Chapter 551

551.412(5) (5) Examinations. A rule adopted or order issued under this chapter may require that an examination, including an examination developed or approved by an organization of securities regulators, be successfully completed by a class of individuals or all individuals. An order issued under this chapter may waive, in whole or in part, an examination as to an individual and a rule adopted under this chapter may waive, in whole or in part, an examination as to a class of individuals if the administrator determines that the examination is not necessary or appropriate in the public interest and for the protection of investors.

551.412(6) (6) Summary process. The administrator may suspend or deny an application summarily; restrict, condition, limit, or suspend a registration; or censure, bar, or impose a civil penalty on a registrant before final determination of an administrative proceeding. Upon the issuance of an order, the administrator shall promptly notify each person subject to the order that the order has been issued, the reasons for the action, and that within 15 days after the receipt of a request in a record from the person the matter will be scheduled for a hearing. If a hearing is not requested and none is ordered by the administrator within 30 days after the date of service of the order, the order becomes final by operation of law. If a hearing is requested or ordered, the administrator, after notice of and opportunity for hearing to each person subject to the order, may modify or vacate the order or extend the order until final determination.

551.412(7) (7) Procedural requirements. An order issued may not be issued under this section, except under sub. (6), without all of the following:

551.412(7)(a) (a) Appropriate notice to the applicant or registrant.

551.412(7)(b) (b) Opportunity for hearing.

551.412(7)(c) (c) Findings of fact and conclusions of law in a record in accordance with ch. 227.

551.412(8) (8) Control person liability. A person that controls, directly or indirectly, a person not in compliance with this section may be disciplined by order of the administrator under subs. (1) to (3) to the same extent as the noncomplying person, unless the controlling person did not know, and in the exercise of reasonable care could not have known, of the existence of conduct that is a ground for discipline under this section.

551.412(9) (9) Limit on investigation or proceeding. The administrator may not institute a proceeding under sub. (1), (2), or (3) based solely on material facts actually known by the administrator unless an investigation or the proceeding is instituted within one year after the administrator actually acquires knowledge of the material facts.

551.412 History History: 2007 a. 196; 2013 a. 36.

subch. V of ch. 551 SUBCHAPTER V

FRAUD AND LIABILITIES

551.501 551.501 General fraud. It is unlawful for a person, in connection with the offer, sale, or purchase of a security, directly or indirectly, to do any of the following:

551.501(1) (1) To employ a device, scheme, or artifice to defraud.

551.501(2) (2) To make an untrue statement of a material fact or to omit 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.

551.501(3) (3) To engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.

551.501 History History: 2007 a. 196.

551.501 Annotation Intent to defraud is not a necessary element under s. 551.41 (2). State v. Temby, 108 Wis. 2d 521, 322 N.W.2d 522 (Ct. App. 1982).

551.501 Annotation Lack of reliance is a defense to all claims based on a misrepresentation theory. The application of s. 551.59 (1) (b) does not restrict the defense to claims under s. 551.41 (2). Carney v. Mantuano, 204 Wis. 2d 527, 554 N.W.2d 854 (Ct. App. 1996), 95-2529.

551.501 Annotation Whether a representation is material under s. 551.41 (2) is determined based on the objective standard of whether the omitted or misrepresented fact would have made a difference to a reasonable investor’s decision to invest. State v. Johnson, 2002 WI App 224, 257 Wis. 2d 736, 652 N.W.2d 642, 01-1092.

551.501 Annotation An investment contract is any investment in a common enterprise with the expectation of profit to be derived through the essential managerial efforts of someone other than the investor. An investor may have a role in the managerial efforts of an investment contract, so long as the investor does not provide the essential managerial efforts for the investment contract. State v. LaCount, 2008 WI 59, 310 Wis. 2d 85, 750 N.W.2d 780, 06-0672.

