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Lots of traveling recently and flying today.  But talk to you soon!

What does it mean when the SEC brings a Section 17(a) enforcement action?

By way of background, the Securities and Exchange Commission has the power to bring civil lawsuits against defendants who allegedly violate US securities laws.  
Section 17(a) is part of the Securities Act of 1933.  You can find it codified at 15 USC Section 77q.  The SEC has brought a number of high-profile Section 17 cases in the past few years.  For example, the SEC sued Citigroup, Inc. pursuant to Section 17(a) following the 2008 financial crisis.
The relevant part of the statute states that it is illegal, in connection with any offer or sale of a security:
"(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property 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 light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."
 Here are two key points about Section 17(a):
1. Only the SEC  - - (usually) not private investors - -  can bring a Section 17 action.  Courts (but there is some contrary case law) hold that private investors do not have a "private right of action" - - meaning they are not allowed to sue - - based on violations of Section17.
2. The SEC only has to prove negligence in a Section 17 case.   Keep in mind that Section 10(b) and Rule 10b-5 of the US securities laws require proof that the defendant knowingly or recklessly made a false statement in connection with the offer, sale or purchase of a security.  The SEC does not have to prove that a speaker knew or was reckless in not knowing that a statement was false in a case brought under Section 17(a)(2).  The SEC need only prove that the defendant was negligent in making money from a false statement in connection with the offer or sale of securities.  

What does it mean when a court denies a defendant's motion to dismiss? The plaintiff wins?

When students from other countries read a U.S. court decision where a judge "denies a motion to dismiss," it may appear that the judge is ruling that the plaintiff won her case.  That's not accurate.

In a civil litigation when a judge denies a defendant's motion to dismiss, the case will continue instead of ending early.   The plaintiff did not win the case.  On the other hand, the defendant failed to convince the judge that the case (or at least one of the claims in the case) must end.

A defendant typically brings a motion to dismiss early in the case.  The defendant is asking the judge to end the case because there is a significant problem.  For example, a defendant may argue that the plaintiff's Complaint has important defects.  The defendant also might argue that the court lacks personal or subject matter jurisdiction.  

 For example, let's say Patty sues David for fraud in a United States federal court.

Rule 9 of the Federal Rules of Civil Procedure requires Patty to include additional detail in her Complaint because she is alleging fraud.   Patty must allege when, where, and how the fraud took place.  If the Complaint does not have this detail David could ask the judge to dismiss the case.  David wants the judge to end Patty's fraud case.

If the judge denies David's motion Patty's case will continue  to the next stage of the litigation.  But Patty has not won her case.

As a practical matter, perhaps David will be more willing to settle the case because the judge denied his motion to dismiss.  But the case is not over - - Patty must still prove her claims if the case goes to trial.


What do appellate courts in the US do? Do they provide the parties with a new trial?

No, on appeal there isn't a new trial.  Appellate courts in the United States are mainly responsible for determining whether the trial judge made a mistake or not.  There are no juries at the appellate level and there is usually a panel of three judges - - in some cases there might be more.  

For example, let's say there was a criminal case in a United States federal district court - - a trial level court.  And we'll say the jury in the criminal case decided that the defendant was guilty.  If the defendant appeals, he is not going to argue to the federal appellate level court (a Circuit Court of Appeals) that the jury was wrong. Instead, he will argue that the District Court judge made an important mistake.  The defendant's lawyer might argue that the judge explained the law incorrectly to the jury.  Perhaps the defendant's lawyer will argue that the judge allowed the jury to consider inadmissible evidence.  Improper jury conduct might also be the basis for an appeal and demand for a new trial.  

If an appellate court agrees that a conviction was improper it may send the case back to a trial level court for a new trial. 

An appeal from a civil case will also focus on whether the judge made a mistake.  For example, let's say a judge grants summary judgment in favor of a defendant.  The plaintiff could appeal the judge's decision on grounds that the judge failed to apply the law correctly or overlooked some important facts.  If the appellate level court decides that the judge made a mistake the court can send the case back to the trial court.

What types of laws can Congress pass? What are the limits to Congress's power to pass laws?

A few students asked some creative questions about Congress's power to pass laws.  The short answer is that the Constitution grants Congress the power to pass certain types of laws.  If the Constitution does not grant Congress the power to pass a law, then Congress can't pass it.  The federal courts - - and ultimately the Supreme Court - -determines whether the Constitution grants Congress the power.

Students quickly understand that Congress cannot pass a law that violates a Constitutional right.  For example, Congress cannot pass a law demanding that people accept a religious belief because the First Amendment prohibits Congress from making any law regarding the establishment of a religion.

