Randall Fincke (Fincke) was an entrepreneur on a mission to expand automated electronic defibrillation (AED) technology. In 2000, Fincke and a business partner formed Access Cardiosystems, Inc. (Access) to market, manufacture, and sell Fincke’s new AED technology. From its inception, Access was not financially stable, and in early 2001, Fincke was forced to invest his personal funds into the company. Subsequently, Fincke began to look for outside investors to help fund Access’s business operations. Eventually, Fincke found three loyal investors (the Investors), who invested 4.6 million dollars in Access between the spring of 2001 and June 2002.
In July 2002, Fincke received a letter from Phillips Electronics (Phillips) indicating that Access’s new AED technology infringed on one of Phillip’s patents. By October 2002, Access’s financially instability continued, and as a result, Fincke presented a business plan to the Investors and one potential new investor (the New Investor) with the hopes that they would make additional financial contributions to Access. The business plan outlined Access’s financial status, risk factors, and litigation issues; however, it did not reveal the patent infringement letter from Philips. Shortly after receiving the business plan, the New Investor, who had no prior dealings with Fincke or Access, invested two million dollars in Access. In April 2003, despite the new capital, Access remained financially unstable, and the Investors converted their debt into equity and purchased additional Access stock thereby forcing Fincke to relinquish his majority ownership of Access to the Investors. Simultaneously with Fincke’s cessation, a board of directors was created with the Investors, the New Investor, and Fincke as directors. In November 2003, however, the board removed Fincke from his position because they began to suspect he mismanaged Access and made misrepresentations to them regarding Access’s financial and operational success.
In 2004, after Fincke was ousted from Access, he attempted to assert control over Access’s intellectual property, and the Investors along with the New Investor filed suit against Fincke in the Massachusetts Superior Court alleging fraud, misrepresentation, and violations of Section 410(a)(2) of the Massachusetts Blue Sky Laws. On February 8, 2005, Access filed for bankruptcy and the case was removed to the bankruptcy court. The bankruptcy court found that Fincke made a material misrepresentation in the 2002 business plan, in violation of Section 410(a)(2) of the Massachusetts Blue Sky Laws, by failing to disclose the Phillips patent infringement issue. Additionally, the court found that the New Investor was entitled to damages as a result of Fincke’s violation of Section 410(a)(2) because his investment was solicited by means of the business plan. On appeal, the Massachusetts District Court affirmed the bankruptcy court’s findings. Subsequently, Fincke appealed to the First Circuit Court of Appeals, arguing that the New Investor was not entitled to damages under the Section 410 (a)(2) of the Massachusetts Blue Sky Laws because his investment was not solicited “by means of” Fincke’s misrepresentations in the business plan as required by the statute.
Massachusetts Blue Sky Laws
The Massachusetts Securities Laws (the Blue Sky Laws) are comprised of Mass. Gen. Laws. ch. 110A, § 101 et. seq. In relevant part, Section 410(a)(2) of the Blue Sky Laws prohibits a person from “offer[ing] or sell[ing] 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.” In enacting the Blue Sky Laws, the legislature intended the statutes to be interpreted in accordance with Section 12(2) of the Securities Act of 1933. Indeed, the language of the Section 410(a)(2) is virtually identical to the text of Section 12(2) of the Securities Act of 1933. Accordingly, courts interpreting Section 410(a)(2) utilize the plain language of the statue, Massachusetts case law, and federal case law under Section 12(2) of the Securities Act of 1933.
Section 410(a)(2) of the Blue Sky Laws is both redressive and preventative, and as such, it achieves many objectives. In the most literal sense, Section 410(a)(2) grants buyers of securities a special remedy against sellers who secure their investment by means of fraud or misrepresentation. Figuratively, Section 410(a)(2), seeks to level the playing field in the securities market and create a higher level of business ethics by compelling disclosure of unpropitious matters that could substantially influence a buyer’s decision to invest in a seller’s venture. Additionally, “Section 410(a)(2) provide[s] a heightened deterrent against sellers who make misrepresentations by rendering tainted transactions voidable at the option of the defrauded purchaser, regardless of the actual cause of the investor’s loss.”
