Sec Reg Cases

• • 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

information concerning ongoing acquisition discussions becomes material by virtue of the statement denying their existence

• Probability
• a factfinder will need to look to indicia of interest in the transaction at the highest corporate levels.

• Examples
• board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries may serve as indicia of interest.

• Magnitude
• To assess the magnitude of the transaction to the issuer of the securities allegedly manipulated, a factfinder will need to consider such facts as the
• size of the two corporate entities and of the potential premiums over market value.

At the pleading stage, a plaintiff satisfies the materiality requirement of Rule 10b-5 by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions.

5% is a good starting point

• other factors:
• • whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate
• • masks a change in earnings or other trends
• • hides a failure to meet analysts' expectations
• • changes a loss into income or vice versa
• • concerns a segment or other portion of the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability
• • affects the registrant's compliance with regulatory requirements
• • affects the registrant's compliance with loan covenants or other contractual requirements
• • effect of increasing management's compensation
• • involves concealment of an unlawful transaction.

• The materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm's stock.
• In efficient markets materiality is defined as information that alters the price
• of the firm's stock
• Reasonable investors are in the market
• Information important to the market will be reflected in the stock's price
• Thus, information important to reasonable investors is immediately incorporated into stock prices

• Statement or omission must be demonstrable of being true or false
• Reasonable investors do not rely upon puffery and generalization when deciding whether to buy stock

• an investment contract = a contract, transaction or scheme whereby a person
• invests his money
• in a common enterprise
• and is led to expect profits
• solely from the effort of the promoter or a third party,

• • Must choose to give up a specific consideration in return for separable financial interests with the character of a security
  • Long term rather than short term consumption

• Horizontal Commonality
• Pooling of assets of multiple investors so all share in profit and loss

• Broad vertical commonality
• Well-being of all investors depends on promoters expertise

• Narrow vertical commonality
• Investors fortunes must be interwoven with and dependent on efforts of promoters or 3rd parties

• Profits = capital appreciation developed from the initial investment or participation in earnings from other investor funds
• Long term profits v. short term consumption

• • all that matters is that the INVESTOR's profit is derived solely from the efforts of others; the entire scheme does not have to be profitable
  • Policy: low risk schemes attractive to elderly unsophisticated investors

• Focus is on the dependency of the investor on the entrepreneurial or management skills of the
• promoter or 3rd party

Analyze expectation of control at time interest sold

If general partner in fact has little ability to control the profitability of the investment (Williamson)

An agreement among the parties leaves a general partner with so little power that it distributes power like a limited partnership

Partner so inexperienced or unknowledgeable in business affairs that he is unable to intelligently exercise his partnership powers

Have to look at specific business knowledge not general

Partnership dependent on unique managerial skill such that they can't remove manager or otherwise exercise meaningful partnership powers

• After purchase, If the investor's profits depend predominantly upon
• the promoter's efforts, then the investor may benefit from the disclosure and other requirements of the federal securities laws.

If value of promoters efforts already impounded in purchase price and nothing else is expected to be done, less need for securities regulation

Labeled stock + common characteristics of stock= security

5 characteristics (only for common stock/ preferred can also be covered (some flexibility))

• Right to receive dividends contingent upon apportionment of profits
• Negotiability
• Ability to be pledged or hypothecated
• Conferring of voting rights in proportion to shares owned
• Capacity to appreciate in value

• Note= Maturity is less than 9 months
• Factors:
• Motivations of the Lender & the borrower
• Lender= for profit
• Borrower= for general business purposes
• Plan of distribution
• Offered to broad segment of the public
• Public's reasonable perceptions
• No risk reducing factor
• Uncollateralized
• Uninsured

13(a) & rule 13a-11 require filing of an 8-k when director resigns

If disagreement on any matter relating to registrant's operations, policies or practices, requires brief description of what caused the disagreement

Must give a copy of disclosure to resigning director

Resigning director can furnish a response letter stating whether director agrees with disclosure