But obviously Congress has broad powers to enact laws given the number of federal laws that exist today.  Since the Great Depression, the Supreme Court has held that most laws passed by Congress were Constitutional under the Commerce Clause.

 To understand Congress's power to pass laws you should start with the Commerce Clause of the Constitution which empowers Congress to pass laws regulating commerce with "foreign nations" and "among the several States."  Over time, the Supreme Court has interpreted the Commerce Clause to enable Congress to pass a wide range of laws.  

Here is a general guide to Congress's power pursuant to the Commerce Clause (let's not worry too much about foreign commerce for now):

1. Congress can pass laws that concern the "instruments" and "channels" of interstate commerce and people that travel from one state to another state. For example, think about the mail, telephone, and highways. All of these can be used to conduct interstate activity.  

A person who uses a phone or the mail to commit a crime may be subject to federal law.  

Congress can pass laws regarding highway safety.  A person who travels across state lines and commits a crime may be subject to federal law.

Congress can even pass laws that may affect whether people will choose to travel from one state to another.  In one important case the Supreme Court held that anti-discrimination laws were Constitutional as applied to a private restaurant because the restaurant generated substantial business from out-of-state customers.

2. Activity within a state that may substantially affect interstate commerce can be subject to federal laws.  For example, even if a business conducts activity entirely within a state or a person conducts illegal activity entirely within a state, but Congress concludes that this conduct can substantially affect interstate commerce, then Congress can regulate the activity. 

 Below is a short video introducing the Commerce Clause.  


What if a person believes a ridiculous lie - - is it fraud?

The elements of fraud are a representation of a material fact, falsity, scienter, reasonable reliance, and injury.

Taking these in order...


We need to have a statement (or in some cases an omission) about an important fact.  Usually opinions and predictions are not legitimate bases for a fraud case, although there can be exceptions.  If I say vanilla ice cream is delicious but you prefer chocolate, I have not deceived you.

 Also, the fact must be important.  If I sell you a car and I say the car is new, that is probably an important fact.  You'll pay more for a new car than a used car.   If I tell you the car was built last Tuesday morning but the car was built last Tuesday afternoon that is probably not an important difference.


The important representation of fact must be false. If I say a car is brand new and it really is brand new, well, don't complain, I told you the truth.


Scienter means some sort of culpable mental state.  In a fraud case the defendant must know that the statement is false or at least be reckless with the truth.


This is key to the student's question.  If a reasonable person would not believe the lie then the fraud case should fail.  But generally speaking people have a right to believe what they are told.  Courts typically don't expect people to conduct investigations if they have no reason to suspect a lie.  

However, let's say a buyer knows that a car he is buying is used.  The salesperson lies and says the car is new.  The buyer could not reasonably rely on the salesperson's lie if he knew that the car was used.

In most cases the jury will decide whether reliance was reasonable or not unless a judge decides that it was obvious that the reliance was not reasonable.  Judges in the United States have the power to grant summary judgment if all of the important evidence and the law clearly favors one side.   In those cases a judge can grant judgment without a trial.  If it is obvious that a plaintiff did not reasonably rely then a judge could grant summary judgment for the defendant.  


The plaintiff must suffer some type of harm.  Spending money on a new car which is actually a used car would be a typical injury in a fraud case.


What are actual cause and proximate cause in a negligence lawsuit?

A defendant is liable for negligence only if his carelessness (breach of his duty of care) caused plaintiff's injury.

Courts will instruct juries that causation means that the plaintiff must prove actual cause  and proximate cause.

Actual Cause (sometimes called "cause-in-fact")

Actual cause is easier: "but for" what the defendant did, would the plaintiff have gotten hurt?

If a mechanic does not fix a car's air-conditioning  properly and later that day the car's rear tire explodes, the mechanic is not liable because the mechanic's  carelessness did not cause the tire to explode.

Proximate Cause

Some courts call proximate cause  "legal cause" but you might also see it called "substantial cause".  

It is not enough that a defendant's act eventually resulted in plaintiff's injury - - in some cases that might not be fair to the defendant.  Typically, a plaintiff will not be able to prove proximate cause if the defendant's action was an insignificant cause of the accident, there was some kind of intervening act, or if the type of harm was unforeseeable.

Here are some examples:

Let's say a defendant carelessly drops a banana peel on a sidewalk.  Someone drives by who loves bananas and is distracted by the banana.  The driver causes an accident.  Leaving a banana peel on the sidewalk was an actual cause of the accident but not a proximate cause because the type of harm was not a foreseeable risk from leaving a banana peel on a sidewalk.  We could also argue that the defendant did not have a duty to prevent this accident but let's talk about that later.

