Participant liability as employee of seller, broker-dealer and  sales person

WSSA provides that certain participants in securities transactions are liable to purchasers “unless such person sustains the burden of proof that he or she did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist. There is contribution as in cases of contract among the several persons so liable.”

Liability of Employees of Seller

In Hines v. Data Line Sys., 114 Wn.2d 127, 787 P.2d 8 (1990), the court considered allegations that a law firm was an “employee” under RCW 21.20.430(3). It determined that there was insignificant evidence of the law firm’s employee status. It did not say that an independent contractor like the law firm could not be and “employee” for purposes of the statute. It would seem that an expansive definition of employee would be required to construe “the WSSA broadly” (Haberman v. Washington Pub. Power Supply Sys., 109 Wn.2d 107,126 159, 744 P.2d 1032 (1988)).

Liability as Broker-Dealer or Salesperson.

Under the WSSS, only those licensed by the Washington Department of Financial Institutions may be paid commissions for sales of securities. For the commission payment to be lawful, the salesperson must be licensed and work for a licensed broker dealer.

If the persons who are paid commissions are unlicensed they are liable under § 21.20.430 (3) which reads, “every broker-dealer, salesperson, . . . who materially aids in the transaction is also liable jointly and severally with and to the same extent as the seller or buyer.

Broker dealer is defined in RCW 21.20.005(3): "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for that person's own account. If a person is paid commissions, that person is “in the business.” The few cases that involve this issue are criminal and from other states. One example is People v. Fullop, 837 P.2d 215 (1992).  

Salesperson is also a statutorily defined term in RCW 21.20.005(2) "’Salesperson’ means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect sales of securities.” Even unsuccessful attempts to represent an issuer who is attempting to effect sales of a security is unlawful.

A person is receiving commissions on the sale of a security if the payments are “transaction-based compensation.” This is the standard definition of prohibited compensation to unlicensed persons used by state and federal securities agencies. In this case the Defendants received monthly compensation based on the amount of the investment (usually 2% or 4% monthly). Payments calculated by the size of transaction (investment) are “transaction-based compensation.” Defendants are unlicensed broker-dealers or salespeople who were paid commissions.