempt security or in the promotion or negotiations for sale of an exempt or nonexempt security. Western-Realco Ltd. v. Harrison, 791 P.2d 1139 (Colo. App. 1989).

The plain language of this section makes no distinction between an untrue statement of a material fact and a failure to state a material fact. Thus the supreme court will not create such a dichotomy and disapproves any reading of the Securities Act of 1981 that results in such a practice. Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095 (Colo. 1995).

Similar transaction evidence of whether the defendants engaged in a pattern or practice and a plan, scheme, or design in regard to the alleged fraud and violation of the Colorado Securities Act related to a material fact and the trial court erred in not allowing the plaintiffs to present such evidence where the probative value thereof was not substantially outweighed by the danger of unfair prejudice. Munson v. Boettcher & Co., Inc., 832 P.2d 967 (Colo. App. 1991).

Arbitration of claims under this section was final such that plaintiff was collaterally estopped from reasserting same claims under federal securities laws. The court found the Colorado and federal securities statutes to be "quite parallel". Coffey v. Dean Witter Reynolds Inc., 961 F.2d 922 (10th Cir. 1992).

A financial consulting agreement in which one party is retained to assist the other party in the identification of a suitable publicly held company with which that party could effect a reverse acquisition is not a security for purposes of this section. Broadview Fin., Inc. v. Entech Mgmt. Servs. Corp., 859 F. Supp. 444 (D. Colo. 1994).

There is no specific limitations period attached to this section. Ohio v. Peterson, Lowry, Rall, Barber & Ross, 472 F. Supp. 402 (D. Colo. 1979), aff'd, 651 F.2d 687 (10th Cir.), cert. denied, 454 U.S. 895, 102 S. Ct. 392, 70 L. Ed. 2d 209 (1981).

Three-year statute of limitations applicable. It is apparent that, under one or another of three statutes (former 13-80-108(1)(a), 13-80-108(1)(b), or 13-80-109) a three-year statute of limitations is provided by Colorado law for civil actions arising out of this section. Ohio v. Peterson, Lowry, Rall, Barber & Ross, 472 F. Supp. 402 (D. Colo. 1979), aff'd, 651 F.2d 687 (10th Cir.), cert. denied, 454 U.S. 895, 102 S. Ct. 392, 70 L. Ed. 2d 209 (1981) (decided prior to 1986 enactment of three-year statute of limitations in 13-80-101).