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SECURITIES REGULATION • • •
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sales of securities by the issuer issuer to investors Issuer Transactions Transactions —involving the sales selling of outstanding outstanding securities among investors investors Trading transactions —purchasing and selling Primary Market=new companies, new IPOs Only a select few can get a piece of it at first o Secondary Market=old stocks o There is much more information involved and EVE!O"E can buy or sell these #!PO$ If you want to raise %&'' million interest rate Bond Issue —borrowing at an interest o People need a level of security before they invest with you and take on your debt —these assets set aside aside for debt, make the interest rate rate Security Interest —an asset-backed deal —these lower take on any more debt Restrictive Covenants Covenants —agree to "OT take o amount of capital aside for debt Equity Cushion —putting ( amount o Must think creatively creatively of what will increase increase investor investor interest interest and lower interest interest rate o DEFINITION OF SECURITY SEC v. W !owey )&*+o Issuer as a citrus grove, selling it to people as an investment little plots, issuer does .// of the
work I001E$ Is this an INVESTMENT CONTRACT hich !"ld #ake it a SECURITY "nde$ %&'() !* the +,, Act #akin it ha.e t! be REGISTERED "nde$ %/0 !E0—this I0 ." I"VE0T2E"T 3O"T.3T, #O4$ '() 2ust be an investment of "oney '&) Into a co""on enter#rise ',) 5or #rofit #rofit '1) 2$!*it de$i.ed SOLELY FROM T3E EFFORTS OF OT3ERS Investor must have significant and essential managerial efforts o There was an investment of money, into this common enterprise, for profit, and 3!e4 did o
e.e$4thin that de$i.ed the 5$!*its $nited !ousing %oundation v. %or"an )&*67#ousing development, told people that if they bought 8&9 shares of stock: then the y could get a
room for the low price; They did, but price went went up, bring suit saying saying this is a security I001E$ Is this a sec"$it4 "O—This is "OT . 0E31IT! St!ck6 NOT A STOC7 3ERE8S"bstance !.e$ F!$# F!$# 3ould "OT assign it& #ledge it& use it for loan& no rights to #rofit o O"/! could 3O"012E IT o If you leave have to sell it back at 5I(E< price, "OT at profit o 3! t! *i"$e !"t i* it is stock: 3alled stock= issued by company= given for #rofit #rofit = gives a share of #rofit #rofit = maybe o derived from the efforts of others= cannot have ma>or control by the investor; The right to receive dividends contingent upon profits o o "egotiability .bility to be pledged as collateral o Voting Voting rights o 3apacity to appreciate in value o 0ale of it by a corporation o
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RULE6 when a #urchaser is "otivated to use or CONSUME the the ite" #urchases then the o
securities laws do '(T a##ly SEC v. Edwards )?''+-—the %I)E* return return People invested in a payphone sale and leaseback deal for investment, Edwards does .// O5
T#E 4O@—/ike !owey People got a &+A annual return—. 5I(E< ET1" 3ompany goes belly up I001E$ Is this an in.est#ent c!nt$act9 th"s a sec"$it49 e.en hen it is a FI:ED $et"$n $athe$ than a VARIA;LE $et"$n !E0 T#I0 I0 ." I"VE0T2E"T 3O"T.3T Security definition is BROAD BROAD in order to be !E"#B!E to ada$t ada$t to a%% of t&e situations in '&ic& $eo$%e de(ise $%ans to sc&eme ot&ers 0.TI05IE0 .// O5 T#E E/E2E"T0 O5 #O4E!—B1T, 5I(E< distinction bet'een #"ED return return and RULE6 Does not 'ant circum(ention) NO distinction *AR#AB!E return o
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Bel"ont Reid Buying gold coins off of a company that is going to refine them soon so that they can catch the
rising market for gold and be 4OT# 2OE Invest"ent Contract+!(WE, Contract+!(WE, 2oney$ !E0 ECpectation of Profit$ !es 3ommon enterprise relying solely on others for profit elying on them to refine in order to catch rising market o YES9 in.est#ent c!nt$act beca"se !* this $eliance o If "O rising market, NOT an in.est#ent c!nt$act9 >ust relying on #a$ket o Chinchilla Case !ou !ou buy a chinchilla, take care of it, then it has babies and the promoter buys them back from you at profit Investment contractD !owey2oney$ !es Profit$ !es !es 3ommon enterprise relying on the efforts of others$ The investors took care of the animals #O4EVE, their resale ca me from the o promoters making their their success rely on the efforts efforts of others .lso, they are not eCpert investors ."< there is a lack of disclosure here$ o They are very challenging to raise and die a lot of the time ti me The court does '(T want to allow circu"vention of the regulations regulations y giving o $artici$ation /'* the court wants to 0R(TECT investors investors NOM#NA! $artici$ation fro" shady shady sche"es. o NOM#NA! PAR+#C#P PAR+#C#PA A+#ON NO+ ENOU,- ENOU,- McSushi Case 5ranchisee manager "OT an investment investment contract "OT relying on on efforts of others—!O1 others—!O1 2.@E T#E <.! <.! TO <.! <.!
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Broad 1ert 1ertical ical Co""onality /ook only to a connection between the efforts of the promoter and the collective • successes or losses of the investors Strict 1ertical Co""onality eFuire a direct relationship between the success of the promoter and that of the investors • —reFuires the promoters promoters and investors to share share the risks of the venture venture !ori2ontal Co""onality Co""onality o eFuires a POO/I"G of investors funds—emphasiHes the common enterprise among investors 2ARTNERS3I2 AND LLC INTERESTS AS SECURITIES Rea%ities +est +est $S v. 3eonard+ Substance.Economic Rea%ities o
?'A commission, really taking 7'A;
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derived solely fro" the efforts of others and it shows on their
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//3 interests are investment contracts, the analysis parallels that of GPs and /Ps L2s dee#ed In.est#ent C!nt$acts and Sec"$ities8Lack !* C!nt$!l !ook to '&et&er t&e in(estors/ in(estors/ contro% o$tions are more t&eoretica% t&an rea% ; Therefore& Securities3orporate 0tock /imited Partnerships Interests in 2anagerJmanaged //3s '(T SecuritiesSecuritiesGeneral Partnerships Interests in 2emberJmanaged //3s 3andreth Case Case I5 you can use the F!$#an Ele#ents *!$ *indin !"t i* it is a St!ck then 4!" d! NOT need t!
