GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 1991

S	1 

SENATE BILL 245

Short Title:  Enhance Securities Enforcement.	(Public)
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Sponsors: Senator Soles.
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Referred to:  Judiciary I.
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March 20, 1991

A BILL TO BE ENTITLED
AN ACT TO ENHANCE THE ENFORCEMENT PROVISIONS OF THE NORTH CAROLINA SECURITIES ACT AND THE INVESTMENT ADVISERS ACT.
The General Assembly of North Carolina enacts:
Section 1.  Article 2 of Chapter 78A of the General Statutes is amended by adding two new sections to read:
"§ 78A-11.  Unlawful telephone rooms.
It is unlawful for any person to willfully manage, supervise, control, or own, directly or indirectly, either alone or in association with others, any telephone room in this State.  For purposes of this section, ‘telephone room' means an enterprise in which two or more persons engage in telephone communications with members of the public using two or more telephones at one location, or more than one location in a common scheme or enterprise, in violation of G.S. 78A-8 or G.S. 78A-12.  It is an affirmative defense to a prosecution under this section that the person acted in good faith and did not directly or indirectly induce an act or acts constituting a violation of G.S. 78A-8 or G.S. 78A-12.
"§ 78A-12.  Manipulation of market.
	(a)	In addition to the prohibitions of G.S. 78A-8, it is unlawful for any person to:
(1)	Willfully quote a fictitious price with respect to a security;
(2)	Effect a transaction in a security which involves no change in the beneficial ownership of the security, for the purpose of creating a false or misleading appearance of active trading in a security, or a false or misleading appearance of activity with respect to the market for the security;
(3)	Enter an order for the purchase of a security with the knowledge that, at substantially the same time, an order of substantially the same size, and at substantially the same price, for the sale of the security has been, or will be, entered by or for the same person, or an affiliated person, for the purpose of creating a false or misleading appearance of active trading in a security, or a false or misleading appearance of activity with respect to the market for the security;
(4)	Enter an order for the sale of a security with knowledge that, at substantially the same time, an order of substantially the same size, and at substantially the same price, for the purchase of the security has been, or will be, entered by or for the same person, or an affiliated person, for the purpose of creating a false or misleading appearance of active trading in a security, or a false or misleading appearance of activity with respect to the market for the security; or
(5)	Employ any other deceptive or fraudulent device, scheme, or artifice to manipulate the market in a security.
(b)	A transaction effected in compliance with the applicable provisions of the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder is not manipulation of the market under subsection (a) of this section."
Sec. 2.  G.S. 78A-46(a) reads as rewritten:
"§ 78A-46. Investigations and subpoenas.
(a)	The Administrator in his discretion
(1) 	May make such public or private investigations within or outside of this State as he deems necessary to determine whether any person has violated or is about to violate any provision of this Chapter or any rule or order hereunder, or  to aid in the enforcement of this Chapter or in the prescribing of rules and forms hereunder,
(2) 	May require or permit any person to file a statement in writing, under oath or otherwise as the Administrator determines, as to all the facts and circumstances concerning  the matter to be investigated, 
(3) 	May publish information concerning any violation of this Chapter or any rule or order hereunder, and
(4) 	May appoint employees of the Securities Division as securities law enforcement agents and as other enforcement personnel.
a.	Subject matter jurisdiction – The responsibility of an agent shall be enforcement of this Chapter and Chapters 78C and 78D of the General Statutes.
b.	Territorial jurisdiction – A securities law enforcement agent is a State officer with jurisdiction throughout the State.
c.	Service of Orders of the Administrator – Securities law enforcement agents may serve and execute notices, orders, or demands issued by the Administrator for the surrender of registrations or relating to any administrative proceeding.  While serving and executing such notices, orders, or demands, securities law enforcement agents shall have all the power and authority possessed by law enforcement officers when executing an arrest warrant."
Sec. 3.  G.S. 78A-47(a) reads as rewritten:
"§ 78A-47. Injunctions; cease and desist orders.
