In a state-administrator case study, the scenario starts here. Focus on what changes once the scenario is viewed through state law. An agent is sued for making material misrepresentations during the sale of a registered security. Under the USA, the agent may avoid liability by proving that:

AThe client is a sophisticated investor who should have known better
BThe misrepresentation was made verbally rather than in writing
CThe client made a profit on the transaction despite the misrepresentation
DThe agent did not know, and in the exercise of reasonable care could not have known, of the misrepresentation✓ Correct answer

Explanation

Why D — The agent did not know, and in the exercise of reasonable care could not have known, of the misrepresentation

Under USA Section 410(b), a seller has an affirmative defense to a fraud-based civil liability claim if the seller can prove that they did not know, and in the exercise of reasonable care could not have known, of the untruth or omission. This is sometimes called the "due diligence" defense. State-law analysis leads to the same conclusion despite the alternate scenario.

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