Corporation, Securities
& Business Law Forum
January 2001 Vol. 46, No. 2
Statements or expressions of opinion or comments appearing herein are those of the editors or contributors, and not necessarily those of the association or section.
Contents
* Update from the Department of Business Services
* Electronic business transactions
* HIPAA: changing health care operations as we know it
* Software piracy, licensing and compliance: one copy--multiple users
This edition of the newsletter has several interesting articles, including an article from Ken Buzbee, the Director of the Illinois Secretary of State's Department of Business Services. In this article, Mr. Buzbee discusses current developments in his department. We also present an informative article that discusses the requirements of a notice to rescind a purchase of securities under the Illinois Securities Law, and a recent Seventh Circuit case on this issue.
For the practitioners involved in representing health care entities, the edition contains an article discussing the privacy standards that apply to electronic health information. In addition, we present an article that discusses the impact of the Electronic Commerce Security Act on electronic business transactions. We also present an article on software piracy, licensing and compliance. This edition also contains our regular column--BusinessLaw Flash Points (also available at IICLE's website www.IICLE.com).
Finally, we look forward to your comments and suggestions. We also welcome your submissions to the newsletter.
David E. Doyle
10 S. La Salle Street
Suite 3500
Chicago, Illinois 60603
312/606-0529
ddoyle@doylelaw.com
Update from the Department of Business Services
By Ken Buzbee, Director, Department of Business Services, Illinois Secretary of State, Jesse White
The Department of Business Services has undergone significant changes during the first eighteen months of Secretary Jesse White's administration. We continue to strive toward the Secretary's often-expressed goal of better customer service and increased accountability to the taxpayers of Illinois.
As of May, 2000, the Corporation/Limited Liability Companies database is available on the Internet at www.cyberdriveillinois.com, allowing the public direct access to information reducing the need for contact with the department.
The transition to our new imaging system is occurring during October and November in UCC and will have a significant impact on the filing and retrieval of documents during the transition from manual files and searches with paper to the electronic files and searches with images. We anticipate a learning curve slow down of a few weeks for our staff. The influx of several thousand farm liens being filed with the division during a very short period of time at the same time we are transferring to the imaging system will further exacerbate the problem. In July of 2001 the revised Article 9 of the Uniform Commercial Code becomes effective. While the legislation sets forth several changes, one of the most notable is the requirement for a 48 hour filing turnaround. We expect to be able to meet that requirement.
The additional space gained in the old State Library has been renovated and occupied by part of the Corporation Division. We have moved a total of 25 employees into this space. The document filing sections are now centrally located and are readily available when customer contact is necessary.
In furtherance of the goal of improved customer satisfaction, the Department set about revising all of its forms. Twenty-five per cent could be changed at their reorder point while the other seventy five per cent require legislative changes. Legislation was submitted last session to allow the revisions as well as to permit fund restructuring and other technical changes. This legislation did not come out of the rules committee during the restricted legislative session, but a resubmission is planned for next session.
Members of the Business Acts Advisory Committee continue to monitor statutory changes made in other states and propose similar changes or recommend new legislation in order to keep Illinois competitive as a place to organize and maintain a business entity. The expertise of this committee has broadened with the addition of new legislative members as well as members from the legal profession.
Secretary White has plans for enhanced customer service and more efficient use of taxpayer dollars through advanced technology and innovative approaches to delivery of services, both in the immediate future and over the longer term. I will be reporting on these in future columns.
