Chapter 7

 

SECURITIES ACT LIABILITY

 

An important basis for modern securities regulation is the requirement of providing full disclosure to investors in the offer and sale of securities.[1] Severe civil liabilities and criminal penalties can result if a person does not provide such full disclosure to investors.[2]

 

SECTION 11 OF THE SECURITIES ACT OF 1933, 15 U.S.C. 77k (1988)

 

Section 11 of the Securities Act provides a cause of action for fraud in the offering of securities pursuant to a registration statement.[3]

 

SEC RULE 176, 17 C.F.R. 230.176 (1990)

 

SECTION 12 OF THE SECURITIES ACT OF 1933, 15 U.S.C. 77l (1988)

 

Section 12(1) of the Securities Act provides a cause of action for the sale of unregistered securities.[4]

 

PINTER v. DAHL, 486 U.S. 622 (1988)

 

Section 12(2) of the Securities Act provides a cause of action for fraud in the sale of securities.[5]

Section 12(2) applies to sales of securities in a public offering.[6]

 

GUSTAFSON v. ALLOYD CO., INC., 513 U.S. 561 (1995)

 

Section 12(2) can result in damage awards without the allowance of certain offsets.[7]

SECTION 17(a) OF THE SECURITIES ACT OF 1933, 15 U.S.C. 77q(a) (1988)

The United States Securities and Exchange Commission can bring an enforcement action pursuant to Section 17(a) of the Securities Act for fraud in the sale of securities.[8]

 

AARON v. SEC, 446 U.S. 680 (1980)

 

Violations of Section 17(a) can result in criminal penalties as well.[9]

A private right of action is not available to investors pursuant to Section 17(a).[10]

 

2000 Harry Stansbury

 

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[1] 15 U.S.C. 78g-78h, 78o (1988); Regulation G, 12 C.F.R. 207 (1990); Regulation T, 12 C.F.R. 220 (1990); Regulation U, 12 C.F.R. 221 (1990); Regulation X, 12 C.F.R. 224 (1990); 17 C.F.R. 240.10b-6 to .10b-8, 240.10b-13 (1990); see DONNA S. CARPENTER & JOHN FELONI, THE FALL OF THE HOUSE OF HUTTON 99 (1989); WILLIAM GREIDER, SECRETS OF THE TEMPLE 311-12 (1987); 6 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 2965-76 (3d ed. 1990); CHRIS WELLES, THE LAST DAYS OF THE CLUB 242-245 (1975); T.G. Callery & Anne H. Wright, NASD Disciplinary Proceedings - Recent Developments, 48 Bus. Law. 791, 791-839 (1993); Jeffry L. Davis, William C. Dale & James A. Overdahl, Using Finance Theory to Measure Damages in Cases Involving Fraudulent Trade Allocation Schemes, 49 Bus. Law. 591, 597-610 (1994); Daniel R. Fischel & David J. Ross, Should the Law Prohibit "Manipulation" in Financial Markets?, 105 Harv. L. Rev. 503, 507-42 (1991); William W. Foshay, Market Activities of Participants in Securities Distributions, 45 Va. L. Rev. 907, 907-26 (1959); Fred N. Gerard & Michael L. Hirschfeld, The Scienter Requirement Under Rule 10b-6, 46 Bus. Law. 777, 777-780 (1991); Michael P. Jamroz, The Net Capital Rule, 47 Bus. Law. 863, 863-68 (1992); Robert L. Knauss, A Reappraisal of the Role of Disclosure, 62 Mich. L. Rev. 607, 635-40 & n.136 (1964); Donald C. Langevoort, Information Technology and the Structure of Securities Regulation, 98 Harv. L. Rev. 747, 751-54 (1985); William T. Lesh, Federal Regulation of Over-the-Counter Brokers and Dealers in Securities, 59 Harv. L. Rev. 1237, 1244-1274 & n.27 (1946); David A. Lipton, A Primer on Broker-Dealer Registration, 36 Cath. L. Rev. 899, 899-908 (1987); Henry F. Minnerop, The Role and Regulation of Clearing Brokers, 48 Bus. Law. 841, 841-852 (1993); Art Detman, Can Ross Perot Change Wall Street?, Dun's, Mar. 1973, at 46; Robert L. Frome, Registration of Employee Broker Dealer, N.Y. L.J., Oct. 27, 1988, at 3; Roberta S. Karmel, Net Capital, Customer Protection Rule Revisions, N.Y. L.J., Dec. 19, 1985, at 1; Carol J. Loomis, The Unbelievable Last Months of Hayden, Stone, Fortune, Jan. 1971, at 114; Rifka Rosenwein, In‑housers Gain From Rise In Securities Compliance Work, Manhattan Law., Mar. 1‑7, 1988, at 1; Michael Siconolfi, Lehman Brothers Plans Pretax Charge of $30 Million for Severance Payments, Wall St. J., Apr. 1, 1994, at A8; see, e.g., Miley v. Oppenheimer & Co., 637 F.2d 318 (5th Cir. 1981); Arthur James Huff, SEC Securities Exchange Act Release No. 29,017 (Mar. 28, 1991), reprinted in 48 SEC DOCKET 10 (1991).

