Class 12 Rule 10b-5 Flashcards
Affiliated UTE Citizens of Utah v. US
Facts: UDC was formed to manage rights of mixed-blood members with TBC (full-blood)
-claims involving gas, oil, mineral, other rights.
shares issued to mixed-blood members.
Had to try to sell to members before outsiders.
1st security bank of Utah was the transfer agent. Officers of the bank, Gale and Haslem, started acting as middlemen between UDC shareholders and outside shareholders (no tribal blood).
Gale and Haslem didn’t disclose their roes or contacts with the tribal members.
I: Since Ds didn’t make misstatements could Ps have relied on them?
H: Omissions allow for reliance without a specific showing that the Ps relied of disclosures.
R: The text isn’t limited to misstatements but includes (FINISH)
Halliburton co. v. Erica P. John Fund, Inc.
Facts: Erica P. John Fund is lead plaintiff in this 10b-5 class action certification case. Halliburton made a series of misrepresentations regarding its potential liability in asbestos litigation.
Ps need to show question of law or fact common to class member predominate over any question affecting only individual members
Need to show loss causation
SC remanded, basic doesn’t need loss causation for class certification
Re-appeal, Halliburton argues lack of price impact shows lack of reliance by Basics standard.
I: Can lack of price impact rebut Basics presumption of reliance for class. certification? also does Basic still hold.
H: Yes, Basic still holds for fraud on the market. (No special justification for overturning precedent)
and we can rebut the Basic presumption by showing lack of price impact.
Rule from Basic:
1. public misrepresentations
2. material
3. show this market is efficient
4. plaintiff traded during period.
this is rebuttable (show that something else affected prices)
Halliburtons arguments:
- capital markets aren’t efficient
-value investors rely on underpricing, not relying on accuracy of the market price
-Basic expanded 10b-5 with lax reliance.
R: Markets are on a continuum of efficiency, not a binary yes/no. Imperfection is not enough.
- isn’t this obvious from bid/ask spreads? Prices cant be updated continuously with infinite precisions.
Value investors invest on the premise of markets eventually reaching appropriate prices.
Note: undervaluation can be from Private info.
Reliance is still necessary, just easier to show.
Congress could have changed reliance with PSLRA.
Halliburtons argument (Part 2)
-Plaintiff should have to prove price impact
-Defendants should be able to rebut price impact
Reasoning: proving price impact would take away Basic’s Presumption
The court agrees price impact can be rebutted!
- if the Ps are establishing market efficiency, why can defendants not use this to show lack of impact?
What is a transfer agent?
person, bank or trust company entrusted to issue, redeem and register securities
What is a Broker?
the title that is given to a person who buys and sells stocks for his clients
What is a market maker?
firm (or person) that takes possession of, and trades in, a security as a principal, thereby assuming market and systemic risk.
Is this another example of an extension of disclosure laws to brokers/dealers? (UTE case)
yes, because this may also be an issue of breach of contract/ breach of fiduciary duty. But instead, it was brought under federal law.
Was this type of transaction coverage the intent of congress? UTE case
Probably. Its a breach of good practice/standard.
How could we argue that omissions shouldn’t be covered?
no direct evidence
Dura Pharmaceuticals, Inc. V. Broudo
Facts: Respondents bought stock in Dura Pharmaceuticals. Pharma said its asthma device was going well (pending FDA approval) and drug (Ceclor) sales were doing well.
Reality was not likely FDA approval and channel stuffing of existing drug (Ceclor).
Appeals court said plaintiff just need to show that they bought during inflation, not that the price drop from revelation was significant. (but if price hasn’t dropped then P cant show loss)
I: Did the Ps plead causation?
H: No.
R: loss happens at revelation, not purchase.
- no harm is sold before revelation.
other factors can cause price declines.
common law roots of 10b-5 (deceit) requires showing of loss.
21D(b)(4) requires plaintiffs to show loss.
Ps must allege this in their complaint
Mineworkers Pension Scheme v. First Solar Inc.
Facts: Ps allege first solar hid defects. stock price declined on revelation.
Issue: what is loss causation? a causal connection between the facts and the losses suffered by Ps? (i.e. show that defect and disclosure led to losses here)
More restrictive: recovery only if market learns of the losses from fraud. i.e. Ps must demonstrate fraud was the reason for non-disclosure.
Can we make this distinction?
losses are from events vs.
losses are from the discovery of fraud
H: Loss causation is a variety of proximate cause.
R: there are infinite varieties of ways torts can cause a loss. It is context dependent and has a foreseeability standard.
Broughman et al. Amicus Brief
Considering Ps must show materiality, How can we have something material without price impact to establish reliance?
Considering Ps must show materiality, How can we reconcile that something is material but not relied upon in the market?
Considering Ps must show materiality, What is Ds release good news at the same time as a revelation of misstatements? if they cancel each other is there no impact?
What does materiality, loss causation/reliance, and damages look to in public firms?
price movements