By James J. Moylan, Tressler, Soderstrom, Maloney & Priess Copyright 2000
I. Introduction
A unique feature of the civil liability provisions in Section 13 of the Illinois Securities Law of 1953, as amended (815 ILCS 5/13) ("Act"), is that the plaintiff/purchaser of the securities must provide the defendant/seller with a written Notice of the Election to Rescind ("Notice") the purchase, "... within six months after the purchaser shall have knowledge that the sale of the securities to him or her is voidable ..." See, section 13.B. of the Act [815 ILCS 5/13.B]. This six-month notice requirement: is an "equitable feature" designed to protect against stale claims, commences when the purchaser becomes "aware" of grounds for voiding the purchase; but is not a statute of limitations. See e.g., Buehl v. Dayson, 127 Ill.App.3d 958, 82 Ill.Dec.869, 469 N.E.2d 403, (Ill.App. 5th Dist. 1984); Bultman v. Bishop, 120 Ill.App.3d 138, 75 Ill.Dec. 552, 457 N.E.2d 994, 997 (Ill.App. 5th Dist. 1983); Gowdy v. Richter, 20 Ill.App.3d 514, 314 N.E.2d 549, 556 (Ill.App. 1st Dist., 3rd Div. 1974); Hidell v. International Diversified Invs., 520 F.2d 529, 539 (7th Cir. 1975).
Providing the written Notice by registered or certified mail is a statutory pre-requisite to filing suit under the Act. Renovitch v. Stewarship Concepts, Inc., 654 F.Supp. 353 (N.D.IL. 1987). However, it has been held that filing a complaint and sending it to the defendant by registered or certified mail within the six-month time frame is sufficient. See, Norville v. Alton Bigtop Restaurant, Inc., 22 Ill.App.3d 273, 317 N.E.2d 384, 391 (Ill.App. 5th Dist. 1974). Until now, no state or federal court has addressed the content of the required written Notice.
II. The case
The issue was squarely presented to the Seventh Circuit Court of Appeals in Jacks v. Schneider Securities, Inc., et al., 217 F.3d 525 (7th Cir. 2000).
Timothy Jacks ("Jacks") filed suit against Schneider Securities, Inc. ("SSI") and two of its stockbrokers, Barry D. Tull ("Tull") and Thomas Grafton ("Grafton") in Rock Island County, Illinois circuit court. SSI is a corporation, engaged in business as a broker-dealer in securities, maintaining its principal place of business in Colorado. Tull is a citizen of Colorado and Grafton is a citizen of California. Jacks alleges Tull and Grafton fraudulently sold him a total of 98,000 shares of Maesa Gaming, Inc. ("Maesa") stock during the period January-March, 1994.
The defendants successfully removed the case to the United States District Court for the Central Division of Illinois and filed a Motion for Summary Judgment, which was granted. The issue defendants raised was that Jacks' two letters to SSI did not constitute a sufficient Notice of his election to rescind under the Act.
By handwritten letter dated August 16, 1996 and sent to SSI by certified mail Jacks stated:
I am making a complaint against Schneider Securities Inc., and Tom Graffton [sic] (stockbroker). He misrepresented Masa [sic] Gaming stock. He sold me appromately [sic] 98,000 share, average stock cost 75 cents per share. When I started selling my stock he quit working for Schneider Securities Inc. and went to work for Masa [sic] Gaming. I believe that there was a [sic] act of fraud. I lost over $50,000. I demand my money back.
See, 217 F.3d 525, at 525-526.
On October 10, 1996 Jacks sent a second certified letter to SSI asking five questions, one of which was whether his August 16, 1996 letter had been received.
III. Discussion
The Seventh Circuit stated that the content of the statutory Notice required by the Act was one of first impression.
The Seventh Circuit quickly disposed of the second letter, concluding that the mere posing of questions does not provide proper notice.
The Seventh Circuit then dissected Jacks' first complaint letter, and stated:
In sum, Jacks' letter did not state he was making his claim under Illinois law. Furthermore, he only stated that he was demanding his "money back," and not that he wanted to rescind the sale. It is unclear if he was demanding only the $50,000 he lost, or the entire amount he invested. It is also unclear whether he wished to keep the stock that he purchased, in which case subsection A [section 13.A. of the Act states that a sale of securities made in violation of the Act is voidable at the election of the purchaser], would not have applied. Because of these factors, we find that neither of the letters Jacks sent to SSI constitute proper notice under §13(B), [sic] even when we interpret the Act liberally as Illinois case law requires.