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! t! a 3!e4 anal4sis #EE, they had all the F!$#an characteristics of a stock—!E0, a security, security, "o #owey needed 3Y2O6 Thinking of making a stock buy by 0am himself or 0ams 3orp; will buy all assetsKliabilities o The .sset buy will "OT be a security The 0tock buy 4I// be a security REAL ESTATE AS SECURITIES GENERAL RULE6 0tandard real estate transaction in the form of a sale or lease of property does NOT o involve the offer of a security; ;UT9 IF o
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Promises of postJacFuisition I"3O2E, O .spects of 2anagement 3ontrol, O .ppreciation from future development of the .3T1./ issuer issuer or seller !ocking v. *uois )&*9*Guy in Vegas wanted to buy a condo in #awaii for an investment
relinFuished any right to enter or use use the property !owey because he relinFuished Invest"ent of Money Money !E0, for profit o Co""on Enter#rise !es, !es, the purchase of real estate combined with a rental pool does evidence o horiHontal commonality E5#ectation of 0rofits 0rofits fro" fro" efforts efforts of others !es, he is ineCperienced and lives far away, no day to day working o Gets to go beyond summary >udgment NOTES AS SECURITIES Di**e$ence !n the t$eat#ent !* n!tes b4 the t! acts6 o +,, Act o . security is any note B1T "OT a note that arises out of a current transaction that will mature 4IT#I" nine months +,1 Act o . security is any note B1T "OT a note with a maturity of /E00 T#." nine months Therefore, any note with a maturity eCceeding nine months would seem to come sFuarely within the o statutory definitions of a security; +y$ica% Attributes of a NO+E o )&- 5iCed, periodic Interest rate )?- 5iCed 2aturity rate )L- "O voting rights Reves v. Ernst 6 ,oung ,oung )&**'o 3ompany sold
udicially crafted e3ce$tions$ )&- "otes delivered in consumer financing o
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)?- #ome mortgages )L- 0hort term notes secured by a lien—to cover short term cash flows, for small business, want them to have cash )+- 3haracter loan—based on good reputation with lender )7- 0hort term notes secured by accounts receivable )- "ote evidencing open account debt )6- "ote evidencing loans by commercial banks for current operations;
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)&- 3oJop sold the notes in an effort to raise capital for its general business operations ."< purchasers bought for an investment opportunity, profit )?- Offered and sold to a broad segment of the public—this is all that is needed to satisfy this—&'' investors )L- .dvertised as investments to the public, thats what they thought )+- "O risk reducing factors—uncollateraliHed and uninsured ."< ."< would escape federal regulation entirely; +&erefore) t&e note #S a security =ith 3O=EY8Y!" 3O=EY8Y!" need ALL !* the ele#ents t! 5ass o =ith Re.es8this is a FACTOR FACTOR TEST8a ;ALANCING TEST o =hen talkin ab!"t NOTES8G! t! Re.es FIRST MATERIALITY LL and L+ .ct$ o egistrants must include in their registration statement such further 2.TEI./ 2.TEI./ information as may be necessary to make the reFuired statement, in light of the circumstances, n!t #isleadin> Rule of Thu"o . misstatement misstatement regarding a financial statement item of 7 percent or less is "OT material; Basic Inc. v. 3evinson )&*99o In.!l.es +,1 Act %(?'b) #ate$ialit4 $e@"i$e#ent Basic says there are no merger talks, Ms sell stock, they actually have a merger, stock goes up Mate$ial Mis$e5$esentati!n R"le6 F$!# +SC #ndustries )&- 0ubstantial /ikelihood )?- That a easonable investor would find it important )L- .nd would alter the total miC of the information available; s state that disclosing everything could ruin deals and mislead investor 3ourt states RULE6 Probabi%ity Re%ati(e Re%ati(e to Ma4nitude +est +est 3ourt states that "ateriality will de#end at any given ti"e u#on a o Ba%ancin4 of of oth t&at t&e e(ent 'i%% occur and The indicated $robabi%ity t&at and o The antici#ated ma4nitude of t&e e(ent in in light of the totality of the co"#any o activity. Use 2$!babilit4 Relati.e t! Manit"de Test *!$ CONTINGENT EVENTS TRUT3 ON T3E MAR7ET 'S"b-Set !* Mate$ialit4) Wieglos v. Co""onwealth Edison )&*9*o Investor in a "uclear eactor 3ompany; 3ompany; Edison reports they will be building building new nuclear reactor •
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sites and this is how long it will take if everything goes right Outside analyst and newspaper reports stating that they will be delayed Ms bring suit because they are delayed dela yed +rut& on t&e Market Defense out t&ere) t&at is common%y kno'n) t&en $eo$%e $eo$%e 'i%% RULE6 Based on t&e information out &a(e to understand t&at t&ey cannot take '&at a com$any says is true '&en it is a4ainst a%% of t&e ot&er outside information5 •
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/ook at the o7ective nature of this situation, if there is enough outside information for a reasonable investor to know what is true; "O liability because there was outside information saying otherwise and their statements were optimistic and not misleading so it did "OT alter the total miC of the information available; 2UFFERY 'S"b-Set !* Mate$ialit4) Eisenstadt v. Centel Cor# )&**6o 3entel disclosed that they got two investment banks to help in their sale and that the sale process •
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was going 02OOT#/!, ended up selling really low; 2"**e$4 is NOT Mate$ial Mis$e5$esentati!n Everybody knows that someone trying to sell something is going to look and talk on the bright side, wouldnt influence a reasonable investor Mere sa%es Puffery is NO+ actionab%e under 678b9 3Y2O8 you have a sales lien and attorney tells you, you cannot sell this, and you say things are •
going smoothly T3IS IS Mate$ial Mis$e5$esentati!n and IS acti!nable8the sale is OVER I* it is "st ROUG3 2ATC3 like Centel8it is STILL GOING8!k t! 5"**e$4 3Y2O8 1irginia Bank Case o 3ompany says that we are receving high price for our stock B1T T#E! @"E4 that they were "OT from a report This is NOT 5"**e$48this is CONCRETE Anal4Be it O;ECTIVELY8hat did the4 7NO= SOFT INFORMATION 'Mate$ialit4) .bout information in the 51T1E, F!$a$d L!!kin State#ents o +&e ;Bes$eaks Caution< Doctrine o 8auf"an v. Tru"#9s Castle %unding )&**Lo Trump looking for investors for his casino, there is Ca"ti!na$4 Lan"ae in the c!nt$act .lso it is very narro'%y tailored and talks about the peak seasons of .tlantic 3ity and the difficult business of operating a successful casino, no operating history, who knows how it is going to perform, capacity is huge, hard to fill, and profits and casinos generally were going to fall, permits Bes$eaks Caution Doctrine :;< Cautionary language in the offering docu"ent 'E=/TES the "ateriality of an alleged "isre#resentation or o"ission )?- #as to substantive and tailored to the specific future pro>ections, estimates or opinions in the prospectus which the Ms challenge o 3.""OT BE BOI/EP/.TE 3ERE8NOT ene$al9 na$$!l4 tail!$ed ca"ti!na$4 lan"ae8NO Liabilit4 Safe -arbor for or'ard9!ookin4 Statements o N&A to 0ecurities .ct, N &(E to ECchange .ct, F!$ 2$i.ate Rihts !* Acti!ns ONLY )&- Bes#eaks Caution 3anguage )?- OR9 if M fails to prove that the forwardJlooking statement was made with /CT$/3 8'(W3E*=E it was misleading 3an be for O./ forwardJlooking statements as well I5 the listener can find the Fualifying meaningful cautionary information; "OT available for IPOs, tender offers, and goingJprivate transactions; +&ink about '&at Obecti(e%y) in common sense) 'ou%d be MA+ER#A! orm >9?: '&at needs to be disc%osed: Amon4 ot&ers: Insolvency—bankrupt 3hange in control—triggering debt obligations •
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estrictive covenants 3onflicts of interest .cFuisitions "otice of deJlisting—shows that they failed to maintain certain reFuirements 4aiving code of ethics /sher v. Ba5ter International )?''+F!$ Mate$ial Misleadin Mis$e5$esentati!n o Y!" need t! sh!6 Materiality /'* RE3I/'CE 5or F$a"d !n the Ma$ket DO NOT NEED RELIANCE9 "st #ate$ialit4 and a t!tal #i e**ect o #ere, profits did not match eCpectations on press releases Safe !aror a##lies here is cautionary forward4looking state"ents+Bes#eaks *octrine 'eed '(T identify what /CT$/33, is going wrong o !(WE1ER& !ERE& t&e cautionary %an4ua4e remained #"ED instead of c&an4in4 'it& t&e c&an4es0&a(e to see if t&is is materia%0AR,UE +-A+ #+ #S Duty to Disc%ose or'ard9!ookin4 Statements @Materia%ity In*! MUST be Mate$ial AND An #nde$endent Duty to Disc%ose t&e #nfo Co"es fro" the Disc%osure Ru%e of NO -A! +RU+-S #alf Truths "easured at the TIME T!E, WERE *ISC3(SE*+no hindsight 0anther Case ecting huge gains—look to see if assumption makes sense 3ook at the level of CERT/I'T, for Soft Infor"ation Disc%osure0Mana4ement #nte4rity @Materia%ity In the Matter of %ranchard Cor# 3orporation owned by Glickman—people revered him and respected his reputation The IPO in this corporation was made based on his reputation
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In the Matter of WR =race "O" disclosure of #1GE retirement benefits for Grace r; 2anagers did '(T question why this was left out of the disclosure re#orts RULE6 If an officer or director 8'(WS (R S!($3* 8'(W that his or her co"#any9s state"ents concerning #articular issues are inadequate or inco"#lete& +&ey &a(e an ob%i4ation to correct t&at fai%ure5 T3E 2U;LIC OFFERING o %/ !* the +,, Act B/RS any offers to sell and sales of a security $'TI3 a registration state"ent covering the security has eco"e effective I' IT- Info about the securitys issuer, the security, the contemplated uses of the offerings • proceeds, and the manner of its sale %(( Imposes liability upon the issuer, its principal officers, its directors, and its underwriters • for any material omissions or misstatements in the registration statement when it became effective Outsiders ./0O liable for the parts they work on or certify o $'*ERWRITERS If a corporation needs to ac@"i$e *"nds$ 3an decide to offer securities and engage the • services of brokerJdealers to sell the securities to the public in either$ irm Commitment Under'ritin4: • One or more investment banking firms )multiple s4ndicateo .gree to 2URC3ASE the sec"$ities *$!# the iss"e$ and the4 $esale o o %&' a share; 0ell to underwriters for %* a share; The %& is the 0PE.< and the underwriters get to keep this If they do "OT sell$ o They are personally hurt financially ."< reputation is hurt 2OE 3O"5I
