John bought 12 paintings from Theo's Art Gallery at a total cost of $1 million. Theo told John that the paintings were a safe investment that could only go up in value. The gallery permitted any purchaser to trade-in a painting in exchange for any other artwork the gallery owned. In the trade-in, the purchaser would get credit for the amount of the original painting and then pay the difference if the new painting was worth more. When John's paintings did not increase in value, John sued Theo for a violation of the US securities laws.

1. What securities law would John claim was applicable to the sale of the paintings?

2. Who wins? ___ John ____ Theo

3. Why?