See, 217 F.3d 525, at 528-529.
Jacks argued that his letters were sufficient. In any event, Jacks argued the 6-month notice requirement is an equitable feature, that when considered in conjunction with the remedial purposes of the Act should be accord a liberal interpretation. Thus, the lack of content in the letter should not bar his suit. See, 217 F.3d. 525, at 529. The Seventh Circuit was not persuaded, stating:
However, under the facts of the present case, there is nothing inequitable about requiring proper notice ... This deviation from the statutory requirements is not a slight variance but rather one which undermines the entire purpose of the notice requirement.
Id.
IV. Comment
The Illinois Securities Department published a "Policy Statement" entitled, "Rescission Offers in Connection with Sales Subject to the Provisions of the Illinois Securities Law of 1953." 2 Blue Sky Law Rep. (CCH) (Illinois),
¶ 23,202 amended (April 11, 1979). This Policy Statement sets forth the suggested content of a rescission offer by the seller of securities in a voidable transaction to "start the clock" on the purchaser's right to rescind. Indeed, the Illinois Securities Department will even provide the seller with a copy of its "Rescission Offer Bulletin" (as amended, 1985) and a draft form of the Rescission Notice Letter, Affidavit, etc. ("Form R") upon request. No comparable Policy Statement or Form Letter exists for purchasers who wish to provide the seller with the statutory "Notice of Election to Rescind."
However, reading the provisions of section 13.B. of the Act, in conjunction with the "Policy Statement" and related materials for a seller seeking to "start the clock" on a voidable securities sale transaction, it is safe to argue that a purchaser's formal Notice under the statute, should address at least the following points, and be sent to the seller within the six-month time frame:
1. The Notice should be directed separately and collectively to each and every person who directly or indirectly participated in the sale and from whom recovery is sought. See, section 13.A. of the Act.
2. The Notice should be sent by registered or certified mail, return receipt requested, to such person's last known address, with proper postage affixed or by personal service. See, section 13.B. of the Act.
3. If the securities are owned in joint names, each jointly named person should formally join in the Notice.
4. The Notice should identify: (i) the security purchased, (ii) the date(s) of purchase, (iii) the purchase price(s), (iv) the amount of income received, if any, (v) the date/event the purchaser discovered the sale transaction is voidable, (vi) state the reason(s) why the purchaser believes the security was sold in a transactions that violated the Act, e.g. the security was sold in violation of the securities registration requirement in section 5 of the Act, the securities were sold in violation of the general anti-fraud provisions of the Act, or in some other violation of Section 12 of the Act, etc., and (vii) provide an affirmative statement that the purchaser is issuing the Notice to the seller(s) within the statutory six-month time frame.
5. The purchaser should state that the purchaser is prepared to tender the securities to the seller or to the court for the purchase price, less income received, if any, plus the statutory interest or, if the securities have been sold, the sale price thereof, date(s) of sale and statutory interest due on the balance, (i.e., the rate stipulated in the instrument, otherwise currently 10% per annum). See section 13.A.(1) of the Act.
6. The Notice should state that it expires 15 days after receipt. See, section 13.C. of the Act.
V. Conclusion
A practitioner retained to represent a purchaser of securities seeking to rescind the investment is advised to compose and send, by registered or certified mail, a specific Notice of Election to Rescind, within the six-month statutory time-frame, containing the content suggested above; or face a Jacks challenge to the client's ability to pursue the claim under the Act in a judicial or arbitration proceeding.