(a)	Whenever it appears to the Administrator that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this Chapter or any rule or order hereunder, he may in his discretion bring an action in any court of competent jurisdiction to enjoin the acts or practices and to enforce compliance with this Chapter or any rule or order hereunder. Upon a proper showing a permanent or temporary injunction, restraining order, or writ of mandamus shall be granted and a receiver or conservator may be appointed for the defendant or the defendant's assets.  In addition to any other remedies provided by this Chapter, the Administrator may apply to the court hearing this matter for an order of restitution whereby the defendant in such action shall be ordered to make restitution of those sums shown by the Administrator to have been obtained by him in violation of any of the provisions of this Chapter.  Such restitution may be payable, at the option of the court, to the Administrator or receiver appointed pursuant to this section or directly to those persons whose assets were obtained in violation of this Chapter.  The court may not require the Administrator to post a bond."
Sec. 4.  G.S. 78A-47 is amended by adding a new subsection to read:
"( c)	The Administrator may issue an order against an applicant, registered person, or other person who willfully violates this Chapter or a rule or order of the Administrator under this Chapter:
(1)	Imposing a civil penalty of up to two thousand five hundred dollars ($2,500) for a single violation or of up to twenty-five thousand dollars ($25,000) for multiple violations in a single proceeding or a series of related proceedings; and
(2)	Requiring reimbursement and the costs of investigation.
Any civil penalty or reimbursement imposed under this subsection shall be paid into the General Fund.  No order under this subsection may be entered without prior notice of an opportunity for hearing."
Sec. 5.  G.S. 78A-56 reads as rewritten:
"§ 78A-56. Civil liabilities.
(a)	Any person who:
(1) 	Offers or sells a security in violation of G.S. 78A-8(1), 78A-8(3), 78A-10(b), 78A-12, 78A-24, or 78A-36(a), or of any rule or order under G.S. 78A-49(d) which requires the affirmative approval of sales literature before it is used, or of any condition imposed under G.S. 78A-27(d) or 78A-28(g), or
(2) 	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 were made, not misleading (the purchaser 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 purchasing the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together  with interest at the legal rate from the date of payment, costs, and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security. Damages 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 as provided by  G.S. 24-1 from the date of disposition.
(b)	Any person who purchases 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 seller 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, shall be liable to the person selling the security to him, who may sue either at law or in equity to recover the security, plus any income received by the purchaser thereon, upon tender of the consideration received, or for damages if the purchaser no longer owns the security. Damages are the excess of the value of the security when the purchaser disposed of it, plus interest at the legal rate from the date of disposition, over the consideration paid for the security.
(c)	Every person who directly or indirectly controls a person liable under subsection (a) or (b), every partner, officer, or director of such a person, every person occupying a similar status or performing similar functions, every employee of such a person who materially aids in the act or transaction, and every dealer or salesman who materially aids in the sale are also liable jointly and severally with and to the same extent as such person, unless the person who is so liable sustains the burden of proof that he 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.
(d)	Any tender specified in this section may be made at any time before entry of judgment. Tender shall require only notice of willingness to exchange the security for the amount specified. Any notice may be given by service as in civil actions or by certified mail addressed to the last known address of the person liable.
(e)	Every cause of action under this statute survives the death of  any person who might have been a plaintiff or defendant.
(f)	No person may sue under this section:
(1)	Based upon a violation of G.S. 78A-24, G.S. 78A-36(a), or any rule or order under G.S. 78A-49(d) that requires the affirmative approval of sales literature before it is used, or any condition imposed under G.S. 78A-27(d) or G.S. 78A-28(g) unless such action is brought within two years after the sale or contract of sale; or
(2)	Based upon a violation of G.S. 78A-8(1), 78A-8(3), 78A-10(b), or 78A-12, unless such action is brought within the lesser of:
a.	Three years after the sale or contract of sale, or
b.	Two years after the plaintiff receives actual notice of, or with the exercise of reasonable diligence should have known of, the facts constituting the violation.
(g)	(1)	No purchaser may sue under this section if, before suit is commenced, the purchaser has received a written offer stating the respect in which liability under this section may have arisen and fairly advising the purchaser of his rights; offering to repurchase the security for cash payable on delivery of the security equal to the consideration paid, together with interest at the legal rate as provided by G.S. 24-1 from the date of payment, less the amount of any income received on the security or, if the purchaser no longer owns the security, offering to pay the purchaser upon acceptance of the offer an amount in cash equal to the damages computed in accordance with subsection (a); and stating that the offer may be accepted by the purchaser at any time within 30 days of its receipt; and the purchaser has failed to accept such offer in writing within the specified period.