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The underwriting compensation received by the underwriters o The selling concession received for any securities sold to the public by any brokerJdealer participating in the distribution Documents $recedin4 $ub%ic offerin4 o 3etter of Intent epresents the culmination of the preliminary negotiations and tentative understandings between the managing underwriter and the issuer 0ets forth the relationship between the issuer and its underwriter until the underwriting agree"ent /gree"ent a"ong the underwriters 5ormal understandings among the members of the syndicate 0olidifies the managing underwriters authority The power to determine with the issuer the offering price of the securities o The underwriting commission o The concessionKcommission provided to dealers participating in the selling group o /llot"ents &'',''' shares of &' million shares to be sold—entitled to &A of the commission ./0O only has &A of the liabilities (ver4allot"ents 0elling more than underwriting syndicate was obligated to sell—high investor interest @nown as a 4reen s&oe o$tion to purchase additional shares from the issuer Bigger demand than eCpected o 5I". limits the amount of overJallotments to &7A of the shares the underwriters are obligated to purchase; /nti4fli##ing Clause Occurs when shares in an IPO are Fuickly resold in the market at a profit—this places downward pressure on the price and impedes distribution 0enalties given for this ehavior Market (ut Clause+Material /dverse Change :M/C< Permits the underwriters to withdraw any time prior to the public offering andKor settlement date if certain conditions arise—seen as poor form and is rarely used$ The government or an 0O has imposed restrictions on the trading of securities o in general There is a war or other national calamity o o There has been a material adverse change in markets There has been a material adverse event affecting the issuer o REGISTRATION STATEMENT o Infor"ation that "ust e included in the registration state"ent $ )&- Information with respect to the egistrant
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esidual, after everyoneD VOTI"G IG#T0$ o !E0 Preferred 0tock o 3.0# 5/O4$ Priority for fiCed amount of dividends /IQ1I<.TIO" o Priority VOTI"G IG#T0 o "O Bond—ust to be highest—will "OT be accepted it 3an be .//O3.TE< two different ways o PO .T.—everyone gets the same regardless of what they bid POPOTIO"./—if you bid higher you get higher A o SEC LETTER OF COMFORT o N9 of the LL .ct The registration statement becomes automatically effective ?' days after filing;
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5I/I"G T#E", /etter of 3omment from 0E3 They review statement, state any deficiencies 5ailure to comply formal 0TOP O:c< o 1nlawful to offer to sell or offer to buy any security unless a registration statement has been filed for that security 3.""OT condition the public or arouse public interest before making the actual public offering 1nder 0ection 7—if regulation statement "OT in effect yet, 3.""OT$ o )&- Transmit a PO0PE3T10 )?-
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"eed a certain level of eCperience "eed have timely filed forms #ave to be up to date with filings Seasoned Issuers Re#orting o .ble to file a 0JL Well48nown Seasoned Issuers :W8SI< o ule +'7 "EE< %6'' million in eFuityKworld markets in t&e &and of NON9affi%iates O, %& billion in nonJconvertible debt that was issued in last L years 3.""OT be Blank 3heck or 0hell companies or Penny 0tocks )R%7o SAFE 3AR;ORS *!$ 2$e-Filin 2e$i!d o ?@ *ay Bright 3ine E5clusion+ Ru%e 7FA 3ommunication done BE5OE L' days BE5OE the filing of a registration statement is E(3/1 for REPOR+#N, COMPAN#ES 5actual business information egularly released in ordinary course of business STI33 cannot "ention the offering B$T can "ake forward looking state"ents Ru%e 7F for ?S#s 3an say anything B1T, need /EGE"<—saying this is not available until filing ."< register with 0E3, or if eCempted, keep on file for L years to show good intentions The =aitin 2e$i!d 0ection 7)c- prohibitions go away after the filing of a registration statement o B1T, 0ection 7)a- kicks in and prohibits 0./E0 until the registration statement becomes effective, B1T o selling efforts 3." commence 0ection 7)b-)&-—"O written communication is allowed offering a security for sale O./ offers are "OT prohibited 3hanged somewhat • • •
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5leCibility—3." give written communication if it >ust states what is on file in the registration statement E< #EI"G—bold red letters stating that this is not an offer to sell o This is "O4 called a PE/I2I".! PO0PE3T10 o 3/.00 "OTE$ #ave to deliver a PO0PE3T10 )?)a-)&'-o .ny written communication that offers securities for sale, like in radio, ads, graphic )internet-, needs registration statement info This is like 7)cB1T "O4, can conditioned the market by O./ communication To see if you have #rotectiono o /ook to see if Oral, "oD /ook to see if offer is writtenD o /ook to see if it has everything need for Preliminary Prospectus o o /ook to see if it is a ?)a-)&'-)b- Tombstone .d /ook to &L7—no forward looking info, need legend o /ook to &*—no forward looking info o o /ook to &9—have to be a eporting Issuer /ook to &L—have to be 4@0I o ree ritin4 Pros$ectus Ru%e G8 Glossy brochures, ads Offer to sell or buy after the registration statement is filed 4#E" o
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Everyone 3." if they follow rules &+ and +LL "onJeporting and eporting To generate interest in company #ave to provide the 5inal Prospectus )&')a-- before O simultaneously with the 5ree 4riting Prospectus IPOs have to include a price range 0easoned and 4@0I #ave to file 5inal Prospectus but do "OT have to deliver with the 54P—>ust include a /EGE"< —saying read the prospectus Filin #ave to file 54P with 0E3 Graphic .rt has to be filed—power points, recorded speeches, ads, media packets E(3/1
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0role" A4;+0E0 1nderwriter sends copies of an article about them in the 40 to customers, this I0 a 54P • Info "OT with the 0E3—O@ I5 with /EGE"< or with final prospectus simultaneously • 2ail has a hyperlink to the underwriter wesite that has issuers prospectus • "OT a direct link—it is to somewhere in the website o ect as long as they are offering the security to the public • 1nderwriters and dealers .s long as their allotment or subscription in the distribution is unsold • 0ulic (ffers By Seasoned and Well48nown Seasoned Issuers o Basic Infor"ation #ackage 3ompanyJspecific info useful to investors assessing the financial performance, position, • and prospects of the firm 1niform disclosure reFuirements for filing under LL and L+ .cts The reFuirements for all financial items appear in egulation 0J( • The reFuirement for all nonJfinancial items appears in egulation 0J@; • Issuer Safe !arors o 4ell @nown 0easoned Issuer )4@0I-$ ule &L Permits such issuers to engage in unrestricted oral and written offers before a registration • statement is filed; O"/! by or on behalf of the issuer o ule &9 .nnouncements by re#orting issuers that have engaged in the regular release of factual • usiness infor"ation or forward looking info will not be treated as offers to sell a security 5;B; Info o 5acts about issuer, its business, or financial developments o 5;/; Info 5orecasts or discussions of future business plans 2!st E**ecti.e 2e$i!d 3an sell now, dont have to worry about 7)a- anymore o Physical delivery, electronic, send to dealers E
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)b-$ /E00 than 1? days .5TE egistration 0tatement filed IPO*' days, after listing on a "ational ECchange?7 days o )c-$ 1nsold .llotments through 1nderwriters N+)+-$ $nsolicited (rder O"/! for Brokers, "OT for 3ontrol Persons E5e"#tion+if you cannot satisfy the aove R"le (&$ ACCESS=DE!#*ERJ If no Rule ; or DA& thenR"le (,6 "eed to give "OTI3E—you have ? business days to give a final prospectus or notice that registration statement is filed and available Problem +J?? This is by an 1"ust an offer, this is an actual T."0.3TIO" This is by a
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SEC v. Ralston 0urina 4hether allowing the eCemption is consistent with the promotion of the full disclosure of the infor"ation thought necessary to infor"ed invest"ent decisions and whether the class of #ersons affected needs the #rotection of the Securities /ct. 5.3TO0$ S of offerees • elationship of the offerees to each other and the issuer • The manner of the offering • Information disclosure or access • 0ophistication of the offerees • Re"lati!n D9 ee#5ti!ns /?19 /?/9 /? o Liabilit4 Unde$ the Sec"$ities Act Secti!n (( . material misrepresentation or omission in a registration statement will sub>ect the issuer and )sub>ect to o due diligence defenses- a variety of persons associated with either the issuer or the distribution to damages in a suit brought by any person who bought securities issued pursuant to that registration statement; o Because of this Investment bankers eCpect additional compensation This 0ection ultimately falls on the investor; "o reliance needed, no causation or in>ury needed—ust in a big pool of shares o 0ome shares are not part of this IPO, some are from a secondary market **;*97A are from IPO B1T because there is the tiny piece not T.@E0 !O1 O1T O5 0T." • /I2IT0 o M must not have been aware of the truth when they bought 0tatute of limitations & year after discovery of the falsity or omission was made or should have been made • "o more than L years after the security was offered to the public • M has to show that the securities purchased were issued pursuant to the registration statement in Fuestion I001E is strictly liable for the material misrepresentations or omissions o