551.501 Annotation The plaintiff in an omissions case was not required to prove reliance as an element of a s. 551.41 (2) claim, as reliance may be presumed in an omissions case. Indeed, positive proof of reliance in such a case is unnecessary. Cuene v. Hilliard, 2008 WI App 85, 312 Wis. 2d 506, 754 N.W.2d 509, 07-0124.

551.501 Annotation In a classic misrepresentation case, a plaintiff must be able to show the requisite causal connection between a defendant’s misrepresentation and a plaintiff’s injury. In Wisconsin the causal connection is defined by statute: a person who offers or sells a security in violation of s. 551.41 is liable to the purchaser. The causal connection is established when a statutory violation is established. Cuene v. Hilliard, 2008 WI App 85, 312 Wis. 2d 506, 754 N.W.2d 509, 07-0124.

551.501 Annotation The legislature clearly envisioned that some facts, even material and relevant ones, would not always need to be disclosed. Materiality is measured by an objective standard; a fact finder assesses whether the omitted fact would have made a difference to a reasonable investor’s decision to invest. If the established omissions are so obviously important to an investor that reasonable minds cannot differ on the question of materiality, materiality may be resolved on summary judgment as a matter of law. Cuene v. Hilliard, 2008 WI App 85, 312 Wis. 2d 506, 754 N.W.2d 509, 07-0124.

551.501 Annotation Section 551.41 does not create a private right of action. Section 551.59 (1) contains a civil remedy for a violation of s. 551.41 (2), and the limitation period in s. 551.59 (5) applies. Colonial Bank & Trust Co. v. American Bankshares, 478 F. Supp. 1186 (1979).

551.501 Annotation Proof that the defendant entered into investment contracts with a purpose or intent to defraud investors is not required for a violation of s. 551.41 (3). The state need only prove that the accused willfully engaged in conduct that operates or would operate as a fraud or deceit upon a person. The nature of the act is dispositive, not the actor’s state of mind. Van Duyse v. Israel, 486 F. Supp. 1382 (1980).

551.501 Note NOTE: The above annotations refer to ch. 551 as it existed prior to its repeal and recreation by 2007 Wis. Act 196.

551.502 551.502 Prohibited conduct in providing investment advice.

551.502(1) (1) Fraud in providing investment advice. It is unlawful for a person that advises others for compensation, either directly or indirectly or through publications or writings, as to the value of securities or the advisability of investing in, purchasing, or selling securities or that, for compensation and as part of a regular business, issues or promulgates analyses or reports relating to securities, to do any of the following:

551.502(1)(a) (a) To employ a device, scheme, or artifice to defraud another person.

551.502(1)(b) (b) To engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.

551.502(2) (2) Rules defining fraud. A rule adopted under this chapter may define an act, practice, or course of business of an investment adviser or an investment adviser representative, other than a supervised person, as defined in section 202 (a) (25) of the Investment Advisers Act of 1940 (15 USC 80b-2 (a) (25)), of a federal covered investment adviser, as fraudulent, deceptive, or manipulative, and prescribe means reasonably designed to prevent investment advisers and investment adviser representatives, other than supervised persons, as defined in section 202 (a) (25) of the Investment Advisers Act of 1940 (15 USC 80b-2 (a) (25)), of a federal covered investment adviser, from engaging in acts, practices, and courses of business defined as fraudulent, deceptive, or manipulative.

551.502(3) (3) Rules specifying contents of advisory contract. A rule adopted under this chapter may specify the contents of an investment advisory contract entered into, extended, or renewed by an investment adviser.

551.502 History History: 2007 a. 196.

551.503 551.503 Evidentiary burden.

551.503(1) (1) Civil. In a civil action or administrative proceeding under this chapter, a person claiming an exemption, exception, preemption, or exclusion has the burden to prove the applicability of the claim.

551.503(2) (2) Criminal. In a criminal proceeding under this chapter, a person claiming an exemption, exception, preemption, or exclusion has the burden of going forward with evidence of the claim.

551.503 History History: 2007 a. 196.

551.504 551.504 Filing of sales and advertising literature.