Electronic business transactions
By Ethel Spyratos, Rooks, Pitts and Poust
As commerce evolves, businesses are confronting electronic transactions. As a result, the business arena is confronted with electronic contracting issues. Among the first states to address the issues of enforcability of electronic contracts is Illinois. Illinois enacted the Electronic Commerce Security Act ("ECSA") that became effective as of July 1, 1999. ECSA applies to business, government and commercial matters. Ensuring integrity and reliability of electronic records and minimizing incidences of forged records distinguishes ECSA from other laws regulating electronic transactions laws, including the Uniform Electronic Transaction Act ("UETA") and Electronic Signatures in Global and National Commerce Act (S. 761) ("E-Sign"). The UETA has been adopted by 22 states1 and its adoption is pending in five other states 2 and the District of Columbia. Illinois has not adopted UETA nor it does not appear that it will since ECSA contains provisions substantially similar to UETA. ECSA also incorporates important additional provisions that address integrity and fraud issues relating to electronic transactions. To the extent ECSA does not address certain electronic contracting issues, UETA may be a source of guidance.
ECSA
ECSA is intended to facilitate electronic communications by providing procedures for creating and verifying electronic contracts and signatures, promote efficient delivery of government services by means of reliable electronic records, minimize the incidence of forged records, establish uniformity of rules regarding authentication and integrity of electronic records, and promote integrity and reliability of electronic records.
Highlights of ECSA
Under ECSA, electronic records may be used as "original" records if the integrity of the records can be assured. Section 5-125 of ECSA states that "where a rule of law requires information to be presented or retained in its original form, that rule of law is satisfied by an electronic record if there exists reliable assurance as to the integrity of the information from the time when it was first generated in its final form, as an electronic record or otherwise." This section of ECSA permits contracting parties to be better assured of firm transactions with respect to business deals.
ECSA also provides rules for securing and certifying electronic records and electronic signatures. Sections 10-105 and 10-110 state that electronic records or electronic signatures shall be considered to be secure if the electronic record or electronic signature can be verified through the use of a qualified security procedure. A qualifying security procedure is a security procedure for detecting changes in the content of an electronic record or identifying a person that is: 1) previously agreed to by the parties; or 2) certified by the Secretary of State. Section 10-135 authorizes the Illinois Secretary of State to certify security procedures as referenced in sections10-105 and 10-110, and provides guidelines for certifying security procedures. Last, ECSA also incorporates provisions that pertain to fraud issues, including with respect to signatures and certification of signatures.
UETA
The National Conference of Commissions on the Uniform State Laws promulgated the Uniform Electronic Transactions Act ("UETA") to create a national standard to govern electronic transactions related to most business, government and commercial matters.
Highlights of UETA
UETA provides for the legal recognition of electronically produced and transmitted signatures, records, transactions and contracts. Of particular interest are the provisions of UETA concerning the use of valid electronic signatures to make binding contracts. Under UETA an electronic signature will be valid if it can be attributed to a particular person. Other provisions include:
* §9 states that an electronic record or signature is to be attributed to a person if it was the act of the person and is to be determined from the context and surrounding circumstances at the time of the creation, execution or adoption of the record
* §10 contains specific provisions governing the effect of the failure to use an agreed security procedure, and the impact of mistakes made by an individual while dealing with an electronic agent, and specifies that, except as specifically provided, the rules of mistake otherwise apply
* §15 contains provisions relating to the determination of whether something has been sent or received to the communication system used by the parties and specifies that, unless otherwise agreed, they are sent or received from the parties' principal place of business or residence
* §13 specifies that electronic records are not to be denied admissibility into evidence solely because the records are in electronic format.
ECSA vs. UETA
ECSA and UETA contain similar provisions concerning:
* legal recognition of electronic transactions
* procedures for electronic record retention
* attribution and effect of electronic record and electronic signature
* admissibility of electronic records and electronic signatures into evidence
Major provisions of UETA which ECSA does not address are:
* when an electronic record is deemed to be sent or received
* procedures for handling mistakes or errors in electronic communications
Major provisions in ECSA which UETA does not address are:
* integrity of an electronic record
* secured electronic records and electronic signatures
* security procedures for electronic records and electronic signature
* certification of security procedures
* fraud issues, including with respect to signatures and certification of signatures.