Federal Court Holds That Lack Of Loss Causation Is Not A Defense Under Massachusetts Blue Sky Law

The United States District Court for the District of Massachusetts recently held in Massachusetts Mutual Life Insurance Co. v. Residential Funding Co., LLC, that lack of loss causation is not available even as an affirmative defense under the Massachusetts Uniform Securities Act, M.G.L. c. 110A, § 410, in contrast with Section 12 of the federal Securities Act of 1933.

M.G.L. c. 110A, § 410(a)(2) provides that any person who "offers or sells a security 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, in the light of the circumstances under which they are made, not misleading, the buyer not knowing of the untruth or omission, and who does not sustain the burden of proof that he did not know, and 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...."

Thus a plaintiff proceeding under Section 410(a)(2) need only establish that "(1) the defendant 'offers or sells a security'; (2) in Massachusetts; (3) by making 'any untrue statement of a material fact' or by omitting to state a material fact; (4) the plaintiff did not know of the untruth or omission; and (5) the defendant knew, or 'in the exercise of reasonable care [would] have known' of the untruth or omission." Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 52, 809 N.E.2d 1017 (2004). In the event of such a material misstatement or omission, the statute permits the buyer to sue for rescission of the securities purchase or for rescissory damages.

The Massachusetts Supreme Judicial Court previously held in Marram v. Kobrick Offshore Fund that a plaintiff under Section 410(a)(2) "does not need to prove either negligence or scienter," and "reliance and sophistication of the buyer are not elements of this statutory claim." 442 Mass. at 53, 55. The court also observed that "Section 410 (a) (2) 'provides a heightened deterrent against sellers who make misrepresentations by rendering tainted transactions voidable at the option of the defrauded purchaser,' regardless of the actual cause of the investor's loss." Id. at 51 (emphasis added) (quoting Casella v. Webb, 883 F.2d 805, 809 (9th Cir. 1989) (construing Section 12 of the Securities Act)). See also id. at 57, n. 24 ("The misrepresentation or omission need only be material; it need not be the cause of any loss. "). But the SJC did not address the issue of loss...