Class 11 Rule 10b-5 Flashcards
What are the elements of the cause of action for Rule 10b-5?
(1) material misstatement
(2) Scienter
(3) Reliance
(4) loss causation
What jurisdictional element is required for a 10b-5 cause of action?
Instrumentality of interstate commerce
When would a securities transaction today not involve the use of an instrumentality of interstate commerce?
What are the time limits for fraud actions under the exchange act?
The earlier of:
(1) 2 years after the discovery of the facts constituting the violation (statute of limitations which does not begin to run until Ps have discovered the facts constituting the violation, or when a reasonably diligent P would have discovered the facts of the violation…whichever comes first) or;
(2) 5 years after such violation. (statute of repose, which means that liability is cut off after five years without exception)
Santa fe Industries inc. v. Green
SF bought 60% of Kirby in 1936. SF slowly acquired more over the years. over 90%, enoguh for short-form merger. SF wanted to squeeze out the minority. SF got appraisal from Morgan Stanley-$640 per share assets, share valued at $125.
SF offered $150 to minority shareholders.
Minority turned down appraisal rights.
Motion for failure to state claim.
I: Does 10b-5 cover this alleged fraud?
H: No, its not a securities law case.
R: The fundamental purpose of securities regulation is about full and fair disclosure.
- The cause of action is traditionally state law.
- The flood gates would be opened since liability could extend to mergers, tenders etc.
Note on valuations: only being offered $150 for $640 in assets is not an acceptable allegation because the $150 could account for debt transactions including that the company was bought out of bankruptcy (but they couldn’t find the balance sheets).
Earnst & Earnst v. Hochfelder
Earnst was auditor of brokerage
the client firm defrauded investors
investors sue Ernst for aiding and abetting for failure to catch the fraud. (only the fraudster was allowed to open his mail. They didn’t catch this).
no allegation of scienter or recklessness.
I: is the auditor liable? What state of mind?
H: no scienter is required
R: congress intended to protect against frauds.
manipulative, device, and contrivance were used by congress to indicate intent.
congress knew how to make a negligence standard but didn’t.
Tellabs, Inc. v Makor Issues & Rights, Ltd.
Tellabs manufactured fiber optics.
the CEO made very positive, likely untrue statements about the prospects of the company.
Jurisdictional split on pleading.
I: What are the proper pleading standards post PSLRA? What is a strong inference?
H/R:
(1) Accept all factual allegations in the complaint as true.
(2) The inquiry is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter.
(3) Determine whether a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference.
- This is how to determine if the pleaded facts give rise to a strong inference of scienter.
What is material misstatement?
The use of an untrue statement concerning a material fact or an omission that, in light of the circumstances, makes other statements misleading.
What are the types of mergers?
- Forward Triangular Merger (find definition)
(if theres enough target shareholders the company can go from a ten to a 15.) we need to push out the stragglers (free rider problem) - Squeeze/Freeze-out, Two-step mergers
-after the 2nd step, minority shareholders are out! - If >90% owned, only board vote, not shareholder vote required at the parent level for 2nd step in Delaware.
How do these prohibitions: “any device scheme, or artifice, to defraud as well as any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” parallel with the prohibition on material misstatements?
Why didn’t the court in santa fe talk about debt?
maybe didn’t want to leave the door open to similar cases with low debt targets.
would federal regulation wipe out the meaningfulness of choice of law?
yes, because shareholder can pick state of incorporation…. (finish)
Did we leave the door open to recklessness? (regarding Earnst v. Earnst)
court reserved the question of whether recklessness as opposed to knowingly making a misstatement, would satisfy the scienter requirement.
Every circuit court addressing the problem has concluded that recklessness satisfies the 10b-5 scienter standard.
Was there an underlying issue of keep state corporation issues in their own jurisdiction? Is this fair given 10b-5 is so broad and overlaps other statutes/jurisdictions? Or better to contain 10b-5?
considering shareholder can pick the state of incorporation, would federal regulation wipe out the meaningfulness of the choice of law?
