Chapter 10

 

SECURITIES EXCHANGE ACT LIABILITY

 

The prevention of fraud is imperative to the maintenance of investor confidence in the public trading markets.[1] As a result, much litigation has taken place, especially during the past 20 years, over allegations of fraud in the sale of securities.[2] The rights and remedies of defrauded investors have become well established by this myriad of litigation.[3] Investors defrauded in the purchase of publicly offered securities, as well as privately offered securities, have causes of action against the sellers.[4]

SECTION 10(b) OF THE SECURITIES EXCHANGE ACT OF 1934, 15 U.S.C. 78j(b) (1988)

 

SEC RULE 10b-5, 17 C.F.R. 240.10b-5 (1990)

 

BLUE CHIP STAMPS v. MANOR DRUG STORES, 421 U.S. 723 (1975)

 

ERNST & ERNST v. HOCHFELDER, 425 U.S. 185 (1976)

BASIC, INC. v. LEVINSON, 485 U.S. 224 (1988)

 

CENTRAL BANK OF DENVER v. FIRST INTERSTATE BANK OF DENVER, 511 U.S. 164 (1994)

It is now clear that professionals, such as attorneys and accountants, involved in securities matters can face serious liabilities as a result of these activities.[5] The attorneys and accountants must exercise extreme caution in carrying out their professional duties so as to exhibit proper responsibility in order to avoid such liabilities.[6]

Section 1301 of the Federal Securities Code[7] proposes to make it unlawful for any person to engage in a fraudulent act or to make a misrepresentation in connection with a sale or purchase of a security.

Over the years, confusion had arisen concerning a statute of limitations period for civil fraud liability claims.[8] Many courts used the state securities law statute of limitations in the state where the federal claim existed, causing different treatment from state to state.[9] The statute of limitations is now one year from the sale of the security or three years from the sale, if the fraud was concealed.[10]

 

2000 Harry Stansbury

 

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[1] See JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 156-89 (1982); DETLEV F. VAGHTS, BASIC CORPORATION LAW 541-57 (2d ed. 1979); John C. Coffee, Jr., Milking Milken: Sentencing as Quid Pro Quo, Legal Times, Dec. 3, 1990, at 29; John Sturc & Gerald Lins, Congress Gets Tough on Securities Violations, Legal Times, Oct. 1, 1990, at 27.

[2] See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 871-1049 (2d ed. 1988).

 

[3] See Alan R. Bromberg & Lewis D. Lowenfels, Aiding and Abetting Securities Fraud: A Critical Examination, 52 Alb. L. Rev. 637, 639-43 (1988); Kenneth R. Cone & James E. Laurence, How Accurate are Estimates of Aggregate Damages in Securities Fraud Cases?, 48 Bus. Law. 505, 505-21 (1994); Dean Furbush & Jeffrey W. Smith, Estimating the Number of Damaged Shares in Securities Fraud Litigation: An Introduction to Stock Trading Models, 48 Bus. Law. 527, 527-42 (1994); Donald C. Langevoort, Disclosures that "Bespeak Caution", 49 Bus. Law. 481, 481-92 (1994); Mark L. Mitchell & Jeffry M. Netter, The Role of Financial Economics in Securities Fraud Cases: Applications at the Securities and Exchange Commission, 48 Bus. Law. 545, 545-72 (1994); Note, The Fraud-on-the-Market Theory, 95 Harv. L. Rev. 1143, 1144-53 (1982); see, e.g., Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972); Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971).

[4] 18 U.S.C. 1961‑1968 (1988); see 1 ALAN R. BROMBERG & LEWIS D. LOWENFELS, SECURITIES FRAUD AND COMMODITIES FRAUD 2.2, at 2:18 to 2:44.1 (1991); 4 HERBERT B. NEWBERG, NEWBERG ON CLASS ACTIONS 22.01, at 4 & nn.4-6 (2d ed. 1985); ADAM SMITH, SUPERMONEY 165-69 (1972); Joseph A. Grundfest, Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority, 107 Harv. L. Rev. 961, 982 & n.79 (1994); Milton Pollack, Book Review, 90 Harv. L. Rev. 482, 484 (1976) (reviewing MULTINATIONAL APPROACHES - CORPORATE INSIDERS (Louis Loss ed., 1976)); Developments in the Law - Class Actions, 89 Harv. L. Rev. 1318, 1321-31 (1976); Note, Ancillary Relief in SEC Injunction Suits for Violation of Rule 10b-5, 79 Harv. L. Rev. 656, 657-68 (1966); Note, Expert Legal Testimony, 97 Harv. L. Rev. 797, 800‑03 (1984); Note, Pleading Securities Fraud with Particularity Under Rule 9(b), 97 Harv. L. Rev. 1432, 1434‑47 (1984); Paul M. Barrett, Justices Deal Investors a Blow In Certain Suits, Wall St. J., Apr. 20, 1994, at A3; Dennis J. Block & Jonathan M. Hoff, Damages Remedy of 12(2) And Class Actions, N.Y. L.J., Apr. 2, 1992, at 5; Edward Brodsky, Expert Testimony In Securities Cases, N.Y. L.J., May 18, 1977, at 1; Judy Gotterer, Lawyer Testimony: Slow, Steady Growth, Legal Times of Wash., Apr. 16, 1979, at 17; Linda Greenhouse, High Court Ruling Sharply Curbs Suits On Securities Fraud, N.Y. Times, Apr. 20, 1994, at A1; Jonathan F. Mack, Class Certification of Common Law Claims In Securities Fraud Actions, N.Y. L.J., Nov. 6, 1992, at 1; Claudia MacLachlan, High Court Hears Case on Private Securities Lawsuits, Nat'l L.J., Dec. 13, 1993, at 17; Floyd Norris, A Victory for Accountants and Lawyers in Securities Fraud Cases, N.Y. Times, Apr. 20, 1994, at C6; see, e.g., Reves v. Ernst & Young, 113 S. Ct. 1163 (1993); Holmes v. Securities Investor Protection Corp., 112 S. Ct. 1311 (1992); H.J. Inc. v. Northwestern Bell Telephone, 492 U.S. 229 (1989); Agency Holding Corp. v. Malley‑Duff & Assoc., Inc., 483 U.S. 143 (1987); Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479 (1985); American National Bank & Trust Co. v. Haroco, 473 U.S. 606 (1985).