(2) 	No seller may sue under this section if, before suit is commenced, the seller has received a written offer stating the respect in which liability under this section may have arisen and fairly advising the seller of his rights; offering to return the security plus the amount of any income received thereon upon payment of the consideration received, or, if the purchaser no longer owns the security, offering to pay the seller upon acceptance of the offer an amount in cash equal to the damages computed in accordance with subsection (b); and providing that the offer may be accepted by the seller at any time within 30 days of its receipt; and the seller has failed to accept such offer in writing within the specified period.
(3) 	Offers shall be in the form and contain the information the Administrator by rule prescribes. Every offer under subsection (g) shall be delivered to the offeree or sent by certified mail addressed to him at his last known address. If an offer is not performed in accordance with its terms, suit by the offeree under this section shall be permitted without regard to this subsection.
(h)	No person who has made or engaged in the performance of any contract in violation of any provision of this Chapter or any rule or  order hereunder, or who has acquired any purported right under any such contract with knowledge of the facts by reason of which its making or performance was in violation, may base any suit on the contract.
(i)	Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this Chapter or any rule or order hereunder is void.
(j)	The rights and remedies provided by this Chapter are in addition to any other rights or remedies that may exist at law or in equity, but this Chapter does not create any cause of action not specified in this section or G.S. 78A-37(d)."
Sec. 6.  G.S. 78A-57 reads as rewritten:
"§ 78A-57. Criminal penalties.
(a)	Any person who willfully violates any provision of this Chapter except G.S. 78A-8, 78A-9, 78A-11, or 78A-12, or who willfully violates any rule or order under this Chapter, or who willfully violates G.S. 78A-9 knowing the statement made to be false or misleading in any material respect, shall upon conviction be punished as a Class I felon; but no person may be imprisoned for the violation of any rule or order if he proves that he had no knowledge of the rule or order.  Any person who willfully violates G.S. 78A-8, 78A-11, or 78A-12 shall, upon conviction be punished as a Class H felon.
(a1)	In lieu of a fine otherwise authorized by law, a person who has been convicted of or who has pleaded guilty or no contest to having engaged in conduct in violation of the provisions of this Chapter may be sentenced to pay a fine that does not exceed the greater of three times the gross value gained or three times the gross loss caused by such conduct, plus court costs and the costs reasonably incurred in investigation and prosecution.
(b)	The Administrator may refer such evidence as is available concerning violations of this Chapter or of any rule or order hereunder to the proper district attorney, who may, with or without such a reference, institute the appropriate criminal proceedings under this Chapter.  Upon receipt of such reference, the district attorney may request that a duly employed attorney of the Administrator prosecute or assist in the prosecution of such violation or violations on behalf of the State.  Upon approval of the Administrator, such employee shall be appointed a special prosecutor for the district attorney to serve without receiving compensation from the district attorney.  Such special prosecutor shall have all the powers and duties prescribed by law for district attorneys and such other powers and duties as are lawfully delegated to such special prosecutor by the district attorney.
(c)	Nothing in this Chapter limits the power of the State to punish any person for any conduct which constitutes a crime by statute or at common law."
Sec. 7.  G.S. 78C-28 reads as rewritten:
"§ 78C-28.  Injunctions; cease and desist orders; civil penalties.
(a)	Whenever it appears to the Administrator that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this Chapter or any rule or order hereunder, he may in his discretion bring an action in any court of competent jurisdiction to enjoin the acts or practices and to enforce compliance with this Chapter or any rule or order hereunder.  Upon a proper showing a permanent or temporary injunction, restraining order, or writ of mandamus shall be granted and a receiver or conservator may be appointed for the defendant or the defendant's assets.  In addition to any other remedies provided by this Chapter, the Administrator may apply to the court hearing this matter for an order of restitution whereby the defendant in such action shall be ordered to make restitution of those sums shown by the Administrator to have been obtained by him in violation of any of the provisions of this Chapter.  Such restitution shall, at the option of the court, be payable to the Administrator or receiver appointed pursuant to this section or directly to the person or persons whose assets were obtained in violation of this Chapter.  The court may not require the Administrator to post a bond.
