#13095 - Liability Under The 33 Act - Securities Regulations (Duke Cox)

A material misrepresentation or omission in a registration statement when it became effective will subject the issuer and (subject to due diligence defenses) a variety of persons associated with either the issuer or the distribution to damages in a suit brought by any person who bought securities issued pursuant to that registration statement

Anyone who buys stock issued pursuant to a defective registration statement has standing to sue under §11. There is no requirement that the purchaser show any sort of reliance on the registration statement or the statutory prospectus

1. Nor is it the plaintiff’s burden to show causation or injury

There are some limits.

1. the plaintiff must not have been aware of the truth at the time he bought the securities.

2. strict statute of limitations: within one year after discovery of the falsity or omission was or should have been made, and in any event no more than three years after the security was offered to the public

3. the plaintiff have to show that the securities purchased were issued pursuant to the registration statement in question

   1. The courts have read §11 literally to impose a tracing requirement on the plaintiff and high statistical probabilities are no substitute for tracing

For the issuer, there is no defense at all to culpability

1. Beyond the strict liability of the issuer, due diligence is a defense available for all other persons specifically made subject to suit by §11(a)

List of defendants 11(a)

1. issuers

2. Signors

   1. NOTE T or F: You do not want to be a signor of the registration statement

3. Directors

4. Underwriters

5. Senior officers

6. Experts

§11(b)(3) expertised v. other portions of the registration statement. An expertised portion of the registration statement is one prepared by or on the authority of an expert

1. expertised portion:

   1. expert is liable for misstatements or omissions unless “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 complete and accurate

   2. All other non-issuer defendants may raise the defense that they “had no reasonable ground to believe, and did not believe” that there was any inaccuracy or omission

   3. In other words, the burden of due diligence investigation lies solely upon the expert; the others have a qualified right to rely on his efforts

2. non-expertised portions of the registration statement:

   1. the signatories of the registration statement, the directors, and the underwriters are all subject to the duty to investigate and are able to raise the defense of due diligence only if “after reasonable investigation” they had “reasonable ground to believe and did believe” that the statements therein were true and complete

   2. Everyone must investigate, in other words, or risk the consequences

3. There must be investigation and, after such investigation, no reason to doubt the accuracy of the registration statement. The lead underwriter carries out the investigation, then the whole underwriting syndicate is protected.

   1. Each underwriter is liable for their allotment amount only.

BarChris drew a distinction between corporate insiders (management) and outsiders (non-management directors), and in turn between outsiders who have special expertise or involvement in the distribution (e.g. directors who are the company’s lawyers or investment bankers) and others. Among these, there seems to be a sliding scale of responsibility based on what can realistically be expected of the particular defendant.

1. At one end of this scale, top managers of the issuer are held to the highest standard of diligence

2. At the other end of this scale, outside directors and other “peripheral” participants are judged in a more forgiving light – though their duty to investigate remains. Their exposure in turn varies depending upon particular expertise

When you file S-3 as WKSI, it’s effective immediately

1. Which is when Section 11 liability attaches.

   1. Since you incorporate by reference to 10K and 10Q, underwriter’s counsel therefore has to review 10K and 10Q periodically.

   2. So everything must be done beforehand

Rescission remedy: the person purchasing can return the security and get his money back if issuer violated section 5.

1. D must be seller of the security:

   1. the owner who passes title;

   2. an individual who solicits interest by desire to further his or her financial interest (such as stock broker or underwriter who gets a commission)

      1. Solicitation cannot be purely gratuitous must further your own interests

   3. Several courts: issuers in a firm commitment underwriting agreement are not sellers because they only pass title to the underwriters.

      1. However, can have a chain of litigation, buyer sues seller 1, seller 1 sues seller 2, up the chain.

There is no state of mind element: this is strict liability

1. Nor is there any requirement that the plaintiff establish injury

2. All that is left to plaintiff to show is that (a) there was a violation of §5, (b) the facilities of interstate commerce were involved in the offer or sale to the plaintiff, (c) the plaintiff has made adequate tender of the security if it is still owned, and (d) the action has been brought within the time stated in the statute of limitations

   1. Even more than §11, this provision is designed to deter violations; it is not compensatory in nature

Once the right of rescission is established, the only remaining...