Securities Law and Liability

Question 1

A security is:

Answer 1

• Listed Securities
  
  • Things like Bonds, Any note, Stock, Debenture, etc.
• Things vague and not listed
  
  • Investment contract
  • Interest or instrument commonly know as security

Question 2

True (Corporate) stock

Answer 2

• True Stock is always a security
  
  • Characteristics of true stocks
    
    1. Right to receive dividends
    2. Negotiability
    3. Pledge or hypothecate
    4. Voting rights
    5. Possibility of appreciation of value
• Sale of true corporate stock is always a sale of a security

Question 3

Security Registration

Answer 3

• The general rule is that all securities have to be registered before they are sold unless they are exempt.
• If it is not registered, there is almost strict liability for recision

Question 4

Underwriter

Answer 4

any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security

Question 5

Non-Stock: Investment Contract

Answer 5

• a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
• it is a security

Question 6

To determine whether an investment scheme may qualify as investment contract, the court looks at:

Answer 6

• the economic reality of the situation: “The question is whether an investor, as a result of the investment agreement itself or the factual circumstances that surround it, is left unable to exercise meaningful control over his investment.”

Question 7

The characteristics typically associated with common stock are:

Answer 7

1. the right to receive dividends contingent upon an apportionment of profits;
2. negotiability;
3. the ability to be pledged or hypothecated;
4. the conferring of voting rights in proportion to the number of shares owned; and
5. the capacity to appreciate in value.

Question 8

Are Partnerships Securities?

Answer 8

Since there is equal right to management in a partnership, under the reasoning of Robinson v. Glynn, it is not a passive investment, and therefore not a security.

Question 9

Registration Requirements

Answer 9

1. a security may not be offered through the mails or by use of other means of interstate commerce unless a registration statement has been filed with the SEC,
2. securities may not be sold until the registration statement has become effective, and
3. the prospectus (disclosure document) must be delivered to the purchaser before sale.

Question 10

Safe Harbor Provisions

Answer 10

Safe harbor provisions are statutory exemptions that have certain requirements, if met, make the person safe and deemed to have complied with the statutory requirement. If the person does not meet the safe-harbor standards they are not guilty, but they are not protected and have to proceed as normal.

Question 11

Misstatement in Registration Statement

Answer 11

A plaintiff does not have a cause of action by just providing evidence of a misstatement in a registration statement. The misstatements need to be material enough to cause an investor to rely on the statement when they otherwise would not have.

Question 12

Materiality Test

Answer 12

Would a reasonably investor have considered the information important when purchasing the security?

Question 13

Liability for Failure to Register

Answer 13

• Strict liability
• False or Misleading Statements in registration of material facts

Question 14

Who is liable for a security?

Answer 14

• Issuer
• Signer
• Director
• Experts
• Underwriters

Question 15

What is the liability for in Securities?

Answer 15

Recession

Question 16

Defenses to Recission

Answer 16

1. NON-EXPERTISED PORTIONS:
   
   • With regards to non-expertised portions of the disclosure, non-experts must prove that after reasonable investigation, they had reasonable grounds to believe and did believe that the statements therein were true, and complete.
   • (DUE DILIGENCE DEFENSE).
2. EXPERTISED PORTIONS:
   
   • For an expert, with regards to the expertised portion of the disclosure, he must prove that, after reasonable investigation, he had reasonable grounds to believe and did believe that the statements therein were true, and complete.
   • (DUE DILIGENCE DEFENSE).
3. NON EXPERTS WITH REGARDS TO EXPERTISED PORTION:
   
   • Non experts must prove that they did not know that the expertised portion of the disclosure was false or misleading
   • (NO DUE DILIGENCE REQUIREMENT) (I HAD NO FUCKING IDEA DEFENSE).