The “by means of” language in Section 410(a)(2) plays a critical role in assessing liability under the statue because it is one of the only built in mechanisms that limits the defendant’s liability. However, there is scant legal precedent interpreting the “by means of” clause in Section 410(a)(2). Nevertheless, some matters surrounding the clause are clearly settled. Firstly, the clause imposes liability on the seller regardless of whether the buyer relied on the misrepresentation. Secondly, the provision requires privity between the buyer and seller. Thirdly, the clause mandates that there must be a causal connection between the seller’s misrepresentation and the buyer’s investment. Courts interpreting the causal connection requirement have found that the sale does not need to be directly related to the alleged misrepresentation. Therefore, the causal connection requirement will be satisfied simply if the misrepresentation is used to effect the sale.
The First Circuit’s Decision
The First Circuit Court of Appeals affirmed the lower courts’ findings and rulings. The Court held that under Section 410(a)(2) of Massachusetts Blue Sky Laws, investments are solicited “by means of” a material misrepresentation “when the communication containing the material misrepresentation was used to effect the sale—and not whether it was actually successful in securing the sale.” The court reasoned that the central purpose of Section 410(a)(2) was to deter securities fraud, and the “use” approach followed in suit with this purpose and was consistent with Massachusetts precedent. Furthermore, the court found that when analyzing the “use” approach, courts should use utilize objective evidence in determining whether the seller violated Section 410(a)(2). Additionally, the Court noted that reliance on the part of an investor was not integral to analyzing whether their investment was solicited “by means of” a material misrepresentation because action by the seller alone is sufficient to trigger a violation of Section 410(a)(2). Using these directives, the First Circuit Court of Appeals held that Fincke violated Section 410(a)(2) because objective evidence illustrated that the New Investor had no prior dealings with Fincke, and his decision to invest followed on the heels of receiving the misrepresented business plan.
The First Circuit Court of Appeal’s decision provides clarity to Section 410(a)(2) of the Massachusetts Blue Sky Laws. Going forward, courts will utilize a seemingly bright-lined test for determining whether a seller violates Section 410 (a)(2). That test is, when viewed objectively, whether the material misrepresentation was used to effect the sale. Notwithstanding this test, the First Circuit Court of Appeals may have created a slippery slope for future litigation because it did not place temporal limits on its test. In In re Access Cardiosystems, Inc., Fincke distributed the misleading business plan in October 2002, and the New Investor contributed to Access on October 30, 2002. The period between Fincke’s distribution of the business plan and the use of the material misrepresentation is extremely short. The First Circuit Court of Appeals placed no temporal limits on its test to deal with future cases where the misrepresentation and use are not closely connected in time. By placing no qualifying limits on its test, the First Circuit Court of Appeals might have created the presumption that the “use” approach allows for a seller to be liable under Section 410(a)(2) of the Massachusetts Blue Sky Laws for an infinite amount of time after they make a misrepresentation.
Looking ahead, courts will likely be forced to redefine the “use” approach as put forth by the First Circuit Court of Appeals. Future defendants will urge the courts to place temporal limits on this approach, arguing that a material misrepresentation, as objectively viewed, cannot be used for an infinite amount of time so as to fraudulently influence a sale. Conversely, future plaintiffs will contend that once a misrepresentation is made it lasts forever. When presiding over these cases, courts should make their determinations on a case-by-case basis, utilizing objective evidence and their discretion. Additionally, courts should not attempt to undertake fashioning a rigid rule regarding timing because cases involving Section 410(a)(2) of the Massachusetts Blue Sky Laws are very fact intensive and an inflexible rule would not serve the litigants’ justice in these cases.
Nicole A. Maruzzi, Commentary, Bluer Skies in Massachusetts: First Circuit Clarifies Section 410(a)(2) of the Massachusetts Blue Sky Laws, 4 Suffolk U. L. Rev. Online 2 (May 16, 2016), http://suffolklawreview.org/bluer-skies-in-massachusetts
 See Access Cardiosystems, Inc. v. Fincke (In re Access Cardiosystems, Inc.), 404 B.R. 593, 609 (Bankr. D. Mass. 2009) aff’d, 488 B.R. 1 (D. Mass. 2012).
 See id. at 610 (describing formation of Access). Access was originally incorporated as Acelex and the name of the corporation was later changed to Access Cardiosystems, Inc. Id.
 See id. at 610-11 (summarizing Access’s financial turbulence).
 See id. at 611 (outlining Fincke’s search for outside investors).
 See id. at 613.