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The underwriters Escott v. BarChris Construction . *act!$ Buys receivables for cash—negotiates with businesses, sometimes guaranty Bar3hris needs a factor—they need cash for a construction pro>ect of Bowling /anes 2isrepresentation in registration statement Guaranty of &''A, not ?7AJJlied about liabilities %+''k in unpaid loans from O55I3E0 of the comp o 0how their ability to raise capital, lack of real creditors, never told Overstate "et Profits 2isstated future prospects by making up companies 2aterial misrepresentations in financial statements /ied about use of offering proceeds Based its determination that the underwriters had not established a due diligence defense in large part on the fact that the lead underwriter delegated much of its diligence responsibility to counsel JJ who merely took documents produced by the issuer and statements made by the issuer at face value, and made no independent verification; There "ust e an investigation& /'*& after such investigation& no reason to dout the accuracy of the registration state"ent. 4hat if I figure out the mistake But filed, then amend the neCt day ,ou sto##ed the ti"e+anyone who ought in defective #eriod would still have D;;+those that ought after the a"end"ent+C/''(T Y!" a$e $es5!nsible *!$ hat 4!" E:ERCISE CONTROL OVER If you own 6'A of company—thats a lot, controlling person If you >ust own some shares—"O 3O"TO/—no liability %(( ELEMENTS )&- . material misrepresentation or omission B1T,
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/ook to siHe of market for these shares /ook to many factors, are there OT#E 5.3TO0 Ms need clear evidence that this was caused by the material misrepresentations or omissions in the registration statement #EE, state that misstatements were not likely to cause a stock price decline o ."< the stock went 1P T#EE5OE, o s met their burden, by N&&, by establishing that the misstatement was barely material and that the public failed to react adversely to its disclosure; <.2.GE0JJN&& Based upon the difference between the amount paid for the security—so long as that does not eCceed the offering price—and$ o Its value at the time of suit, The consideration received on resale if the security was sold before the suit, O o The consideration received if the security was sold after the suit, but before o >udgment, I5 that would produce a lesser measure than that stated in )a-; '( liaility if the issuer9s stock goes u# after the offering o In Shelf Registration Conte5t o WorldCo" Case Telecommunication company bankruptcy 4hen the company is performing a shelf takedown, not the same notice o R"le (8 4rite the elements down, pg; ?'& of supplement 1nderwriters are in a short period of time with shelf takedown 0TI// need to do a RE/S('/B3E investigation into the info out there o o /ike analyst reports, have to look beyond mundane answers and look to a$eas !* probably good if you do that c!nce$n9 RED FLAGS8 o Particular ECpertise in an area— !I=!ER standard+R$3E ; e"races this In 4orld3om 3ase the eCecutive was held to this standard—he only relied on the statements of his EEs—but then he settled out of pocket, knew this wasnt enough o Pg; 7'6 problem *J& &0T Q1E0TIO" 4here would this misrepresentation be in the registration statement 4as it in a part in which the accused had 3O"TO/ OVE "< ? Q1E0TIO" 4.0 IT 2.TEI./ o 4as it important to a reasonable investor 0roaility v. Magnitude o 4hat would you need to know o 4hat other info is out there—if you should know about it #ave to see if there is P1B/I3 I"5O 4hat Public could .33E00 1/E &6—were there red flagsD 0hould check into rumors Problem *J? o 54Ps N&& liability is O"/! for misrepresentations or omissions in EGI0T.TIO" 0T.TE2E"T0, "OT 54Ps Neati.e Ca"sati!n /oss "OT caused by material misrepresentations or omissions o
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"OT recoverable o /ker"an Case %(&'a)'() 0inter v. *ahl )&*99o 3ase about the sale of unregistered securities Pinter was a registered securities dealer and he was going to sell leases for oil fields to ured, that is, o by being persuaded to purchase securities without full and fair info; ;UT9 s!licitati!n is !nl4 liable t! th!se that s!licit *!$ VALUE9 *!$ thei$ !n o *inancial bene*it9 NOT i* the4 "st ant t! assist a *$iend 51T#E EVIury ust show$ Violation of N7 The facilities of interstate commerce were involved in the offer or sale of the M The M has made adeFuate tender of the security if it is still owned The action is within the 0O/ of N&L; 2E."T TO
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ECtends rescissionary remedy to situation where a person offers or sells a security b y the use of an instrumentality of interstate commerce by means of a false or misleading prospectus or oral communication; )&- .ny person who offers or sells a security )or a controlling persono Controlling #erson is a fact argument )?- Interstate commerce o )L- material misrepresentation or omission o )+- in a prospectusKoral communication o emedy IG#T TO E03I00IO" o If it is still owned—consideration paid plus interest—E03I00IO" If M disposed of the security—difference between the price paid and the amount o received in the sale udge looks to see if there is an obligation to send a prospectus 2eaning if it is a public offering o o #e limits N&?)a-)?- to O"/! P1B/I3 O55EI"G0 !yer v. Malouf o trying to get Ms to invest in real estate pro>ects But it was a PonHi schemeJJJownership was never conveyed, no construction, gave their investment to other investors "O registration statement Is this a public offering for N&?)a-)?This is important—if allow to escape this then they can circumvent rule to register Pg; 7?9 is the factors—discovery needed on these (ral Co""unications o estricted to communication in connection to a prospectus o %W0
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Issuer sales are known as #ri"ary offerings 0ales by others are referred to as either trading transactions or secondary distriutions Trading transactions .E eCempt from N7 0econdary distributions are "OT; The $nderwriting Conce#t and Sales for an Issuer N+)&- is the central eCemption of the 0ecurities .ct It eCempts transactions by ."!O"E e5ce#t an issuer, underwriter, or dealer Issuer and dealer are straightforward, underwriter is the gray areaJJN?)a-)&&- is broad 0ome broad roles that Fualify someone as an underwriter$ .ny person who purchases from an issuer with a view to the distribution of a security= or .ny person who offers or sells for an issuer in connection with a distribution= or .ny person who participates or has a direct or indirect participation in the activities covered by & or ? above= or .ny person who participates or has a participation in the direct or indirect underwriting of any such undertaking; +&e $urc&ase) sa%e or under'ritin4 acti(ity must be in connection 'it& a distribution5 =illigan v. SEC #eld securities for &' months, the publishing company he was holding stock in was not doing as well as he hoped, he sells them Is he an 14 !E0, this is an invest"ent #ur#ose This is a Vie t! Dist$ib"ti!n because he was seeing how well he did, did bad, sells /OO@I"G .T$ Timing Investment Intent 3hanged 3ircumstances )very rare(ld Rule+ if someone held it for L years—"O view to distriute '(W+Bench"ark is years for Resale If not—you are an underwriter because new guy does not have the same info you did when you bought They look at—why are you selling at this time *ISTRIB$TI(' F 0$B3IC (%%ERI'= 6G@I0So$&isticated Purc&asers KNO+ a $ub%ic offerin4 Can fend for t&emse%(es Random $eo$%e0yes it is a $ub%ic offerin4 Problem J+, pg; L7' Private placement—wants to resale 3." O"/! E0E// to )&- 0ophisticated Buyers )?- Intrastate )L- .ccredited Investors I5 0O, then "OT a public offering and "O N7 Problem J7 .lready eCisted in over the counter market—but he bought it in Private Placement, now he wants to resell it on the public market "O GOO<—"O
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3orporation was formed for benevolent reasons and they 1GE< 3hinese people in "!, ", and 3T to purchase 3hinese government bonds, they accepted funds from people and delivered them to the Bank of 3hina in "!3; .t the time, apan was invading 3hina, trying to get money They received "O 3O2PE"0.TIO" .lso, "O registration statement was ever made for the bonds advertised for sale I001E$ Is this corporation an underwriting for the Chinese =overn"ent who is the issuer 0inter v. *ahl If person solicits for the benefit of the issuer they can be liable EVE" if they are o not compensated; It is not for the benefit of the purchaser o 1/E$ N?)a-)&&-—underwriter—any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking; )&- Purchases from an issuer with a view to distriute )?- Offers or sells for an issuer in connection with a distribution )L-
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Reversed. o 2"$chase *$!# an iss"e$ .mong those included within 0ection ?)a-)&&-s definition of 1" ,/> • o
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"ow work it through the chart 3ontrol Person of Theta o They do weekly trading volume of &7'k &9 million shares outstanding o 0he sells &7'k in L months, 7'k each month o &++)e-—it is cumulative of last L months, O//I"G, ."< the GE.TE O5 1/E o 3annot sell more than the GE.TE O5 &A of shares outstanding )here, &9'kOr, .verage 4eekly Trading Volume )here, &7'kT#EE5OE, greater of, is &9'k In first ? months, sells &''k )7' eachT#E", in the Lrd month, can sell 9'k 4hat if she gives &?'k of the shares to 3ornell o It is an .GGEG.TE rule, therefore, 3ornell must abide by the &9'k rule and can only sell 'k ;AA/+ualified Issuer Buyers+IBS o .utomated system on POT./ 3an resell right away, give you liFuidity o
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It is a safe haror for registration require"ent of D> for resale of a restricted security to IBs y #ersons (T!ER T!/' T!E ISS$ER of the security Int$astate O**e$in NL)a-)&&- eCempts intrastate offerings from the registration reFuirement o o N7 O"/! applies to Interstate Offerings .// of the offerees must be E0I
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#as to be less than or eFual to L7 nonJaccredited investors and disclosure 4ho is an accredited investorD o 7'&)a-)7& mil net worth #ave to do own investigation into clients assets, cannot take their word for it It is an4!ne h! *alls ithin an4 !* the cate!$ies laid OR h! the iss"e$ REASONA;LY ;ELIEVES *all ithin #!PO0 an & to .pril &—7'7 of 7 million 3an start on .pril & of neCt year again B1T have to look at each month an & mil, 5eb L mil an of neCt year—3." O"/!