(b)	(1)	If the Administrator determines after giving notice of an opportunity for a hearing, that any person has engaged in, or is about to engage in, any act or practice constituting a violation of any provision of this Chapter or any rule or order hereunder, he may order such person to cease and desist from such unlawful act or practice and take such affirmative action as in the judgment of the Administrator will carry out the purposes of this Chapter.
(2)	If the Administrator makes written findings of fact that the public interest will be irreparably harmed by delay in issuing an order under G.S. 78C-28(b)(1), the Administrator may issue a temporary cease and desist order.  Upon the entry of a temporary cease and desist order, the Administrator shall promptly notify in writing the person subject to the order that such order has been entered, the reasons therefor, and that within 20 days after the receipt of a written request from such person the matter shall be set down for hearing to determine whether or not the order shall become permanent and final.  If no hearing is requested and none is ordered by the Administrator, the order shall remain in effect until it is modified or vacated by the Administrator.  If a hearing is requested or ordered, the Administrator, after giving notice of an opportunity for a hearing to the person subject to the order, shall by written findings of fact and conclusion of law, vacate, modify, or make permanent the order.
(3)	No order under subsection (b) of this section, except an order issued pursuant to G.S. 78C-28(b)(2), may be entered without prior notice or an opportunity for hearing.  The Administrator may vacate or modify an order under subsection (b) of this section upon his finding that the conditions which required such an order have changed and that it is in the public interest to so vacate or modify.
(4)	A final order issued pursuant to the provisions of subsection (b) of this section shall be subject to review as provided in G.S. 78C-29.
(c)	The Administrator may issue an order against an applicant, registered person, or other person who willfully violates this Chapter or a rule or order of the Administrator under this Chapter:
(1)	Imposing a civil penalty of up to two thousand five hundred dollars ($2,500) for a single violation or of up to twenty-five thousand dollars ($25,000) for multiple violations in a single proceeding or a series of related proceedings; and
(2)	Requiring reimbursement of the costs of investigation.
Any civil penalty or reimbursement imposed under this subsection shall be paid into the General Fund.  No order authorized by this subsection may be entered without prior notice of an opportunity for hearing."
Sec. 8.  G.S. 78C-38(b) reads as rewritten:
"(b)	Every person who directly or indirectly controls a person liable under subsection (a) of this section, including every partner, officer, or director of such a person, every person occupying a similar status or performing similar functions, every employee or associate of such a person who materially aids in the conduct giving rise to the liability, and every dealer or salesman who materially aids in such conduct is liable jointly and severally with and to the same extent as such person, unless able to sustain the burden of proof that he 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 and as provided among tort-feasors pursuant to Chapter 1B of the General Statutes."
Sec. 9.  G.S. 78C-39 reads as rewritten:
"§ 78C-39.  Criminal penalties.
(a)	Any person who willfully violates any provision of this Chapter except G.S. 78C-8(a)(1), 78C-8(a)(2), 78C-8(b), or 78C-9 or who willfully violates G.S. 78C-9 knowing the statement made to be false or misleading in any material respect, shall upon conviction be punished as a Class I felon.  Any person who willfully violates G.S. 78C-8(a)(1), 78C-8(a)(2), or 78C-8(b) shall, upon conviction, be punished as a Class H felon.
(a1)	In lieu of a fine otherwise authorized by law, a person who has been convicted of or who has pleaded guilty or no contest to having engaged in conduct in violation of the provisions of this Chapter may be sentenced to pay a fine that does not exceed the greater of three times the gross value gained or three times the gross loss caused by such conduct, plus court costs and the costs reasonably incurred in investigation and prosecution.
(b)	The Administrator may refer such evidence as is available concerning violations of this Chapter or of any rule or order hereunder to the proper district attorney, who may, with or without such a reference, institute the appropriate criminal proceedings under this Chapter. Upon receipt of such reference, the district attorney may request that a duly employed attorney of the Administrator prosecute or assist in the prosecution of such violation or violations on behalf of the State.  Upon approval of the Administrator, such employee shall be appointed a special prosecutor for the district attorney to serve without compensation from the district attorney.  Such special prosecutor shall have all the powers and duties prescribed by law for district attorneys and such other powers and duties as are lawfully delegated to such special prosecutor by the district attorney.
(c)	Nothing in this Chapter limits the power of the State to punish any person for any conduct which constitutes a crime by statute or at common law."
Sec. 10.  This act is effective upon ratification.