Securities Regulation Outline

Securities Regulation II

Professor Robert Hillman

Spring 2012

I. 1933 ACT LIABILITIESS

Section 11: Liability for Defective Registration Statements

Statute: A person acquiring a security whose registration statement contained

An untrue statement of a material fact

i. Or an omission of a material fact

Required to be stated therein,

i. Or necessary to make statements therein not misleading

May sue proper parties,

Unless he knew at the time of such untruth or omission

i. Note: free writing prospectus is not part of the RS

Proper Parties

Issuer

Signatories of the registration statement (RS)

i. Usually including major officers and at least half of the directors

Directors

Underwriters

Experts

i. People who prepare or certify parts of the RS; those providing expert opinions

1. E.g. public accounting firm that certifies the financials

ii. Have liability only for their statements or the material they certify

Others:

i. Lawyers

1. Generally not, unless providing a specific statement that constitutes part of the RS

a. E.g. writes an opinion that the corporation has followed all corporate formalities, and it hasn’t

2. Are exposed to major malpractice liability though

ii. Control persons

1. § 15 provides creates joint and several liability for control persons for violations of §11

a. Unless he has no knowledge of the violation

2. Classic control person: large shareholder who controls management

Note: if you don’t think you can get much money out of someone, might want to try to get their cooperation/testimony in exchange for not suing

Defenses

Issuer – none. Strict liability.

i. All others – Section 11(b): due diligence

Non-Expertised Parts

i. Experts have no liability here

ii. Non-experts have satisfied due diligence if:

1. He conducts a reasonable investigation

2. And has reasonable grounds to believe that the registration statement is truthful, complete and accurate

Expertised Parts

i. The expert: satisfies the defense if he believed that his statements are true after conducting a reasonable investigation

ii. The non-experts: satisfy the defense if they had no reason to believe the expertised parts were not true and complete

Investigations

Escott v. BarChris

i. Financial statements only expertised if certified, which happens annually

ii. Sliding scale: people more involved in the RS probably held to a higher standard

1. Here, preparer just took management’s word on lots of issues without independent verification

2. This is not reasonable investigation where there were many options he could have pursued

iii. New Director: maybe different scale of reasonableness, but has to do something

WorldCom

i. Shelf Registrations: same level of reasonable inquiry required from underwriters as in normal Registrations

1. Although, time constraint may make this nearly impossible – often underwriters not chosen until the last minute

2. But statute doesn’t distinguish between Registrations

ii. Note: opinion from a summary judgment – court not going to be favorable to ∆s

Red Flags

i. WorldCom, BarChris: When they come up, what is reasonable may mean added diligence

ii. Expense/revenue ratio much lower than competitors

1. When reporting better-than-industry norms, need to check the numbers

iii. IPOs

1. Indication to experts that the company has never done this and might need more careful examination

Methods

i. File searching: probably only need to spot check files

1. Going through all files probably wouldn’t be reasonable

ii. Serious questioning of management

iii. Create a paper trail

1. Be discreet, but establish that you’ve made an investigation

Section 11(e): Damages

Damages=amount paid (not to exceed public offering price) minus

i. Value at time suit brought

ii. If value declines more, you had an opportunity to mitigate damages and sell your stocks

Negative Causation

i. If any portion of the loss (i.e. drop in price) is attributable to factors other than the registration statement, then the ∆ is not liable for that portion

1. E.g. if the price dropped, and the entire market dropped also

2. Heavy burden of proof on ∆

ii. Akerman v. Oryx Comm.: See if stock price drops before disclosure

1. Court finds that drop before public disclosure (even after disclosure to the SEC) won’t contribute to damages

2. Doesn’t address insider trading possibilities, or who has the burden of proof (people trading on the info causing price to drop)

a. Conflicting experts, but court still went with ∆

Release of Positive Information

i. Release of positive information prior to suit may cancel out any price drop due to public disclosure of RS error

ii. Doesn’t matter that price would have gone up but for the RS problem

Plaintiff Hurdles

Section 13: Statute of Limitations

i. One year after th