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&' million, uses broker dealer that has relationships with 6' nonJaccredited, but sophisticated, to raise * million 3old calls to ? wealthy investors and sell & million to them 5or the & million one o 3an do it with 7'+ 5or the * million one "O 7'7—over 7 million o 7'D o "O 2OE T#." L7 nonJaccredited 0o 0P/IT IT 1P . 7' for +;7 million from L7 non .nd then do it again with the other L7 0o .GGEG.TIO" I0 O@ 8G and 8and (io%ations of 6 are a44re4ated +O,E+-ER 8G and 8 are NO+ a44re4ated to4et&erJ So it 'ou%d be ok under a44re4ation) too easy to 4et around Re4u%ation D B1T #.VE TO /OO@ .T I"TEG.TIO" o !E0, single plan !E0, same class !E0 at the same time !E0, same consideration !E0, same purpose T#EE5OE, The4 a$e inte$ated t! be (? #illi!n and a .i!lati!n !* %/ If we did not have this integration rule, aggregation would not be enough to stop their violations Violations o Over L7 nonJaccredited General solicitation—cold calls and do not know if they are sophisticated 0hould have 7' offering to L7, then it would end, then months after the end of that, start the new 7' offering =hen the last #!ne4 is $ecei.edHend !* !**e$in 4ould have to space out the & million 7'+ offering as well; 210T 0TI// /OO@ .T .GGEG.TIO" 1/E0 Ala4s l!!k at A$eati!n AND Inte$ati!n AND then #a4be back o an & of ?'&' 5eb & ?'&', 7'7 offering, preferred stock, through brokers, that have preJeCisting relationship, 7 mill, L' nonJaccredited investors, complies with all rules )disclosure-, to fund facilities .ug & ?'&'—&' million of bonds 7' offering "ew marketing campaign, to fund marketing campaign o 7'7, "O .ggregation problem because nothing was raised before Then month safe harbor, O@ under integration, months before 7' EVE" I5 within + months, o "O integration, "OT T#E 0.2E P1PO0E, "OT the same class 7', "O aggregation problem, unlimited amounts Integration, but it was after months, but even if, same as above o an &, 7'+ offering, & million, common stock, &' nonJaccredited and unsophisticated, preJeCisting relationships, closes on the same day, all cash, all to fund facilities eCpansion • •
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On 2arch &, 7' offering, &' million, common stock, cash, eCpansion of facilities, L7 nonJaccredited purchasers "ovember &, 7'7 offering, + million of common stock, ?7 former law students, not sophisticated B1T are accredited and ?7 nonJaccredited To fund a new office building o 7'+ and 7'7 are aggregated together, 7 million, they are O@, 7' is not aggregated .ggregation is O@ IntegrationD 7'+ and 7' )an, 2archo .// of the factors, very similar They will probably be integrated with together, within months They will eCceed nonJaccredited, no disclosure "O4, they will hurt each other, 7'+ is now && million, violation of N7 B1T still no integration with the 7'7, so the 7'7 is O@ But #.VE TO GO B.3@ TO .GGEG.TIO"— a$eati!n l!!ks at (& #!nths9 n!t #!nths like inte$ati!n 7'7 aggregated with 7'+ and violations of N7 && million dollars worth, OVE 7'7 aggregation limit GOO
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. preJeCisting relationship between a Fualified offeree and the brokerJdealer )rather than the issuer- will suffice to render communication limited under ule 7'?)cF$a"d in connection 'it& the 2"$chase !$ Sale !* a Sec"$it4 o R"le (?b-/ The center#iece antifraud #rovision under the federal securities laws. 2ust at the very least establish two things$ )&- There must be fraud, whether in the form of an affirmative misrepresentation or some sort of device, scheme or artifice to defraud; )?- That fraud must be in connection with )L- the purchase or sale of a security /ink between s fraud and purchases or sales of securities by the victims o SEC v. Te5as =ulf Sul#hur Co. o 5alse corporate publicity was disseminated in a manner reasonably calculated to influence the investing public B1T, it is "OT necessary to show that the purpose of the misleading statement o was to influence investors O"/! that a material misstatement was disseminated in a medium on which investors rely "eed not be a person to whom it was specifically directed )?- in connection with Vies !* the c!"$t o #as to touch upon the sale of the security 0uperintendent of Insurance v; Bankers /ife 3ase 5oreseeable reliance 0emerenko 3ase Investment aspect that is essential to scheme "st de*$a"d s!#e!ne !"t !* thei$ #!ne49 t! c!n.ince the# t! b"4 #e a ca$9 o and then sell that ca$ and b"4 I;M st!cks NOT in c!nnecti!n ith To !ave standing to sue& need to #urchase or sell the security "OT POTE"TI./ P13#.0E0 o SEC v. Jandford o In &*96, 3harles Wandford, a securities broker, persuaded 4illiam 4ood to open a >oint investment account for himself and his mentally retarded daughter; The 4oods gave Wandford discretion to manage the account and a general power of attorney to engage in securities transactions without their prior approval; .fter 4ood died, all of the money that he had invested was gone; 0ubseFuently, Wandford was indicted on federal wire fraud charges for selling securities in the 4oodsX account and making personal use of the proceeds; The securities brokerXs conduct was in connection with the purchase or sale of any security; "oting that WandfordXs practices were not independent events, the 3ourt found that each sale was made to further his fraudulent scheme and that each was deceptive because it was neither authoriHed by, nor disclosed to, the 4oods; Therefore, ustice 0tevens concluded, the stockbrokerXs breaches of fiduciary duty were in connection with the securities sales, within the meaning of the 0ecurities ECchange .ct of &*L+, because the securities transactions and breaches of fiduciary duty coincided; Is getting someone to spend money to buy something, is it a securities transaction o •
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"O, it is something you can use If the proceeds of a fraud are used to buy something that you can use and is not a security Therefore, "OT in connection with #ere is a million dollars, invest my money broker, and he does, later, he says liFuidate my money, but the broker steals the money "OT in connection with 3EO, making statements about companys prospects saying they are great when he knows that they are not true There is no purchase or sale of a security But people rely on it to buy This is Reas!nabl4 F!$eseeable YES9 F$a"d *!$ (?b-/ #ave to distinguish from 0uffery or saying we are optimistic or tongue and cheek
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Standing to sue 0tanding to sue in private actions under ule &'bJ7 is limited to actual purchasers or • sellers of securities )Blue 3hip 0tamps 3aseSciente$ Intent or knowledge of wrongdoing Its sub>ective intent, but you can prove that with a clear statement to deceive • Ernst and Ernst v. !ochfelder )&*6Private actions under ule &'bJ7 must show that the acted with sciente$ in order to • succeed In this case, the Ms >ust based their argument on lack of diligence, meaning a • negligence claim 0o no good—has to be a "ental state e"racing intent to deceive& "ani#ulate or • defraud. Tellas v. Makor Issues 6 Rights )?''6-—0upreme 3ourt .s a check against abusive litigation by private parties, 3ongress enacted the Private • 0ecurities /itigation eform .ct of &**7 )P0/.The .ct reFuires Ms to state$ • 4ith particularity the facts constituting the alleged violation, ."< o o The facts evidencing scienter 3ongress states that this has to be proved that shows a st$!n in*e$ence that the acted with scienter /ower court says that st$!n in*e$ence standard is met if a reasonable person could infer • that acted with scienter 3O1T 0.!0 "O • R!ad#a5 *!$ Sciente$6 o Fi$st, as with any motion to dismiss, the court must accept all factual allegations o in the complaint as true; Sec!nd, the court must consider the complaint in its entirety, as well as other o sources courts ordinarily consider when ruling on motions to dismiss JJ documents incorporated by reference and other matters of which the court may take >udicial notice; The inFuiry is whether a%% !* the alleed *acts , taken collectively, give rise to a strong inference of scienter; Thi$d, in determining whether the pleaded facts give rise to a YstrongY inference o of scienter, the court must take into account plausible opposing inferences; The
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inference of scienter must be cogent and compelling, thus strong in light of other eCplanations; In sum, the court must ask$ when the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inferenceD 3as t! be c!ent and c!#5ellin NOT9 5la"sible The4 #"st ha.e kn!n ith c!#5ellin ce$taint4 1acated and Re"anded o Makor Issues 6 Rights v. Tellas )?''9-—On emand "ow I001E #ow likely it is that the allegedly false statements were the result of merely o careless mistakes at the management level based on false info fed it from below O o o .n intent to deceive or a reckless indifference to whether the statements were misleading The product at issue was the companys 5/.G0#IP product "ot knowing everything about it and not knowing that the info they were being o fed was false is eCtremely unlikely due to its importance Reversed& there is Scienter Problem &?JL pg; 67 Problem with how they are recogniHing revenue 3oming in above of analyst pro>ections 3oming in above competitor 35O and outside auditor agrees to financial reports 3EO signs off on it 3omes out that financial reports were wrong on purpose Is 3EO liable for fraudD ust a few people o