 See In re Access Cardiosystems, Inc., 404 B.R. 593, 614-15 (Bankr. D. Mass. 2009) aff’d, 488 B.R. 1 (D. Mass. 2012) (outlining contents of business plan).
 See id. at 614 (noting discrepancies in business plan).
 See id. at 615 (describing investments made by New Investor).
 See Access Cardiosystems, Inc. v. Fincke (In re Access Cardiosystems, Inc.), 460 B.R. 67, 71 (Bankr. D. Mass. 2011) aff’d in part, vacated in part, 488 B.R. 1 (D. Mass. 2012) aff’d, 776 F.3d 30 (1st Cir. 2015) (summarizing stock plan leading to Fincke’s cessation of ownership).
 See id. (describing formation of new board of directors).
 See id. (outlining removal of Fincke for misrepresentations and mismanagement).
 See id. at 72-73 (setting forth events leading to litigation).
 See In re Access Cardiosystems, Inc., 460 B.R. 67, 71 (Bankr. D. Mass. 2011) aff’d in part, vacated in part, 488 B.R. 1 (D. Mass. 2012) aff’d, 776 F.3d 30 (1st Cir. 2015) (describing procedural path of litigation).
 See In re Access Cardiosystems, Inc., 776 F.3d 30, 32 (1st Cir. 2015) (discussing lower court’s ruling).
 See id. (discussing procedural history).
 See id. at 34-35 (outlining Fincke’s challenges to damages award).
 Mass. Gen. Laws. ch. 110A, § 410(a)(2) (2015).
 See Marram v. Kobrick Offshore Fund, Ltd., 809 N.E.2d 1017, 1025 (Mass. 2004) (discussing history of Massachusetts Blue Sky Laws).
 See Mass. Mut. Life Ins. Co. v. DB Structured Products, Inc., 110 F. Supp. 3d 288, 297 n.9 (D. Mass. 2015) (recognizing similarities between state and federal laws).
 See Marram v. Kobrick Offshore Fund, Ltd., 809 N.E.2d 1017, 1025 (Mass. 2004) (setting forth method of interpretation for applying Blue Sky Laws).
 See Harry Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227, 227 (1933) (describing dual purpose of Securities Act).
 See Mary Elizabeth Bierman, Mixed Arbitrable and Nonarbitrable Claims in Securities Litigation: Dean Witter Reynolds, Inc. v. Byrd, 34 Cath. U. L. Rev. 525, 532 (1985) (highlighting special remedies in cases of misrepresentation or fraud).
 See Michael J. Kaufman, Legislative History of 1933 Act civil Remedies, 26 Sec. Lit. Damages § 6:6 (2015) (noting additional purposes of Securities Act of 1933).
 See Marram v. Kobrick Offshore Fund, Ltd., 809 N.E.2d 1017, 1025 (Mass. 2004) (internal quotations omitted).
 See Arnold S. Jacobs, 5 Disclosure & Remedies Under the Sec. Laws § 3:148 (2015).
 See In re Access Cardiosystems, Inc., 776 F.3d at 35 (1st Cir. 2015) (highlighting lack of case law regarding interpretation of language).
 See David O. Blood, Comment, There Should Be No Reliance in the “Blue Sky”, 1998 B.Y.U. L. Rev. 177, 185 (1998).
 See Sanders v. John Nuveen & Co., 619 F.2d 1222, 1225-26 (7th Cir. 1980).
 See Alton Box Bd. Co. v. Goldman, Sachs & Co., 560 F.2d 916, 924 (8th Cir. 1977).
 See J. William Hicks, 17A Civil Liabilities: Enforcement & Litig. § 6:118 (2015).
 See In re Access Cardiosystems, Inc., 776 F.3d at 33, 37 (1st Cir. 2015).
 See id. at 36.
 See id. (discussing persuasiveness of “use” approach).
 See id. at 36-37 (discussing objective standard).
 See In re Access Cardiosystems, Inc., 776 F.3d at 37 (1st Cir. 2015) (noting reliance not needed to advance claim).
 See id. (outlining objective evidence against Fincke).
 See id. at 36.
 See In re Access Cardiosystems, Inc., 404 B.R. 593, 614-15 (Bankr. D. Mass. 2009) aff’d, 488 B.R. 1 (D. Mass. 2012) (summarizing timeline of events).