Public Offering Antifraud Liability (Chapter 8)

Question 1

11(a)

Answer 1

[Who can be sued]

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue— [see list of defendants]

Question 2

11(g)

Answer 2

[Damages]

In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public.

Question 3

11(a) list of DEFENDANTS

Answer 3

(1) every person who signed the registration statement;
(2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;
(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner;
(4) every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has with his consent been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report, or valuation, which purports to have been prepared or certified by him;
(5) every underwriter with respect to such security.

Question 4

6(a): who must sign the RS

Answer 4

Any security may be registered with the Commission under the terms and conditions hereinafter provided, by filing a registration statement in triplicate, at least one of which shall be signed by each issuer, its principal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and the majority of its board of directors or persons performing similar functions (or, if there is no board of directors or persons performing similar functions, by the majority of the persons or board having the power of management of the issuer), and in case the issuer is a foreign or Territorial person by its duly authorized representative in the United States; except that when such registration statement relates to a security issued by a foreign government, or political subdivision thereof, it need be signed only by the underwriter of such security. Signatures of all such persons when written on the said registration statements shall be presumed to have been so written by authority of the person whose signature is so affixed and the burden of proof, in the event such authority shall be denied, shall be upon the party denying the same. The affixing of any signature without the authority of the purported signer shall constitute a violation of this subchapter. A registration statement shall be deemed effective only as to the securities specified therein as proposed to be offered.

Question 5

11(b)(3)

Answer 5

[Defenses]

[N]o person, other than the issuer, shall be liable as provided therein who shall sustain the burden of proof—

(3) that
(A) as regards any [non-expertised] part of the registration statement …he had, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and

Question 6

11(b)(3)(A)

Answer 6

[Non-experts & Non-expertised Sections]

(1) Reasonable investigation
(2) Reasonable and (3) actual belief in statements

See Worldcom (heightened DD requirements)

Question 7

11(b)(3)(B) - Experts

Answer 7

[Experts & Expertised Section]

(1) Reasonable investigation
(2) Reasonable and (3) actual belief in statements

Question 8

11(a)(4)

Answer 8

[Experts & NON-expertised Section]

No liability
Experts not responsible for non-expertised sections of RS

Question 9

11(b)(3)(B) - Non-experts

Answer 9

[NON-experts & Expertised Section]

(1) Reasonable and (2) actual belief in statements

Compare Escott (reliance defense easy to get) with Worldcom (red flags)

Question 10

11(c)

Answer 10

[Standard of Reasonableness]

In determining…what constitutes reasonable investigation and reasonable ground for belief, the standard of reasonableness shall be that required of a prudent man in the management of his own property.

Question 11

11(e)

Answer 11

[Damages: Loss causation defense]

“Provided, that if the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted, … such portion of or all such damages shall not be recoverable.”

Question 12

Section 11 damages overview

Answer 12

§ 11(e) provides measure of damages
- § 11(e) provides affirmative “negative causation” defense

§ 11(g) states that the amount of damages cannot exceed the public offering price

§ 11(f) defendants are jointly and severally liable

  - certain defendants receive cap on damages
        - § 11(e) underwriters’ liability is capped at the total    price underwritten and distributed
       - § 11(f)(2) outside directors are proportionately liable if they did not know of violation

Question 13

12(a)(1)

Answer 13

Any person who –
(1) offers or sells a security in violation of
section 5 … .
shall be liable to the person purchasing such security from him … to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.

Question 14

12(a)(2)

Answer 14

Any person who – …
(2) offers or sells a security … by means of a prospectus or oral communication, which contains an untrue statement of material fact … (the purchaser not knowing the untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth . . .

shall be liable to the person purchasing such security from him …

Question 15

12(a)(2)(b)

Answer 15

Loss Causation – In … subsection (a)(2), if the person who offered or sold such security proves that any portion … of the amount recoverable … represents other than the depreciation in value … from such part of the prospectus or oral communication, with respect to which the liability … is
asserted … , … such portion … shall not be recoverable.