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4ould it show fraud, not on its own, no one is going to go along with fraud >ust for a few people 1nnamed sources says the company due that they were wrong o 2aybe it is an EE saying it but dont want to lose their >ob Individually not enough, but what about collectively 3! 5la"sible that the de*endants didn+t kn! o I* it is ha$d t! belie.e that the4 didn+t kn! o This is the standa$d9 b"t in the end has t! be c!ent and c!#5ellin o 4hat if lower level EEs gave false reports to 1pper /evel EEs o 3a.e t! l!!k at the #anne$ in hich the *alse in*! as i.en I* it is s! abs"$d9 then 4!" #"st l!!k int! it o Sciente$ )&- 3learly stated intent )?- @now that something is false when you say, and it is foreseeable that an investor would rely on these false statements, but not necessarily having a bad intent )L- ecklessness F$a"d (?b-/ ';ad Act9 Sciente$9 Reliance9 This bad act ca"sed l!sses) )&- 2aterial 2isrepresentation of 5act )?- #alf Truth by omission—makes it materially misleading )L- 5ailure to disclose information—where duty to disclose )&- 0tatutory eFuirements o egistration statement Prospectus Periodic reports )&'J@, &'JQeport unusual events or specified events from form 9J@ )where a company 210T disclose)?- 5ailed to 3OE3T a material misstatement when it was false when it was o made 3EO says earnings for & st Fuarter were &; billion, ? months later, due to a bunch of accounting errors, the earnings were really &;? billion =allagher Case !E0 to correcting, "O to updating This is 4O"G when he said it, so #.VE to correct it "OT to updating pro>ections 4hen it is false when it is made, #.VE to correct it If 3EO says they have flu vaccines that will bring in 7'' million "eCt day, contaminated, only can get &'' million =allagher would say "O, it would be an 1P<.TE, do not have to update 4as "OT 5./0E when he made it #ave to disclose on periodic reports like the ECchange .cts says, they will have to wait L months; )L- 2ust provide information to make otherwise statement not materially o misleading; 0tatements that are true, but absent other information, will not be true; 2erger talks, say that they are in talks with merger that will bring more revenue, drives up the stock price "ow it is off ? days later =allagher would say "O, its updating o
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B$T& Ti"e Warner Case :different view< o Pg; 96, footnote + and holding It is now materially misleading and people are still o relying on that information !ou are omitting material information, it is a #./5 o T1T# When a cor#oration is #ursuing a s#ecific usiness goal o and announces that goal as well as an intended a##roach for reaching it& it "ay co"e under an oligation to disclose other a##roaches to reaching the goal when those a##roaches are under active and serious consideration 0#O1/< follow the Time 4arner standard, because it is o safer, more disclosure; True statement that we have merger talks, disclose it 0ecret, not disclosed, that all these merger talks are dependent on my ability to make a vaccine that are not looking good, probably not going to happen, do not tell them this This is a #./5 T1T# • #ave to provide information that will make the disclosed • statements wholly true; EVE" G.//.G#E would say you cannot make a half truth • If you knew this when you said the other thing, you have o to provide this as well, this is not >ust simply updating; Gallagher says "O continuous disclosure, Time 4arner
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Bad .ctK2aterial 2isrepresentation or Omission 0cienter eliance /oss 3ausation .pproCimately caused the economic harm to the M o "OT responsible for other factors /ike "EG.TIVE 3.10.TIO" has the b"$den8"nlike %(( Of proving the bad act caused the loss M is seeking to recover The Bad .ct actually caused the harm 4hy have this rule$ o 3ompensatory for victims But there are limits to this, have to show loss causation, do not want frivolous lawsuits udge says "O it was not material to the bondholders 4hen you are a bondholder—is this company solvent and pay me dividends and they will pay my principal in the end Bondholders do not care if the stock goes up or down, >ust worried about paying back their debt 0o this should not matter to bondholders like it would to eFuity holders The dissenting >udge says !E0, it was clearly material, it relates to the auditor I"TEGIT! If people would know these things, they would not have invested in this venture 2isrepresentations were about the Fuality of the firms management and auditor ."< the firms current incentives with regard to risk aversion
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Every time someone makes a bad >udgment, that goes towards their overall >udgment into the future, seems pretty intrusive The ma>ority /ook to the 5OE0EE.BI/IT! of the conseFuences of the misrepresentations that would lead to the harm to the investors #ave to plead the actual misrepresentations caused the loss Goes back to the issue of 2ateriality Each time you are presented with a materiality Fuestion—look at was it material in this situation with these people; .// three come to a different approach for the same facts *ura 0har"aceuticals v. Broudo
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Growth based on phone line installations 3orrection saying the earlier ones were overstated and that future earnings will be lowered Based on this, stock goes down o POB/E2 5O M 4hich one caused the loss o The correction or the future earnings pro>ection o 3ompanies should give all bad news together, harder for M to show loss o causation <1. makes it hard when multiple causes of loss causation o In c!nnecti!n ith 2"$chase !$ sale =3O CAN YOU SUE %(( liabilit4 o 1K4 and eCperts %(& liabilkit4 o 0inter v. *ahl& even if you help them Re"lati!n D o R"le (11 o 1nsolicited broker transactions for resales Third parties play a role o o 0ri"ary 1iolator 3ommits the act proscribed by the statute or rule .ctually making the false statements and know that they are false when making them Secondary 1iolator o .ssists or supports the primary violator or is liable because of a relationship with the violator Central Bank of *enver v. %irst Interstate Bank of *enver o N&6)a- the 0E3 has the authority to go after people even if they do not have 0cienter or eliance N&'bJ7—nothing about /iding and /etting 3entral Bank uses this to say "O "O aiding and abetting in a private action under N&'bJ7 0E3 can bring it under N&'bJ7 N?'—secondary liability on 3O"TO/ PE0O"0 brought by the 0E3 Stoneridge Invest"ent 0artners v. Scientific4/tlanta o 3harter paid %?' dollars more to 2otorola and 0cientificJ.tlanta for each boC and in return, get %?' worth of advertising, basically it was a wash 0. >ust booked this normally, B1T 3harter booked the advertising revenue currently B1T deferred the eCpenses—BO.0TE< their books 0uppliers had no say in supplying this information, but had to know something was up, this transaction makes no sense If the supplier 4.0 making direct misrepresentations about 3harter—would be primary violator If the supplier paid someone else to say them—0TI// liable as a primary violator—they are
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If 3harter over billed 0., then disclosed to public that over billed them, 0. says nothing, does not find it 0tonebridge case would say "O liability to 0., too intrusive, have to look into every single mistake, and those mistakes will cause them to be liable;
Wright v. E 6 , Press eleases from BT, BT got their information from E Z ! "o endorsement )final audit was not done- by E Z !, no direct statements to investors from E Z ! "o false or misleading statement was attributed to E Z ! at the time of public dissemination Central Bank says "O primary liability If you draft and review and edited the information given to investors, then third parties would be liable C!nt$!l 2e$s!n and Res5!ndeat S"5e$i!$ Liabilit4 N&7 of the 0ecurities .ct and N?' of the ECchange .ct hold control persons liable to the same eCtent as o the person they control o /ffir"ative *efenses N&7 of the 0ecurities .ct The control avoids liability if it is established that the controlling #erson had no knowledge of or reasonale grounds to elieve in the e5istence of the facts u#on which the liaility of the control #erson is alleged to e5ist 2irrors N&& and N&?)a-)?N?' of the ECchange .ct /iability arises $'3ESS the controlling #erson acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action #aving to show an inducement to act is a distinction to N&7 Principal ust because you are a 3ontrol Person If you do your >ob the right way, you will not be held liable o N?' 1"/E00 good faith and did not directly or indirectly I"<13E the fraudulent act o o *onohoe v. Consolidated (#erating 6 0roduction Cor#oration )&**+Ms claim that the s fraudulently lured them into investing in a pro>ect to drill oil wells on land in which the s fully knew there wasnt any oil to be found The main was Bridges, who defrauded everyone, whom is insolvent so the Ms are going after "ortman and Berrettini on 3ontrol Person liability; /ower court found for s but failed to address 3ontrol Persons liability !arrison v. *ean Witter Reynolds Inc. TW( 0R('= TEST for Control 0erson 3iaility5I0T The 3ontrol Person needs to have actually eCercised general control over the o operations of the wrongdoer 0E3O"< The 3ontrol Person must have had the power or ability—even if not eCercised— o to control the specific transaction or activity that is alleged to give rise to liability " and B had significant control, B1T /ffir"ative *efense of =((* %/IT! is availale. The Burden of proving Good 5aith is on the GOO< 5.IT# o