What would happen if someone stepped outside to take a picture of the banana peel an hour later and was struck by lightning?  Again, the plaintiff might be able to prove actual cause but the strange sequence of events leading to the injury should cut off the defendant's liability for negligence.


Or, let's say a defendant manufactures a product that could be used as an explosive.   A bad guy buys the product and uses it as a weapon.  Victims sue the manufacturer for negligence.  A court (or jury) might determine that the bad guy's action was an intervening cause and the manufacturer cannot be held liable for negligence.  Intentional criminal acts are frequently identified as intervening acts that should cut off negligence liability.  As you probably guessed, there are some policy questions that courts and legislatures must consider when determining whether a defendant should be held liable for negligence where someone else acts criminally.



What is the difference between Res Ipsa Loquitor and Strict Liability?

A student wrote, "I am confused Res Ipsa Loquitor with Strict Liability"

This is actually a really interesting point when you look at the history of strict liability and case law in the United States.

Res Ipsa Loquitor means we allow the jury to presume that the defendant was careless - - breached his duty of care - - based on the circumstances of the accident.  The classic res ipsa loquitor case was a barrel falling from a warehouse. In my book I described a refrigerator falling from a window.  The plaintiff might not have any proof as to exactly how the defendant acted carelessly,  but we can assume that the defendant did something silly, otherwise the refrigerator would never have fallen.  The circumstances of the accident allow the jury to assume that the defendant breached his duty of care, even if there is no other proof.  The defendant could try to introduce evidence to defeat res ipsa loquitor (burglars broke into his house and threw the fridge out the window while he was away on vacation or something like that).  

Strict Liability means that the defendant is liable no matter how carefully he acted.  Liability is based on the defendant doing "X", not how carefully defendant does "X."

If a company manufactures or distributes a defective product the law imposes strict liability. Even if the company claims it was careful it will be liable for a defective product.  We assume that it would be better to make the company pay for the damage caused by its defective products instead of making people who are hurt by the defective product pay for their own injuries.

I liked this question because over time strict liability replaced res ipsa loquitor for defective products.  If you go to a US law school you will read a case from the 1940s (Escola v. Coca Cola Bottling) in which a waitress was hurt by a defective bottle.  She won her case based on res ipsa loquitor.  But one important judge believed that she should have won based on strict liability.  Over time, strict liability became the rule for liability in defective product cases.

What is proof beyond a reasonable doubt?

In a criminal case in the United States the government must prove its case "beyond a reasonable doubt."   Even if a juror is confident that a defendant is probably guilty, he must vote to acquit if there is a reasonable doubt.  A defendant usually does not have to prove anything (there can be some exceptions where a defendant raises an affirmative defense, such as self-defense).  

Judges at trials are responsible for explaining to jurors what it mean for the state to prove guilt beyond a reasonable doubt, however,  there is no single definition.  You can see examples of such instructions online by searching for different state's "pattern jury instructions." (e.g.,

One way to explain the standard is to tell jurors that a reasonable doubt is an actual - - not an imaginary doubt - - that a reasonable person would have based on evidence.  

Obviously we can doubt anything - - maybe the computer screen you are looking at now does not really exist.  But doubting the existence of your computer screen would be unreasonable based on all the evidence available to you.  If based on the evidence a reasonable person would doubt that the state has proven its case, then the jury must vote to acquit.  

Some courts explain the standard as proof "that is so convincing a person would rely on it without hesitation" or proof that is sufficient to make the juror "firmly convinced" of the defendant's guilt.  

Although there is no single definition, this does not mean that any definition is permissible.  If a judge provides an incorrect instruction to the jury and the jury convicts the defendant, the conviction could be overturned on appeal.



Plea Agreements: Why there are few criminal trials in the US

In the United States very few criminal cases go to trial.  In fact, I think it is fair to say that if every person in the United States demanded his right to a trial our criminal justice system would have a serious challenge.

Most people are aware that in the US a person has the option of pleading guilty or not guilty to the crime with which  he is charged.  The defendant is usually hoping for better treatment from the judge if he pleads guilty.

Typically in the US there is a period of negotiation between the prosecutor and the defendant (and the defendant's lawyer) in which the prosecutor will try to reach an agreement with the defendant to convince him to plead guilty.  These agreements are called plea agreements or plea bargains.

Often a defendant will agree to plead guilty to lesser or fewer charges.  For example, a defendant charged with robbery might agree to plead guilty to attempted robbery.  In other situations a suspect might agree to testify for the state.  In exchange, he might avoid prosecution or he might enter a plea agreement in which the prosecutor will recommend that the judge show leniency in sentencing (punishing).

Before a judge will accept a guilty plea the judge should make sure that the defendant understands that he is waiving his right to a trial.  Below is a video briefly discussing plea agreements.