If response letter has to be an amendment to 8-k w/in 2business days of its receipt

No scienter required

Purpose of FD

• Don't want a chilling effect by making issuers afraid to speak out of fear of a post hoc materiality assessment
• Cost to market efficiency and capital formation
• 7 categories of information with high probability of being material
• Earnings info
• Mergers, acquisitions, tender offers, joint ventures or changes in assets
• New products or discoveries, or developments regarding customers or supplies

• Changes in management control
• Change in auditors or reliance on auditors report
• Events regarding issuers securities

• Stock splits, repurchases, sales of securities, changes to rights of security holders
• Bankruptcies and receivership
• Nonpublic= not been disseminated in a manner sufficient to insure its availability to the investing public
• Reasonably designed to provide broad, non-exclusionary distribution to the public

3 principal classes presently barred

• Potential purchasers of shares
• Actual owners who decided not to sell based on rosy representations
• SH, creditors who suffered loss in value of investment bc of insider activities
• Last 2 classes can often bring a derivative action on behalf of the issuer if a seller or purchaser itself

• Pro Restriction
• 10b-5 litigation especially vexatious
• High settlement values
• Disruption of business operations
• Abuse of discovery procedures
• Can take up a lot of time with meritless claims
• Litigation decided based on which oral representation credited by the jury
• No way to contradict oral testimony (how do you say you didn't really want to purchase the stock?)
• Fact of sale of stock can be dealt with at dismissal or SJ phase

• Scheme of fraud if:
• Fraud coincided with sales themselves
• couldn't do fraud without selling securities

• 2 step process for appointing lead P
• Identify presumptive lead P
• Filed complaint or motion to serve as lead P
• Must have traded during that time
• Largest financial interest in the relief sought, determined by court

• Satisfy FRCP 23 Adequacy requirement
• Ability and incentive to represent claims vigorously
• Adequate counsel
• Conflict bet. Claims of movant and those asserted on behalf of the class
• Can look at choice of counsel to determine adequacy

• Adequacy busters:
• Unsophisticated/inexperienced counsel
• Plainly incapable of representing
• Clearly unreasonable fee

• See if presumption rebutted
• Proof that lead P:
• Not fairly and adequately protect interests of the class
• Unique defenses
• BUT Only class members can challenge

• Factors for approval of Lead P's choice of counsel
• Quantum of legal experience and sophistication possessed by lead P
• Manner in which P chooses law firms to consider
• Process in which P makes final choice
• Qualifications and experience of counsel
• Retainer agreement seriously negotiated between P and counsel

Conduct must befairly viewed as manipulative or deceptive to be covered by act

• Opinions can be attacked just as any other fact by looking at what supports it
• Must be an underlying material fact undergirding opinion or belief
• standing alone (no provable facts) CANNOT be a basis to sustain an action
• Reasons for directors recommendations or beliefs in factual record
• Corporate minutes
• Statements of directors
• Circumstantial evidence bearing on the facts that would reasonably under lie reasons claimed & the honesty of any statement that those reasons are the basis for a recommendation or other action

• Firms can keep silent unless positive law requires them to speak
• Registration statement and prospectus must be accurate when used to sell stock, not just when filed
• Only a duty to correct if originally incorrect when 10-k filed

• If fraud on the market, no requirement to have statement accompanied by meaningful caution at the time of statement
• Boilerplate is not enough
• cautions must be tailored to risks accompanying projections
• Cautions don't have to be correct (actually cause results to be different)
• Don't know w/o discovery whether cautionary items were important at the time Baxter issued them
• Didn't update = Inference that maybe they omitted important factors

Manipulative and deceptive = strong inference for intentional or knowing misconduct

• Inquiry is whether facts taken collectively give a strong inference of scienter
• Must take into account plausible opposing inferences
• Must consider all plausible non-culpable explanations for D's conduct
• Standard: reasonable person would deem inference of scienter cogent and at least as compelling as any opposing inference one could draw from facts alleged