Question 17

Causes of Action under Rule 10b-5

Answer 17

• Market manipulation
  
  • providing misleading material info to market; and
• Insider trading
  
  • not providing material info to market when duty to do so
• Rule 10b-5 has been interpreted as applying to any security including those of closely held corporations.

Question 18

For Common Law Fraud, P must prove:

Answer 18

1. Intentional (scienter): knowledge of falsity or reckless disregard for truth
2. Misrepresentation, or omission w/ duty
   
   • Duty: fiduciary or misleading
3. Existing fact
   
   • Not a future event – prediction
   • Can be false statement of intent to perform
4. Materiality
   
   • Important to reasonable person deciding whether to do deal
5. Reliance
   
   • They must have believed statement was true
6. Causation
   
   • Actual cause (transaction causation): related to reliance
   • Proximate cause: damages caused by misrepresentation – no intervening acts – substantial factor

Question 19

Whether the misleading statements regarding ongoing merger discussions were material enough to alter the decision of a reasonable investor.

Answer 19

Misleading statements during merger discussions will be material under Rule 10b-5 if the misstatements would have changed the view of the total information by a reasonable investor.

Question 20

TEST: Whether a reasonable shareholder would consider the omission or misrepresentation important in making a decision on how to vote.

Answer 20

They take into consideration the magnitude of the event and the probability of whether it will occur. There must be a substantial likelihood of that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Question 21

Duty to Disclose

Answer 21

• The duty of disclosure arises if you make a statement that is partially true, misleading, or inconsistent with previous statements. Either you tell the truth or you don’t say anything at all.
• When there is a corporate misstatement the corporation has a duty to correct it.Any statements on behalf of the corporation, by someone with duty to speak for the corporation can give rise to a duty to disclose.

Question 22

Fraud on the Market Theory

Answer 22

• In the corporate context the Fraud on the Market theory creates a presumption that all of the stockholders relied on the integrity of the market price in making their decision.
• To rebut the fraud on the market presumption the defendant must show that:
  
  1. The shareholder didn’t believe the integrity (people would have sold anyway).
  2. The market itself didn’t believe the integrity (there was no fluctuation in the price as a result of the statements).

Question 23

Whether misinformation that was not available to the public can be the basis for a claim under the fraud-on-the-market doctrine.

Answer 23

A fraudulent statement needs to be made publicly accessible in order for a plaintiff to claim that the statement caused a loss on the investment.

Question 24

Scienter

Answer 24

RULE 10b-5 requires that the person making the fraudulent statement do so with the intent to deceive, manipulate, or defraud.

Question 25

Damages under 10b-5

Answer 25

• Value at time of purchase if no fraud (or vice versa if false negative info)
• Must incur a loss. Inflate purchase price not enough.

Question 26

Whether a breach of fiduciary violates Rule 10b-5.

Answer 26

10b-5 prohibits conduct involving manipulation or deception, but are not so expansive as to govern incidences of fiduciary breach.

Question 27

Market Manipulation 10b-5 Rules

1. Standing
2. Scienter
3. Misrepresentation
4. MAterial Fact Requirement
5. Reliance
6. Causation
7. Damages

Answer 27

1. Standing
   
   • Blue Chip Stamps: Duetchman: You actually have to purchase securities to have standing, you cannot sue for something that you would have lost had you traded.
2. Scienter
   
   • Ernst: There must have been an intent to defraud.
3. Misrepresentation
   
   • Santa Fe v. Green: Non-Disclosure + Duty or misleading statement when you have a fiduciary duty
4. MATERIAL FACT REQUIREMENT -;
   
   • Reasonable Investor would consider it important in deciding whether to purchase or sell the security
5. Reliance
   
   • Fraud on the Market Presumption; any information effects the market and thus the prices of securities. This can be rubutted by proving that the plaintiff would have bought or sold whether the information was out there or not.
6. CAUSATION
   
   • Proximate and Actual
7. Damages
   
   • Difference between the price the person paid and the value of the stock at the time the transaction was made.