Securities Fraud
Material misrepresentation
Unfairness as fraud
Opinion as fraud
Failure to correct/update as fraud
(last updated 17 Apr 12)
Securities Fraud Action
Rule 10b-5
• Transaction (“in connection with
•
•
purchase or sale of securities”)
Plaintiff (“purchasers or sellers” /
except SEC)
Defendant (“primary violator” /
including company)
• Elements
– Material misrepresentation or
omission
– Scienter
– Reliance
– Causation
– Damages
Rule 10b-5:
• Procedure
– Jurisdictional nexus (federal court)
– Statute of limitations / repose
– Special rules for class actions
It shall be unlawful …To make any
untrue statement of a material fact or
to omit to state a material fact
necessary in order to make the
statements made, in the light of the
circumstances under which they were
made, not misleading, …
Can unfair transaction be
securities fraud?
Unfairness as fraud?
Santa Fe
95%
Minority
(Green)
5%
Kirby Lumber
Short-form merger
• 95% shareholder
• Post-merger notice
Morgan-Stanley
• Assets = $640/sh
• FMV = $125/sh
• Price = $150/sh
Minority – appraisal for
“fair value”
Why not seek appraisal?
Santa Fe Industries v. Green (US 1977)
Rule 10b-5
It shall be unlawful for any person, directly
or indirectly,
(1) To employ any device, scheme, or
artifice to defraud,
(2) To make any untrue statement of a
material fact … or to omit to state a
material fact necessary in order to
make the statements made, in the light
of the circumstances under which they
were made, not misleading, or
(3) To engage in any act, practice, or
course of business which operates or
would operate as a fraud or deceit
upon any person,
in connection with the purchase or sale of
any security.
Justice Byron White
Santa Fe Industries v. Green (US 1977)
Section 10 -- Manipulative and
Deceptive Devices
It shall be unlawful for any person,
…(b) To use or employ, in
connection with the purchase or
sale of any security … any
manipulative or deceptive
device or contrivance in
contravention of [SEC] rules …
Justice Byron White
Are opinions misleading?
Va Bankshares v. Sandberg (US 1991)
“ in the opinion of the Board of
Directors, the merger price
is high value for the shares
… fair price.”
Supreme Court (actionability of opinions)
… Shareholders know that directors
usually have knowledge and expertness
far exceeding the normal investor’s
resources … [and] will think it important
…
… statements of belief are factual in two
senses: [1] directors … hold the belief
stated … and [2] statements about the
subject matter of belief expressed.
… disbelief, standing alone, is
insufficient to satisfy element of fact. …
Whether price “fair” depended on
provable facts about actual/potential
operations … in accordance with
recognized methods of valuation.
Justice David Souter
Is there a duty to update?
to correct?
Duty to correct / update
Company disclosed in Annual Report:
• 3/9/99: “[company] subject to
comprehensive government regulation”
Company should have disclosed:
• 3/17/99: FDA sends letter demanding
compliance [Bloomberg reveals in June]
• 9/99: FDA insists on substantial
penalties [not reported]
When Company did disclose:
• 9/29/99: Abbott press release that in
settlement negotiations with FDA [stock
drops 6%]
• 11/2/99: FDA and Abbott settle [court
enters consent decree = $100 million
fine + $18 million accounting charge /
stock drops 8%]
Duty –
• to correct?
• to update?
Seventh Circuit:
“We do not have a system of
continuous disclosure”
“A statement need be corrected only
if it was incorrect when made …”
“Updating documents has its place …
but only when selling stock.”
Second Circuit:
duty to update when “information
alive in market”
Judge Frank Easterbrook
Congress:
SOX 409 – new Form 8-K
When is a “guess” false?
Forward-looking information
Regulation S-K
MD&A (Item 303)
Annual 10-K must reveal
Any known trends or uncertainties
that have had or that the registrant
reasonably expects will have a
material favorable or unfavorable
impact on net sales or revenues or
income from continuing operations
…
Material (bespeaks caution)
“Commitments” (repeated)
•
Growth in “low teens” and
EPS in “mid-teens” and CF of
$500 MM
In fact
•
•
•
Renal division not meeting
budget
Immunoglobin products
below predictions
Manufacture failure of drug –
w/o changing forecasts
PSLRA (Exchange Act 21E)
(c) Safe harbor
(1) In general
in any private action arising under this
title that is based on an untrue statement
of a material fact or omission of a
material fact necessary to make the
statement not misleading, a person
referred to in subsection (a) of this
section shall not be liable with respect to
any forward-looking statement, whether
written or oral, if and to the extent that—
(A) the forward-looking statement is-(i) identified as a forward-looking
statement, and is accompanied by
meaningful cautionary statements
identifying important factors that
could cause actual results to differ
materially from those in the forward
looking statement; ..
Baxter Annual Report:
Statements throughout this report that are not historical facts are forwardlooking statements. These statements are based on the company's current
expectations and involve numerous risks and uncertainties. Some of these
risks and uncertainties are factors that affect all international businesses,
while some are specific to the company and the health care arenas in which
it operates.
Many factors could affect the company's actual results, causing results to
differ materially, from those expressed in any such forward-looking
statements. These factors include, but are not limited to, interest rates;
technological advances in the medical field; economic conditions; demand
and market acceptance; risks for new and existing products, technologies
and health care services; the impact of competitive products and pricing;
manufacturing capacity; new plant start-ups; global regulatory, trade and tax
policies; regulatory, legal or other developments relating to the company's
Series A, AF, and AX dialyzers; continued price competition; product
development risks, including technological diffiulties; ability to enforce
patents; actions of regulatory bodies and other government authorities;
reimbursement policies of government agencies; commercialization factors;
results of product testing; and other factors described elsewhere in this report
or in the company's other filings with the Securities and Exchange
Commission.
Material (bespeaks caution)
Seventh Circuit:
“… when markets are informationally
efficient, it is impossible to segment
information as plaintiffs propose…”
“Yet Baxter’s language may fall short.
[Baxter may have known more than
identified as potential risks.] Baxter
[argues full truth had reached the
market] – hard to understand the
sharp drop in the price of its stock.
…”
Judge Frank Easterbrook
Plaintiffs get discovery – but of what?
The end