Law Outlines Securities Litigation Outlines
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§ 10(b) of the Exchange Act and Rule 10b-5
In general, § 10(b) of the Exchange Act proscribes, by the use of any instrumentality of interstate commerce, "any manipulative or deceptive device or contrivance" in connection with the purchase or sale of a security.
Rule 10b-5 bars by use of any means or instrumentality of interstate commerce or the mails or any facility of any national exchange:
(1) To employ any device, scheme or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person,
In connection with the purchase or sale of a security.
There is an implied right of action under § 10(b) and Rule 10b-5. See Superintenddent of Ins. v. Bankers Life & Cas. Co.; see also Herman & McLean v. Huddleston ("[A] private right of action under Section 10(b) . . . and Rule 10b-5 has been consistently recognized for more than 35 years. The existence of this implies remedy is simply beyond peradventure.")
Standing: To have standing to sue in a private action under Rule 10b-5, the plaintiff must be an actual purchaser or seller of the securities. See Blue Chip Stamps v. Manor Drug Stores. (pg. 16)
The test often applied is whether the purchaser had absolute discretion.
Under the § 2(a)(3) of the Securities Act, "sale or sell" includes "every contract of sale or disposition of a security for value."
"Value" need not be cash or property; relinquishing or granting a right is enough.
A pledge of a security as collateral is enough. Rubin v. United States(pg. 16)
Contracts to sell are sufficient even though no sale ever takes place. So is a contingent right to receive stock for value. Yoder v. Orthomoelcular Nutrition Institute (pg. 16)
ELEMENTS
(1) Material Misstatement or Omission
Misstatement or Omission
A material fact need not be a "fact" in the historical sense; it may include false statements of future intent.
Projections are actionable if not made in good faith or made with reckless indifference.
The line between a misstatement and an omission
This is not always easy to draw.
One consequences of the distinction is that for omissions, there is a presumption of reliance. See Affiliated Ute
Duty to Correct
"A duty to disclose arises whenever secret information renders prior public statements materially misleading, not merely when that information completely negates the public statement." In re Time Warner Securities Litigation
A statement need only be corrected if it was incorrect when made. Gallagher v. Abbott Laboratories
BUT "[A] projection is not rendered false when the world turns out otherwise." Gallagher v. Abbott Laboratories
Duty to Update
Generally, the mere possession of material nonpublic information does not of itself give rise to a duty of disclosure. See Gallagher v. Abbott Laboratories
BUT Some courts recognize a duty to update:
SPLIT
Second Circuit: There is a duty to update in the Second Circuit. See In re Time Warner Securities Litigation
"[W]hen a corporation is pursuing a specific business goal and announces that goal as well as an intended approach for reaching it, it may come under an obligation to disclose other approaches to reaching that goal when those approaches are under active and serious consideration." In re Time Warner Securities Litigation
ASIDE: There is a duty to update required by various stock exchanges (e.g., the NYSE states that a listed company "is expected to release quickly to the public any news or information which might reasonably be expected to materially affect the market for securities.")
Seventh Circuit: There is no duty to update in the Seventh Circuit. See Gallagher v. Abbott Laboratories
"We do not have a system of continuous disclosure. Instead firms are entitled to keep silent (about good news as well as bad news) unless positive law creates a duty to disclose." Gallagher v. Abbott Laboratories
Updates are due "not when something 'material' happens, but on the next prescribed filing date." Gallagher v. Abbott Laboratories
Statements that mislead by omission include half-truths. See SEC v. Gabelli
Where a voluntary statement is made, there is a duty to speak completely (i.e., avoid half-truths). See, e.g., First Virginia Bankshares v. Benson
A breach of a fiduciary duty is generally a matter for state law claims and not for a 10b-5 action. See Santa Fe Industries v. Green
BUT where there is an actual misrepresentation, the claim will fall under the purview of Rule 10b-5. See Goldberg v. Meridor (finding a violation of Rule 10b-5 based upon issuing stock in exchange for assets where there were misleading disclosures regarding inadequate consideration)
Materiality
In general
To fulfill the materiality requirement "there must be a substantial likelihood 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." TSC Industries, Inc. v. Northway, Inc. (pp. 17-18)
An omitted or misstated fact can be either qualitatively or quantitatively material.
See, e.g., Matrixx Initiatives Inc.v. Siracusano (finding that adverse reaction reports to the use of Zicam were not rendered immaterial simply because there were not enough of them to be statistically significant) (pg. 18)
Rules of Thumb
Prof Saunders mentioned a 10% effect on revenues or profits as an old rule of thumb. (pg. 18)
The Securities Regulation book speaks of a common rule of thumb used to be that a misstatement regarding a financial statement item of 5% or less is not material.
BUT the SEC staff rejects this approach as too limited in scope. See SEC Staff Accounting Bulletin No. 99
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