• Shelf registration (Rule 415)
• Role of underwriter
• Reliance vs. due diligence
(last updated 14 Feb 13)

Transactional nexus
Plaintiff
Defendant
(1) Mat’l misrep
(2) Scienter
(3) Reliance
(4) Causation
(5) Damages
Court
Limitations
Rule 10b-5 § 11
“icw” purch/ sale security
Part of RS
Purchaser or seller
Primary violator
Pl BOP (or duty to speak)
Pl BOP (facts / strong E)
Pl BOP (unless
FOM)
Pl BOP (prox cause)
Pl BOP (O/P or rescission)
Federal
Purchaser
(tracing)
List (I, Ds, Os,
UWs, expert)
Pl BOP (or omission)
Def BOP (“due diligence”)
Def BOP (Pl
“knew”) *
Def BOP
(“other than”)
Rescission (up to offering $)
Federal or state
§ 12(a)(1)
2 yrs + 5yrs 1 yr + 3 yrs
§ 12(a)(2)

In re WorldCom Sec Litigation
(SDNY 2004)
– Nature
– Role of UW
– Audited financial
– Unaudited financials
BALANCE SHEET
LIABILITIES ASSETS
• Cash
• Cap accounts
SH EQUITY
• Retained earnings
How did WorldCom account for “line costs”?

In re WorldCom Sec Litigation
(SDNY 2004)
DATE
4/2000
2/2001
EVENT
WorldCom files10-K (ratio?)
UWs dowgrade WorldComm credit
3/2001 UWs help restructure credit facility
4/2001 UWs buy credit default swaps
4/2001 Cravath (UW counsel) due diligence
4/2001 Andersen (auditor) gives comfort letter
5/2001 Note offering ($11.9 B) under R 415
6/2002 Restatement ($3.8B) + bankruptcy

In re WorldCom Sec Litigation
(SDNY 2004)
Expert
Expertised
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 )
Reliance
(audited financials)
Due diligence
(comfort letter / unaudited financials)

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.
SEC (1981): Underwriters should arrange their due diligence procedures over time for the purpose of avoiding last minute delays [in shelf offerings] … Nothing compels underwriter to do deal without due diligence.

In re WorldCom Sec Litigation
(SDNY 2004)
Underwriters may not rely on an accountant’s comfort letters for interim financial statements. … Comfort letters do not “expertise any portion of the RS”
(1) Audited: prudent man in management of own $$
(2) Unaudited: look at context
(WorldCom deteriorating)
Judge Denise Cote
(SDNY)