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3ook at what the Gs could have done under the circu"stances to #revent the violation& and then /sk whether the Gs+aware that they could take such "easures+decided not to !ave to look if there is a genuine issue of fact regarding the Gs recklessness D@ $'3ESS =ood %aith /'* *id not directly or indirectly I'*$CE the acts constituting the violation
#EE .mong others, the s had substantial amounts of money invested and did eCtensive research on Bridges But this could look like a front and to lure investors But the court did not look at that this way 3ourt said they made good faith efforts in carrying this out ."< they relied on Bridges technical eCpertise, therefore, did not have the power or ability to control )second prongT#EE5OE, =ood %aith re#resents an affir"ative defense to the control o #erson liaility here .55I2E<; o !as to e so"ething M(RE than negligence& has to e /T 3E/ST recklessness T!ERE%(RE& the =E'ER/3 R$3E .ctually eCercise general control o ."<, Power or ability to control specific transaction in issue o (T!ER CIRC$ITS :($R CIRC$IT< Cul#ale #artici#ant standard 3ontrol person himself must either be an actor in the violation, O o Intend his passivity to further the violation—furthers the fraud )deliberate o inaction !arder to #rove o Brokerage !ouse :"ost co""on way D@ is a##lied< Good 5aith defense has come to mean poof the brokerage firm has diligently enforced a POPE 0!0TE2 of supervision and control over its EEs 'on4Brokerage !ouse eFuires proof the control person did not act E3@/E00/! POB/E2 2aterial 5alse communications by an employee "O monitoring system EE acting on behalf of E, Beta is arguably in trouble under espondeat 0uperior EED !es, material misrepresentations o 4hat about the 3EOD .ctually eCercise general controlD o !E0, she is the 3EO Power or ability to controlD o !E0, could have set up a monitoring system Good 5aithD 0ure o But
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ECJhusband, worked for 0mith Barney, using her account to make more commissions and sent money from her account to himself 2onitoring system was "OT implemented consistently Rescissi!n and Restit"ti!n o Berckeley Inv. =rou# v. Colkitt )?''N?*)b-—E03I00IO" . vehicle through which private parties may rescind contracts that were made or performed in violation of other substantive provisions eliance is "OT reFuired "o loss causation reFuired But, 3.""OT be independent to the agreement, the violation has to be intertwined with the agreement; If it is with a registered dealer, then through &'bJ7 it #as to be I" 3O""E3TIO" with the Purchase or 0ale of the 0ecurity If they are "OT registered—through N7 you can rescind it b y N?*)b- because it must be registered 3ontract 3.""OT be performed because of the violation OUTLINE OF T3E ANTI-FRAUD 2ROVISIONS o o
Secti!n ((
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(&'a)'()
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(&'a)'&)
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(?b-/
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Standin8 Purchaser
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Purchaser
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Purchaser
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Purchaser O a seller
)tracingo
De*endants8
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0ignatories, directors, future directors, 1K4s, 3ontrol Persons
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Ele#ents8 material
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misstatement or omission in a registration statement, "O scienter, "O reliance, "O causation, >ust some kind of losses or can ask for rescission o
De*enses8
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Da#aes6
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.nyone who offers oro .nyone who offers oro Primary violators sells the security sells ."< control )responsible persons, persons control persons-, "O aiders or abettors )private actions#as to be a N7 violation
"O defenses absent
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2aterial misstatemento or omission, by means of a prospectus in a public offering, "O scienter, "O reliance, no loss 3.10.TIO", but have to show loss
2aterial misstatement or omission, device scheme or artifice to defraud, have to show reliance, have to show loss causation
0ame as N&&
EFualKcomparative fault,
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any 0afe #arbors, violated N7 or you didnt
some of the courts allow this, forward looking statement safe harbors
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? year discovery rule, 7 year maCimum To commit fraud
Inside$ T$adin .ny unlawful trading by persons possessing material nonpublic information, whether or not the trader is o truly a corporate insider 4ant confidentiality of sensitive market information o .nd Informational .dvantage o Chiarella v. $nited States )&*9'o 3hiarella was a printer for a ma>or printing company; They sent him down takeover papers to print and he figured out the name of the company to be taken over and he used this inside information to purchase stock in the new company 1/E 0ilence in connection with the purchase or sale of securities may operate as a fraud actionable under N&')b- and ule &'bJ7 B1T, such liability is premised upon a duty to disclose arising from a o relationship of trust and confidence between parties to a transaction #EE 3hiarella had "O prior dealings with the printing company #e was not their agent o o "ot a fiduciary o "ot a person in whom the sellers had placed their trust and confidence #e was a 3O2P/ETE 0T."GE o To impose a duty to disclose here would be TOO BO.< and cannot be done without proper 3ongressional intent Misa##ro#riation Theory was '(T adequately #leaded so it did not confront it T#EE5OE =hen an alleati!n !* *$a"d is based "5!n n!ndiscl!s"$e9 the$e can be NO *$a"d absent a d"t4 t! discl!se A duty to disc%ose under 678@b and Ru%e 78b9 does NO+ arise from t&e mere $ossession of non$ub%ic market information ON! commit fraud it you are under a duty to disc%ose "O BE.3# B! 3#I.E//. o Misa$$ro$riation +&eory R"le (1e-, !ou have a mergerKacFuisitions or tender offer Based on material nonJpublic info that the person who is trading knows or has reason to know is material nonJpublic and knows or has reason to know that it was !btained *$!# the bidde$9 the ta$et9 !$ an4!ne c!nnected ith the t! =ith this $"le Chia$ella !"ld be liable o "o breach of 5< needed for this, doesnt matter about the relationship ust in possession bring liability o 4ant to deter people from trying to get a hold of this information o $nited States v. (9!agan )&**6o O#agan was a partner in a law firm who was the counsel for the Grand 2et who wanted to takeover Pillsbury; O#agan did not work on this case but used the information about the takeover to buy a ton of shares of Pillsbury and profited when the takeover took place and Pillsbury stock went way up;
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Misa##ro#riation Theory :for 0ERS('/3 use< . person commits fraud in connection with a securities transaction )violating N&')b- and &'bJ7,- when he misappropriates confidential info for securities trading purposes, in breach of a duty owed to the source of the info Premises liability on a *id"cia$4-t"$ned-t$ade$+s deception of those who entrusted him with access to confidential info 0o to violate N&')b-, you need to have the chargeable conduct involve a dece#tive device or contrivance used in connection with the #urchase or sale of securities *ece#tive device or contrivance #DE!#+ +O +-E SOURCE O#agan 3O"VI3TE< If he would have told Grand 2et he was going to buy shares of Pillsbury before, then it would be O@, disclosure to the source Ti55e$s and Ti55ees o *irks v. SEC )&*9L
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Violating a trust and confidence and traded to the detriment to !O1 0#.E#O/
B1T, a TIPPEE o /SS$MES a fiduciary duty to the shareholders of a cor#oration not to trade on "aterial non#ulic infor"ation only when the insider has reached his fiduciary duty to the shareholders y disclosing the info to the ti##ee and the ti##ee knows or should know that there has een a reach 4ithout this, could circumvent securities laws by >ust tipping off to someone #.VE TO /OO@ .T T4O T#I"G0$ 4hether the I"0I
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4hat if he does "OT tell ump ahead of other shareholders 3annot allow yourself to avoid losses that they will incur "EE< . G.I", I" 3O""E3TIO" 4IT# Breach of /oyalty "EE< . <1T! D!es NOT #atte$ i* 4!" !.e$ hea$ s!#ethin9 4!" a$e n!t liable9 n! b$each O#agon, 2isappropriation Theory o If you have a fiduciary duty to the 0O13E of the information, agreed to maintain confidentiality or a fiduciary relationship If you have a fiduciary duty generally, like produce things, print things, in a film crew on the im 3ramer show; .nd you violate that duty, you misappropriate that duty, and you T.