551.504(1) (1) Filing requirement. Except as otherwise provided in sub. (2), a rule adopted or order issued under this chapter may require the filing of a prospectus, pamphlet, circular, form letter, advertisement, sales literature, or other advertising record relating to a security or investment advice, addressed or intended for distribution to prospective investors, including clients or prospective clients of a person registered or required to be registered as an investment adviser under this chapter.

551.504(2) (2) Excluded communications. This section does not apply to sales and advertising literature specified in sub. (1) which relates to a federal covered security, a federal covered investment adviser, or a security or transaction exempted by s. 551.201, 551.202, or 551.203 except as required pursuant to s. 551.201 (7).

551.504 History History: 2007 a. 196.

551.505 551.505 Misleading filings. It is unlawful for a person to make or cause to be made, in a record that is used in an action or proceeding or filed under this chapter, a statement that, at the time and in the light of the circumstances under which it is made, is false or misleading in a material respect, or, in connection with the statement, to omit to state a material fact necessary to make the statement made, in the light of the circumstances under which it was made, not false or misleading.

551.505 History History: 2007 a. 196.

551.506 551.506 Misrepresentations concerning registration or exemption. The filing of an application for registration, a registration statement, a notice filing under this chapter, the registration of a person, the notice filing by a person, or the registration of a security under this chapter does not constitute a finding by the administrator that a record filed under this chapter is true, complete, and not misleading. The filing or registration or the availability of an exemption, exception, preemption, or exclusion for a security or a transaction does not mean that the administrator has passed upon the merits or qualifications of, or recommended or given approval to, a person, security, or transaction. It is unlawful to make, or cause to be made, to a purchaser, customer, client, or prospective customer or client a representation inconsistent with this section.

551.506 History History: 2007 a. 196.

551.507 551.507 Qualified immunity. A broker-dealer, agent, investment adviser, federal covered investment adviser, or investment adviser representative is not liable to another broker-dealer, agent, investment adviser, federal covered investment adviser, or investment adviser representative for defamation relating to a statement that is contained in a record required by the administrator, or designee of the administrator, the Securities and Exchange Commission, or a self-regulatory organization, unless the person knew, or should have known at the time that the statement was made, that it was false in a material respect or the person acted in reckless disregard of the statement’s truth or falsity.

551.507 History History: 2007 a. 196.

551.508 551.508 Criminal penalties.

551.508(1) (1) Criminal penalties. A person that willfully violates this chapter, or a rule adopted or order issued under this chapter, except s. 551.504 or the notice filing requirements of s. 551.302 or 551.405, or that willfully violates s. 551.505 knowing the statement made to be false or misleading in a material respect, upon conviction, shall be guilty of a Class H felony. An individual convicted of violating a rule or order under this chapter may be fined, but may not be imprisoned, if the individual did not have knowledge of the rule or order. Each of the acts specified shall constitute a separate offense and a prosecution or conviction for any one of such offenses shall not bar prosecution or conviction for any other offense.

551.508(1m) (1m) Enhancement of penalties.

551.508(1m)(a) (a) If a person is convicted of a crime under sub. (1) and the crime is committed against another person who is at least 65 years of age when the crime is committed, for each such offense the maximum fine prescribed under sub. (1) may be increased by not more than $5,000 and the maximum term of imprisonment prescribed under sub. (1) may be increased by not more than 5 years.

551.508(1m)(b) (b) This subsection provides for the enhancement of the penalties applicable for the underlying crime. The court shall direct that the trier of fact find a special verdict as to the age of the victim at the time of the crime.

551.508(1m)(c) (c) It is no defense to the enhancement of penalties under this subsection that the person convicted did not know the age of the victim or reasonably believed that the victim was not at least 65 years of age.

551.508(2) (2) Criminal reference not required. The attorney general or the district attorney of the appropriate county, with or without a reference from the administrator, may institute criminal proceedings under this chapter.