[2] 15 U.S.C. 78o(b)(8)‑(9) (1988); see LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 602‑24 (2d ed. 1988); ROBERT C. POZEN, FINANCIAL INSTITUTIONS: INVESTMENT MANAGEMENT 50‑57 (1978).

 

[3] See Donald C. Langevoort, Fraud and Deception by Securities Professionals, 61 Tex. L. Rev. 1247, 1271‑94 (1983); Charity Scott, Caveat Vendor: Broker-Dealer Liability Under the Securities Exchange Act, 17 Sec. Reg. L.J. 274, 275-77 (1989); Roberta S. Karmel, Revisiting the Shingle, Fiduciary-Duty Theories, N.Y. L.J., Oct. 16, 1986, at 1.

[4] See Note, Churning by Securities Dealers, 80 Harv. L. Rev. 869, 869-85 (1967); Richard A. Booth, New Churning Cases Add Twist To Claims for Portfolio Damages, Nat'l L.J. June 24, 1991, at 34.

 

[5] See Joseph I. Goldstein & L.D. Cox, Penny Stock Markups and Markdowns, 85 Nw. U.L. Rev. 676, 676-95 (1991); Note, Insider Trading in Junk Bonds, 105 Harv. L. Rev. 1720, 1722-25 (1992); Roberta S. Karmel, Pegging Dealer Profits, N.Y. L.J., Aug. 20, 1987, at 1.

[6] See, e.g., Victor Brudney, Origins and Limited Applicability of the "Reasonable Basis" or "Know Your Merchandise" Doctrine, in FOURTH ANNUAL INSTITUTE ON SECURITIES REGULATION 239, 247-49 (Robert H. Mundheim, Arthur Fleischer, Jr. & John D. Schupper eds., 1973).

[7] See, e.g., Martin Lipton, The Customer Suitability Doctrine, in FOURTH ANNUAL INSTITUTE ON SECURITIES REGULATION 273, 275-81 (Robert H. Mundheim, Arthur Fleischer, Jr. & John D. Schupper eds., 1973).

 

[8] FEDERAL SECURITIES CODE 1416 (1980).

[9] See Ralph C. Ferrara & Diane Sanger, Derivative Liability in Securities Law: Controlling Person Liability, Respondeat Superior, and Aiding and Abetting, 40 Wash. & Lee L. Rev. 1007, 1007-29 (1983).

 

[10] See Lewis D. Lowenfels & Alan R. Bromberg, Securities Industry Arbitrations: An Examination and Analysis, in 3 SELECTED ARTICLES ON FEDERAL SECURITIES LAW 137, 138-164 (Franklin E. Gill ed., 1991); Michael McGowan, See You in Arbitration, 79 A.B.A. J. 110 (May 1993); Brigid McMenamin, Friends of the Shafted, Forbes, Apr. 26, 1993, at 185; Rob Rossi, Brokers, Attorneys Try to Curb 'Claims Advisers', Legal Times, Nov. 22, 1993, at 4; Michael Siconolfi, Stock Investors Win More Punitive Awards In Arbitration Cases, Wall St. J., June 11, 1990, at A1.