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D!es NOT #atte$ i* 4!" !.e$ hea$ s!#ethin9 4!" a$e n!t liable9 n! b$each &+eJL )O"/! merger and acFuisitions and Tender Offerso o umping ahead of the line of his shareholders T#EE I0 . G.I" ."< I" 3O""E3TIO" 4IT# o #e avoided losses Broker This is Misa##ro#riation Theory o Breach of a duty to the source o There is an eCpectation of privacy and confidentiality with the way you handle your stocks ."< a material non public information about the corporation o "EE< . G.I" 2aybe reputational gain from other clients, get more clients I" 3O""E3TIO" 4IT# . T.
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/awyer to client O &'b7J?)bo .grees to maintain information . pattern of confidence or relationship of confidentiality 0pouse, parent, sibling, child—presumption of trust and confidence, but this is rebuttable o MIS/00R(0RI/TI(' T!E(R, Employment related duty o MIS/00R(0RI/TI(' T!E(R, o
Net o
Was there a TR/*E on this infor"ation :has to e in connection 'it& <
Net If a TI00ER *id that #erson do it for PERSONA! BENE#+.,A#N *id they have a fiduciary duty :*irks< &-, in s"55le#ent9 als! !n 5> /? !* caseb!!k
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Brown is the 3EO principal .ttorneys—2eyer "023 wanted to buy a subsidiary of Interstate, Interstate said no, "023 wants to buy all of Interstate 4anted to pool all of the revenues of Interstate to be given to "023 for the year to make them look profitable 0tock for 0tock deal Interstate was to give an !5ini!n lette$ from counsel that it was lawful to do merger "032 was to give the same BOT# were to give c!#*!$t lette$s from accountants o "o material adverse changes, done with G..P .t /.0T 0E3O"<, .ccountants find that they under represent the "023 companys losses and over represent companys profits for the year and at BE0T flat, even; Interstate gets this, asks "023 will this have an impact on companys earnings, "023 says no and the losses will be recouped; Interstate had L options, shut it down, close the deal, or delay If delay, you have to predict the future of the stock They want another comfort letter, it is now 4O0E They go ahead with the stock for stock buy, "023 went up, but then the numbers came out and "023 started to go down, bottom falls out "O in>unctive relief on the attorney of Interstate because "O likelihood of further conduct B1T,
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4ith notice and a hearing Sto# (rders 0ecurities .ct 9)d0top a registration statement from being effective anymore Ceased and *esist (rders 0ecurities .ct 9)a-, ECchange .ct ?&)cIt is like in>unctive relief But in>unctive needs higher burden of proof #EE, >ust need rational reason that conduct will continue in the future *isgorge"ent /ike restitution, putting them whole *a"ages Insider Trading has monetary penalties— Trele *a"ages 0ecurities .ct ?')d-, ECchange .ct ?&)d-)L0E3 has power to seek 2onetary ust for violations )?- maC 7'k, eckless disregard that resulted in violation 5or violations involving fraud, deceit, reckless )L- maC &''k .// of the .bove—P/10 loss or risk of loss to others Entities o )&- maC 7'k 5or anyone and anything—>ust for violations )?- maC ?7'k eckless disregard that resulted in violation 5or violations involving fraud, deceit, reckless )L- maC 7''k .// of the .bove—P/10 loss or risk of loss to others (fficer and *irector Bar+ barred from acting as these for a company Court I"#osed+ 0ecurities .ct ?')e-, ECchange .ct ?&)d-)?SEC I"#osed+ 0ecurities .ct 9.)f-, ECchange .ct ?&3)f4hen you have an /nti %raud 1iolation -O +O S+OP +-ESE 3an give as a sacrificial lamb to say one guy is the problem If you can say that So"ehow "anaged the #role" =ive the SEC the requisite infor"ation aout the #role" 3an submit a =ells N!tice ECplaining why the 0E3 should not be charging your client
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.ccounting 5irm—0E3 wants them to be independent—they are an auditor and should be looking at things ob>ectively, if there is a c!ns"ltin relationship, may not be ob>ectively Sarbanes9O3%ey makes Accountin4 and Consu%tin4 SEPARA+E #EE, says they violate ?&)c-, want a 3 and < order The hihe$ the n"#be$ the A"dit $e5!$ts9 the 3 ihe$ 72MG ets9 incenti.e 0ays @P2G violated independent rules ."< caused their company they were audited to #ake thei$ *inancials NOT a"dited b4 an INDE2ENDENT C!#5an4 T#EE5OE, their company, POT., is in violation, "O filings, &L)do violation 80M= says they were >ust "EG/IGE"T Court says '(& ?&)c- says 4!" kne !$ S3OULD ha.e kn!n that the4 *ilin o !"ld n!t be e**ecti.e beca"se the4 e$e n!t inde5endent 80M= says this is '(T enough for a C and * (rder Court says this IS enough o W!E' /00R(0RI/TE T( %I'E /' E'TIT, '() The presence or absence of a direct benefit to the corporation as a result of the violation= ."< '&) The degree to which the penalty will recompense or further harm the in>ured shareholders POB/E2 Issuing options, their grant dates were earlier than the actual dates, making the yield prices lower than the actual price, essentially being in the money right when you buy 67A went to senior management 4anted to recruit good people, so they did this LOO7 AT T3ESE FACTORS t! s"55le#ent '() and '&) ab!.e The need to deter the particular offense o The eCtent of the in>ury to innocent parties o 4hether complicity in the violation is widespread throughout the corporation o The level of intent on the part of the perpetrators o The degree of difficulty in detecting the type of offense o The presence or lack of remedial steps by the corporation o The eCtent of cooperation with the 3ommission and other law enforcement o agencies 3a.e 5enalt4 4hat is available, in>unction, 3 and <, penalties o T#E", 0#O1/< !O1, will it have deterrent threat, stopping bad behavior o without harming innocent people or shareholders; C$i#inal Liabilit4 "nde$ the Sec"$ities Las
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O$ =ill*"ll4 and 7n!in 'intent t! decei.e) #akin a *alse *ilin9 need t! *ile DEFENSE8 no knowledge of the rule NO 5$is!n ti#e then9 ;UT still d! *ine o C!$5!$ati!ns can be *ined "5 t! &/ #illi!n o All indi.id"als ha.e t! 5a4 *!$ thei$ acts o $S v. *i5on o President of company, reporting, he knew he had to make filings and disclosures about insider loans /oaned a lot of money to #I20E/5—any loans of over &'k to insiders must be disclosed #e had 7k of loans—no disclosure