551.508(3) (3) No limitation on other criminal enforcement. This chapter does not limit the power of this state to punish a person for conduct that constitutes a crime under other laws of this state.

551.508 History History: 2007 a. 196; 2009 a. 196.

551.508 Annotation That s. 551.58 (1) does not require a person to know his or her actions are unlawful does not render the statute unconstitutional. Mueller v. Sullivan, 141 F.3d 1232 (1998).

551.508 Note NOTE: The above annotations refer to ch. 551 as it existed prior to its repeal and recreation by 2007 Wis. Act 196.

551.509 551.509 Civil liability.

551.509(1) (1) Securities Litigation Uniform Standards Act. Enforcement of civil liability under this section is subject to the Securities Litigation Uniform Standards Act of 1998.

551.509(2) (2) Liability of seller to purchaser. A person is liable to the purchaser if the person sells a security in violation of s. 551.301 or 551.501 and, as to s. 551.501 (2), the purchaser did not know the untruth or omission and the seller cannot sustain the burden of proof that the seller did not know and, in the exercise of reasonable care, could not have known of the untruth or omission. An action under this subsection is governed by the following:

551.509(2)(a) (a) The purchaser may maintain an action to recover the consideration paid for the security, less the amount of any income received on the security, and interest at the legal rate under s. 138.04 from the date of the purchase, costs, and reasonable attorney fees determined by the court, upon the tender of the security, or for actual damages as provided in par. (c).

551.509(2)(b) (b) The tender referred to in par. (a) may be made any time before entry of judgment. Tender requires only notice in a record of ownership of the security and willingness to exchange the security for the amount specified. A purchaser that no longer owns the security may recover actual damages as provided in par. (c).

551.509(2)(c) (c) Actual damages in an action arising under this subsection are the amount that would be recoverable upon a tender less the value of the security when the purchaser disposed of it, and interest at the legal rate under s. 138.04 from the date of the purchase, costs, and reasonable attorney fees determined by the court.

551.509(3) (3) Liability of purchaser to seller. A person is liable to the seller if the person buys a security in violation of s. 551.501 and, as to s. 551.501 (2), the seller did not know the untruth or omission and the purchaser cannot sustain the burden of proof that the purchaser did not know and, in the exercise of reasonable care, could not have known of the untruth or omission. An action under this subsection is governed by the following:

551.509(3)(a) (a) The seller may maintain an action to recover the security, and any income received on the security, costs, and reasonable attorney fees determined by the court, upon the tender of the purchase price, or for actual damages as provided in par. (c).

551.509(3)(b) (b) The tender referred to in par. (a) may be made any time before entry of judgment. Tender requires only notice in a record of the present ability to pay the amount tendered and willingness to take delivery of the security for the amount specified. If the purchaser no longer owns the security, the seller may recover actual damages as provided in par. (c).

551.509(3)(c) (c) Actual damages in an action arising under this subsection are the difference between the price at which the security was sold and the value the security would have had at the time of the sale in the absence of the purchaser’s conduct causing liability, and interest at the legal rate under s. 138.04 from the date of the sale of the security, costs, and reasonable attorney fees determined by the court.

551.509(4) (4) Liability of unregistered broker-dealer and agent. A person acting as a broker-dealer or agent that sells or buys a security in violation of s. 551.401 (1), 551.402 (1), or 551.506 is liable to the customer. The customer, if a purchaser, may maintain an action for recovery of actual damages as specified in sub. (2) (a) to (c), or, if a seller, for a remedy as specified in sub. (3) (a) to (c).

551.509(5) (5) Liability of unregistered investment adviser and investment adviser representative. A person acting as an investment adviser or investment adviser representative that provides investment advice for compensation in violation of s. 551.403 (1), 551.404 (1), or 551.506 is liable to the client. The client may maintain an action to recover the consideration paid for the advice, interest at the legal rate under s. 138.04 from the date of payment, costs, and reasonable attorney fees determined by the court.

