Securities Remedies for Governmental Purchasers Clarified

Public Entity Securities Purchaser Denied Commission Disgorgement Remedy




In May 2012 the Colorado Supreme Court overturned two lower courts by holding that brokers who sold unrated Collateralized Mortgage Obligations ("CMOs") to a County in violation of a state statute could not be held liable to disgorge their commissions under a common law restitution theory. Capital Securities of America, Inc. v. Griffin, Treasurer of Jefferson County, 278 P. 3d 342, 2012 CO 39 (2012). The Supreme Court noted that the statute in question, C. R. S. § 24-75-601.3, prohibited for the first time public entities from purchasing securities of the type Capital Securities sold to Jefferson County. That is, such purchases and sales were not unlawful at common law, and prior to the statute taking effect Capital Securities had no obligation not to sell unrated CMOs to public entities.

The Court found this fact significant. It held when the General Assembly places statutory duties on governmental entities which were "unknown at common law", the legislature must provide a "clear expression of legislative intent" in order to impose a civil damages remedy. The Court pointed out the General Assembly had considered the availability of damages, equitable remedies and regulatory remedies, yet did not provide a disgorgement remedy under a common law restitution theory in passing § 24-75-601.3. The Court therefore found that the General Assembly intended to exclude restitution as a remedy.

In deciding this holding the Supreme Court distinguished cases applying a statutory construction canon relied upon by the Court of Appeals in the decision below. That canon requires statutes to express a clear intent to negate preexisting common law rights in order for those rights to be negated. The Supreme Court pointed out the canon was inapposite to the case at bar because no common law right of rescission existed for public entities regarding the type of securities purchase at issue prior to enactment of the statute making their purchase illegal.

The Court noted that at the time of the district court judgment Jefferson County could not enforce its statutory right to have the broker repurchase the securities because the County had sold the CMOs at a $2,500,000 profit during the pendency of the action. The Court also noted the district court finding that the sale of the CMOs, though unlawful, was not "reprehensible, dangerous nor particularly blameworthy." Although these salient facts did not determine the outcome or figure directly in the Court's legal analysis, this may be an example of the Court finding a way to do justice by adhering to Colorado's long-standing policy of judicial deference to legislative intent where equities will not be ravaged in the process.

Posted by:  Wes Howard