• When failure to disclose, positive proof of reliance is not required
• All that is required is that facts withheld be material in the sense that a reasonable investor might have considered them important in making the decision
• Obligation to disclose + withholding of facts= causation

• Fraud-on-the-market theory
• Price of stock reflects all available information
• Misleading statements will defraud purchasers even if they don't directly rely on the misstatements

• If required to showindividual reliance, couldn't have a class action
• Individual issues would overwhelm common ones
• To rebut presumptionof reliance, have to sever link between misrepresentation and either price or decision to trade

• 5 step process toinvoke presumption
• To invoke thepresumption a plaintiff must allege and prove:
• (1) that the defendant made public misrepresentations;
• (2) that the misrepresentations were material;
• (3) that the shares were traded on an efficient market; ... And
• (5) that the plaintiff traded the shares between the time the misrepresentations were made and the time the truth was revealed ....

• In fraud on the market cases, inflated purchase price by itself not enough to plead loss causation
• No loss at moment of transaction
• Stock price represents value at that instant
• No loss if sold before misrepresentation found out
• Loss only when facts become known and the share price depreciates

No aiding andabetting liability under 10b-5

• Controlling person
• Makes significant business decisions
• Narrowly defined group
• D who is a controlling person of an issuer with scienter has burden of showing absence of scienter

• Any profit subsequently realized by fraudulent purchase should be deemed proximate consequence of fraud
• However can't recover any portion of profit attributable to D's special or unique efforts (unless already compensated for them)

• D liable for damages that are natural and proximate cause of harm
• Usually use out-of-pocket damages measure
• Recovery of difference between actual value and purchase price

• If fraud in the inducement, then recisssionary damages
• Seeks to return parties to status quo ante minus any value received as a result of the fraudulent transaction

• Equal access theory \
• Congressional purpose that all investors should have equal access to rewards of market
• the Rule is also applicable to one possessing the information who may not bestrictly termed an "insider."

• Silence absent duty to disclose is not fraud
• Corporate insiders should not benefit at the shareholder's expense

a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach

the test is whether the insider personally will benefit, directly or indirectly, from his disclosure.

• Misappropriates confidential info for trading purposes, breaching duty owed to the source of the info
• Breach of loyalty and confidentiality
• Deprives principal of exclusive use of info

• Designed to protect the integrity of the sec markets against abuses by outsiders with no fiduciary duty to corp's SHs
• Full disclosure of intent to use info to trade cleanses deception

• In connection requirement
• Fraud consummated when fiduciary trades without disclosure

• If disclosure to fiduciary of an intention to trade or tip
• Based on assumption that alleged deception is in the undisclosed trading or tipping of info
• deceptive acquisition of info followed by deceptive tipping;
• even if disclosure cleanses deceptive tipping, does not cleanse initial deceptive acquisition

• Purpose of 16(b)
• Prevent the unfair use of info which may have been obtained by insider by reason of relationship with issuer
• Prevailing view is to apply the statute only when its application would serve its goals
• No risk of speculative abuse
• Involuntary nature

Purchase-sale sequence phrase "at the time of purchase" must be construed to mean prior to the time when decision to purchase is made

• begins immediately after initial purchase
• Congress intended to reach only owners who both bought and sold on basis of inside info

• Statute broadly remedial
• Recovery to corporation
• Want a high standard to prevent abuses
• Lowest price in, highest price out in 6 months

• Need to demonstrate all stock was actually issued pursuant to a defective statement
• Otherwise all persons who held stock in street name on and after the offering date could claim a proportional interest in the shares

• If non expert working on non expert part of reg statement,
• Can escape liability ONLY if
• Reasonable care to investigate the facts which a prudent man would employ in management of his own property

• market price some evidence of fair value
• Whatever amount might rightly be subtracted to account for temporary financial crisis of D at time of suit should be offset by adding like amount to account for reasonable likelihood of D's recovery