551.509(6) (6) Liability for investment advice. A person that receives directly or indirectly any consideration for providing investment advice to another person and that employs a device, scheme, or artifice to defraud the other person or engages in an act, practice, or course of business that operates or would operate as a fraud or deceit on the other person is liable to the other person. An action under this subsection is governed by the following:

551.509(6)(a) (a) The person defrauded may maintain an action to recover the consideration paid for the advice and the amount of any actual damages caused by the fraudulent conduct, interest at the legal rate under s. 138.04 from the date of the fraudulent conduct, costs, and reasonable attorney fees determined by the court, less the amount of any income received as a result of the fraudulent conduct.

551.509(6)(b) (b) This subsection does not apply to a broker-dealer or its agents if the investment advice provided is solely incidental to transacting business as a broker-dealer and no special compensation is received for the investment advice.

551.509(7) (7) Joint and several liability. The following persons are liable jointly and severally with and to the same extent as persons liable under subs. (2) to (6):

551.509(7)(a) (a) A person that directly or indirectly controls a person liable under subs. (2) to (6), unless the controlling person sustains the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the existence of conduct by reason of which the liability is alleged to exist.

551.509(7)(b) (b) An individual who is a managing partner, executive officer, or director of a person liable under subs. (2) to (6), including an individual having a similar status or performing similar functions, unless the individual sustains the burden of proof that the individual did not know, and in the exercise of reasonable care could not have known, of the existence of conduct by reason of which the liability is alleged to exist.

551.509(7)(c) (c) An individual who is an employee of or associated with a person liable under subs. (2) to (6) and who materially aids the conduct giving rise to the liability, unless the individual sustains the burden of proof that the individual did not know, and in the exercise of reasonable care could not have known, of the existence of conduct by reason of which the liability is alleged to exist.

551.509(7)(d) (d) A person that is a broker-dealer, agent, investment adviser, or investment adviser representative that materially aids the conduct giving rise to the liability under subs. (2) to (6), unless the person sustains the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the existence of conduct by reason of which liability is alleged to exist.

551.509(8) (8) Right of contribution. A person liable under this section has a right of contribution as in cases of contract against any other person liable under this section for the same conduct.

551.509(9) (9) Survival of cause of action. A cause of action under this section survives the death of an individual who might have been a plaintiff or defendant.

551.509(10) (10) Statute of limitations. A person may not obtain relief:

551.509(10)(a) (a) Under sub. (2) for violation of s. 551.301, or under sub. (4) or (5), unless the action is instituted within one year after the violation occurred.

551.509(10)(b) (b) Under sub. (2), other than for violation of s. 551.301, or under sub. (3) or (6), unless the action is instituted within the earlier of 2 years after discovery of the facts constituting the violation or 5 years after the violation.

551.509(11) (11) No enforcement of violative contract. A person that has made, or has engaged in the performance of, a contract in violation of this chapter or a rule adopted or order issued under this chapter, or that has acquired a purported right under the contract with knowledge of conduct by reason of which its making or performance was in violation of this chapter, may not base an action on the contract.

551.509(12) (12) No contractual waiver. A condition, stipulation, or provision binding a person purchasing or selling a security or receiving investment advice to waive compliance with this chapter or a rule adopted or order issued under this chapter is void.

551.509(13) (13) Survival of other rights or remedies. The rights and remedies provided by this chapter are in addition to any other rights or remedies that may exist, but this chapter does not create a cause of action not specified in this section or s. 551.411 (5).

551.509 History History: 2007 a. 196.

551.509 Annotation This chapter is not the exclusive remedy for securities fraud. It does not preempt common law fraud remedies. Esser Distributing v. Steidl, 149 Wis. 2d 64, 437 N.W.2d 884 (1989).

551.509 Annotation Section 551.59 (7) is operative only when an innocent party elects rescission and restitution and waives a breach of contract remedy. Criticare Systems, Inc. v. Sentek, Inc., 159 Wis. 2d 639, 465 N.W.2d 216 (Ct. App. 1990).