Securities Act - Liability
Section 11
• standing
• “due diligence”
(last updated 14 Feb 13)
Drafters of Securities Act of 1933
James M. Landis {}
Thomas G. Corcoran {}
Benjamin V. Cohen {}
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HLS (1924)
S Ct clerk, Brandeis (1925)
Chair, FTC (1933-34)
Chair, SEC (1935-37)
Dean, HLS (1937-1946)
HLS (1926)
SCt clerk OWH (1927)
WS lawyer (1927-32)
Bureaucrat (1932-35)
Lobbyist par excellence
SJD HLS (1915)
FDR’s “brain trust”
Genl counsel PWA
Dumbarton Oaks (UN)
Investor protection in public offering
• Disclosure (market protection)
– Mandatory
– Managed (“gun-jumping” rule)
• SEC oversight (regulatory protection)
– Review and comment
– Acceleration authority
– Investigation / stop order /
enforcement (§17)
• Private liability (court protection)
– §11: material misinformation in
RS
– §12(a)(1): §5 violation (nonexempt, unregistered sales)
– §12(a)(2): other material misinfo
in offering
September 12, 1938
Compare §11 to Rule 10b-5?
Securities fraud action
Rule 10b-5
• Transactional nexus
• Plaintiff
• Defendant
• Elements
– Material misrepresentation
or omission
– Scienter
– Reliance
– Causation
– Damages
• Procedure
Who can be plaintiffs?
§11 Civil Liabilities on Account of
False Registration Statement
(a) Persons possessing cause of
action; persons liable. In case
any part of the registration
statement, when such part became
effective, contained an untrue
statement of a material fact or
omitted to state a material fact
required to be stated therein or
necessary to make the statements
therein not misleading, any person
acquiring such security … may,
either at law or in equity, in any
court of competent jurisdiction, sue-
§11 Civil Liabilities on Account of
False Registration Statement
(a) Persons possessing cause of
action; persons liable. In case
any part of the registration
statement, when such part became
effective, contained an untrue
statement of a material fact or
omitted to state a material fact
required to be stated therein or
necessary to make the statements
therein not misleading, any person
acquiring such security … may,
either at law or in equity, in any
court of competent jurisdiction, sue-
Krim v. pcOrder.com, Inc.
(5th Cir 2005)
Beebe
buy
Market
(NASDAQ)
Burke
sell
Petrick
CEDE
& Co.
CEDE
& Co.
250,000 shs
(insiders)
2.5 MM shs
(IPO)
Issuer
Is “tracing” a hypertechnicality?
§11 Civil Liabilities on Account of
False Registration Statement
(e) Measure of damages. The suit
authorized under subsection (a) of
this section may be to recover such
damages as shall represent the
difference between the amount
paid for the security (not exceeding
the price at which the security was
offered to the public) and …
[depends on whether sold before or
held through suit]
Who can be defendants?
What is “due diligence” defense”?
Escott v. Bar-Chris Construction Corp.
(SD NY 1968)
Market
(plaintiffs)
Retail group
UW counsel
Factor
$$
notes
Accountant
(auditor)
Managing UW
Board of
directors
Signing
officers
Issuer
UW
UW
build
notes
UW
Bowling
alleys
Company
counsel
§11(a) Persons possessing cause of
action; persons liable.
… any person acquiring such security …
may … sue –
(1) every person who signed the
registration statement;
(2) every person who was a director of
… the issuer …;
(3) every person who, with his consent,
is named in the RS as being … a
director…;
(4) every accountant … who has with his
consent been named as having …
certified any part of the RS … with
respect to the statement in such RS
… which purports to have been …
certified by him;
(5) every underwriter with respect to
such security.
Escott v. Bar-Chris Construction Corp.
(SD NY 1968)
Market
(plaintiffs)
Retail group
UW counsel
Accountant
(auditor)
Managing UW
Board of
directors
Signing
officers
Issuer
UW
UW
UW
Company
counsel
What is “due diligence” defense?
Expertised
Expert
After reas investigation,
reasonably believes
information is true
(ignorance no defense)
Nonexpert
No reasonable ground to
believe was untrue
(ignorance is excuse)
Non-expertised
No liability
[see §11(a)(4)]
After reas investigation,
reasonably believes
information is true
(ignorance no defense)
Rule 176 -- Circumstances Affecting the Determination of What
Constitutes Reasonable Investigation and Reasonable
Grounds for Belief Under Section 11 of the Securities Act
In determining whether or not the conduct of a person
constitutes a reasonable investigation or a reasonable ground
for belief meeting the standard set forth in section 11(c),
relevant circumstances include, with respect to a person other
than the issuer.
(a) The type of issuer;
(b) The type of security;
(c) The type of person;
(d) The office held when the person is an officer;
(e) The presence or absence of another relationship to the issuer
when the person is a director or proposed director;
(f) Reasonable reliance on officers, employees, and others whose
duties should have given them knowledge of the particular
facts ;
(g) When the person is an underwriter, the type of underwriting
arrangement, the role of the particular person as an underwriter
and the availability of information with respect to the registrant;
and
(h) Whether, with respect to a fact or document, incorporated by
reference, the particular person had any responsibility for the
fact or document at the time of the filing from which it was
incorporated.
Directors
“Due diligence”?
“Inside” insiders
• Russo (D / CEO)
• Vitolo, Pugliese (Ds / founders)
• Kircher (D / CFO)
1.
2.
3.
4.
5.
“Outside” insiders
• Birnbaum (D / secy)
“Inside” outsiders
• Grant (D / outside counsel)
• Coleman (D / UW partner)
“Outside” outsider
Break into five groups:
Inside insiders
Outside insiders
Outsiders
Underwriters
Accountant/auditor
• Auslander (D / banker)
Non-directors
Issuer
Underwriters
• Drexel Burnham (managing UW)
• Drinker Biddle (UW counsel)
– Ballard
– Stanton
Accountant (expert)
• Peat Marwick (auditor)
–Berardi
“Due diligence”?
What would you
advise each to do?
The end
Abbey v. Computer Memories, Inc
(ND Cal 1986)
Plaintiff
Mayer &
Schweitzer
(market maker)
sell
Market
(NASDAQ)
Fidelity
Brokerage
buy
Depository
Trust Co.
2 MM shs
(of 11 MM shs outstanding)
Issuer
DLJ
(Pershing )
Is “tracing” a hypertechnicality?