Class 13 Rule 10b-5

Question 1

We’ve seen the courts expansion of 10b-5 to broker/deaker-type defendants, whether intended by congress or not. but we saw limitations with state corporate law.

Who else is included? what if they dont make the misstatements?

Question 2

IS there an express cause of action for aiding and abetting?

Answer 2

No

Question 3

what does the PLSRA added section 20(e) of the exchange act say about giving assistance?

Answer 3

Liability for knowingly giving substantial assistance

Question 4

Central bank of Denver v. First interstate bank of Denver

Facts: PBA raised funds through a debt issuance where central was indenture trustee.
Covenant: land value (securing debt) had to be 160% of outstanding principal and interest.
AmeWest (developer) gave appraisal that land value hadn’t changed (but probably had dropped)
Central also had concerns but delayed getting independent appraisal until after issuance.
Bondholders sued central as aider and abettor.
congress would have stated if secondary liability were to be established.
There wouldn’t be reliance established for secondary liability.
P cant rely on a statement that D didn’t make.

Answer 4

The court ruled that the statute didn’t provide for secondary liability.

Question 5

In light of the central Bank of Denver ruling, why did the court not read more into 10b-5 here? Consistent? or changing views?

Question 6

Dodd-Frank Exchange Act 20(e) changed knowingly to _____.

Answer 6

recklessly (provides substantial assistance to another person)

Question 7

Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.

Facts: Charter, executive, and auditor were defendants related to arrangements to meet expectations.
Scientific-Atlants and Motorola are sued here as suppliers/customers of Charter
Scheme: Charter overpaid for supplies and SciAt and Moto agreed to buy advertising (returning overpayment)
Charter would capitalize supplies (non-GAAP) and record revenue for the supposed advertising sales.

I: Do sciAt and Moto have aiding and abetting liability?

Answer 7

H: this is deceptive but reliance not met. (distinguish Affiliate UTE and fraud on the market)
They arent liable (to private plaintiffs)
The SEC could still take action under 20(e) amendments for Exchange Act from PSLRA additions.

R: They didn’t make the disclosures.Even though conduct, not just disclosures, can trigger liabilities Ds acts/statements were not relied upon by Ps.
Cant have a violation without reliance.
Even though the scheme affected financials, Ds are too remote for reliance. We don’t want to encroach state law.

Question 8

Can there be deception even if there is no misstatement or omission? Does manipulation require a misstatement or omission?

Answer 8

The court (stoneridge) tells us that conduct can be deceptive, and therefore actionable under Rule 10b-5

Question 9

Does aiding and abetting liability allow Ps to circumvent the reliance requirement?

Answer 9

There would still be reliance. It would just be reliance on the statement, rather than the identity of the speaker.

Question 10

What disclosure did the investors rely upon in Stoneridge? what role did the suppliers play in the creation of that misleading disclosure?

Answer 10

The Ps could only make the argument that they directly received info on Charter’s finaincials.

Question 11

What are out of pocket damages? (out-of-pocket measure)

Answer 11

the difference between the k price and the security’s true value at the time of the transaction

Question 12

what are purchasers damages (for out of pocket measure):

Answer 12

difference between the purchase price of security and its true value at time of the transaction.

Question 13

What are sellers damages (for out of pocket measure)?

Answer 13

difference between the sales price of the security and its true value at the time of the transaction.

Question 14

What are damages (for face to face rescissionary measure)

Answer 14

If purchaser defrauded the P, return the securities or

sellers: if seller defrauded the P, return of the purchase price or

The difference between the original sale price and the subsequent sale by the D.

Question 15

Damages for deterrence formula

Answer 15

Pr(detect) x E[damages] >=
E[scheme profits]

(We cant see crimes that aren’t caught. No we have no real way to estimate Pr(detect) reliably.)

Question 16

why not set damages as: damages >= E(scheme profits/Pr(detect)?

Question 17

Who will win/lose if price is inflated due to a misstatement?

Answer 17

those who trade on the wrong info will lose, but the counterparty will gain.

Question 18

Is restitution available from the winner?

Answer 18

No but damages are paid by issuer.

Question 19

The shareholders who didnt trade subsidize the investor who lost due to inflation. Who compensates them? managers?

Question 20

How are damages calculated for class certification?

Answer 20

in a common way (but aren’t every shareholders damages different?)

Question 21

Comcast corp b. Behrand

Facts: antitrust case. 4 violations alleged.
only one available for class cert.
Damages were measured based off of all 4 violations, and couldn’t be attributed individually to each of the 4 violations.
No common measurement available for class.

Question 22

what if the inflation from misstatement varies with time? how can we identify damages?

Question 23

What if the misstatement increases/decreases with different disclosures?

Question 24

What if the correction was slow, over a long time?

Question 25

What can courts apply for face to face damages?

Answer 25

restitution or recission.

Question 26

What do we do if there was a misstatement but the stock price went up? i.e it should have been even higher.

Question 27

Garnatz v. Stifel, Nicolaus and co., inc.

Facts: P was told he could invest in a safe investment (debt instruments)
they weren’t really safe
when value started dropping, he was assured it would go back up.
Damages rule is: price paid less value of securities add any other proximate damages.

Issue: since the plaintiff got full value for his money, are there damages? which damages measure do we use?

Answer 27

H: the court applied rescissory damages
R: P wouldn’t have bought risky securities. He wouldn’t have had the losses, so he can get the losses back from d’s.

Question 28

Regarding opportunity cost, what would Garnatz have made?

Question 29

Why is ther ean issue with backwarding looking bias from market movements?

Answer 29

Garnatz wouldn’t have sued if he had made too much money.

Question 30

Instead of rescission, could we have priced the risk? (value difference ex ante between risky and safe securities) (Garnatz)