Class 10 10b-5 Flashcards
Can you sue under section 11 and 10b-5? What are the differences between the two?
yes,
10b-5 covers a ton of activity: any person, any manupulative or deceptive device, any security
section 11 only coverns misstatements in the registration statement
Hurdle- section 11 is sort of strict liability, 10b-5 requires scienter
Defenses: due diligence defense for section 11
Problems with class actions and PSLRA
Coordination problem: no individual P has enough to gain from suing, so managers are undeterred.
Litigation cost problem: managers may settle, even when innocent, to avoid discovery, legal opportunity (time), and optics costs.
agency problem: overactive Ps attorneys could bring strike suits for little shareholder benefit (but large legal fee benefit).
PSLRA makes it more rigorous to bring suit (particular pleading, freeze discovery)
Given the possibility that large damages may attract plaintiff’s attorneys to file non-meritorious suits, why do you think Congress did not change the damages formula for Rule 10b-5 actions when it adopted the Private securities litigation reform act? PSLRA.
Are there any alternatives to private causes of action for deterring fraud? what are the benefits and costs of those alternatives?
Regulatory action, SEC and DOJ or exchanges.
Blue Chip Stamps v. Manor Drug Stores
Facts:
Blue Chip sold stamps
It was ordered to sell shares, offered to stamp buyer/collectors that had been customers
some customers did not buy
later, the non-buyers sued, claiming that they would have bought if not for misleading statements that undervalued the company. claim owners wanted to keep more for themselves.
I: can someone who didn’t buy, later sue?
H: no, you must have bought or sold.
Reasoning:
prior circuit court held this, Bimbaum case.
Congress had the opportunity to clarify attempts to purchase and sell, but declined
in other provisions offer rather than purchase or sale is used explicitly.
Section 11 and 12 are clear as to needing actual purchase or sale as well.
The court puts a lot of emphasis on the evidentiary difficulties of counterfactuals. How can a D disprove that the P would have bought the security?
Is this fair? Why not simply shift the burden to the p to prove that they would have bought? (like moved money into a segregated account prior to hearing the misstatement/omission)
Who is harmed with this ruling? (Blue Chip)
investors who choose not to purchase due to the fraudulent statements/omissions, actual shareholders who choose not to sell shares, shareholders, creditors, and others who are harmed by insider activities in connection with the purchase or sale of securities
SEC v. Zandford
Facts: old man gave power of attorney to his broker to trade on his behalf for investments.
Broker sold securities and took the cash.
He didn’t misrepresent anything about securities. He was convicted of wire fraud. SEC brought this action for fraud.
I: was this in connection with the sale?
H: Securities laws cover this fraud
Reasoning: the fraud coincided with the securities trades.
10(b) should be construed liberally to meet its underlying purpose of protecting investors.
A specific misrepresentation is not necessary.
The person deceived does not have to be the person on the opposite side of the trader
What would have happened if, without power of attorney, the investor told the broker to sell securities, and then the broker stole?
in light of US v. Litvak,(maybe it seemed confusing that a dealer was being subjected to law meant for protecting investors from issuers misstatements) does it seem reasonable to apply the same disclosure laws to issuers and broker/dealers?