[5] See DAVID R. HERWITZ, ACCOUNTING FOR LAWYERS 125-26 (1980); LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 1051-72 (2d ed. 1988); Joseph I. Goldstein & Catherine Dixon, New Teeth for the Public's Watchdog: The Expanding Role of the Independent Accountant in Detecting, Preventing, and Reporting Financial Fraud, 44 Bus. Law. 439, 457-61 (1989); Lee Berton, How MiniScribe Got Its Auditor's Blessing On Questionable Sales, Wall St. J., May 14, 1992, at A1; Lee Berton, Inventory Chicanery Tempts More Firms, Wall St. J., Dec. 14, 1992, at A1; Brent Bowers & Udayan Gupta, Shareholder Suits Beset More Small Companies, Wall St. J., Mar. 9, 1994, at B1; Edward Brodsky, Accountants' Liability To Investors Expanded, N.Y. L.J., Aug. 7, 1978, at 1; Gail D. Cox, Unlimited Liability, Nat. L.J., Dec. 21, 1992, at 1; Milo Geyelin & Lee Berton, Accountants Assail Malpractice Suits - While Assisting Them, Wall St. J., Aug. 12, 1993, at A1; The Law: Trouble for the Top, Forbes, Sept. 1, 1968, at 23; see, e.g., Touche, Ross & Co. v. SEC, 609 F.2d 570 (2d Cir. 1979); Herzfeld v. Laventhol, Krekstein, Horwath & Horwath, 540 F.2d 27 (2d Cir. 1976).

 

[6] See PAUL HOFFMAN, LIONS OF THE EIGHTIES 269-74 (1982); PAUL HOFFMAN, LIONS IN THE STREET 161-71 (1973); ABA Statement of Policy Regarding Lawyers' Response to Auditors' Requests for Information, 31 Bus. Law. 1709 (1976); Assn. of the Bar of N.Y. Report by Special Committee on Lawyers' Role in Securities Transactions, 32 Bus. Law. 1879 (1977); Edward F. Donohue, Attorney Liability in the Preparation of Securities Disclosure Documents: Limiting Liability in the Face of Expanded Duties, 18 Sec. Reg. L.J. 115, 115-21 (1990); James R. Doty, Regulatory Expectations Regarding the Conduct of Attorneys in the Enforcement of the Federal Securities Laws: Recent Development and Lessons for the Future, 48 Bus. Law. 1543, 1543-65 (1993); James J. Fuld, Lawyer's Responses to Auditors - Some Practical Aspects, 44 Bus. Law. 159, 159-66 (1988); James J. Fuld, Lawyer's Standards and Responsibilities in Rendering Opinions, 33 Bus. Law. 1295, 1298-1316 (1978); James J. Fuld, Legal Opinions in Business Transactions: An Attempt to Bring Some Order Out of Some Chaos, 28 Bus. Law. 915, 940-44 (1973); Stuart C. Goldberg, Policing Responsibility of the Securities Bar: The Attorney-Client Relationship and the Code of Professional Responsibility - Consideration for Expertising Securities Attorneys, 19 N.Y. L.F. 221, 221-45 (1973); Joseph L. Johnson, Jr., Note, Liability of Attorneys for Legal Opinions Under the Federal Securities Laws, 27 B.C. L. Rev. 325, 326-30 (1986); William R. McLucas & Laurie Romanowich, SEC Enforcement Proceedings Under Section 15(c)(4) of the Securities Exchange Act of 1934, 41 Bus. Law. 145, 149-67 (1985); Stephen R. Volk, Arthur N. Field & Joseph T. McLaughlin, Law Firm Policies and Procedures in an Era of Increasing Responsibilities: Analysis of a Survey of Law Firms, 48 Bus. Law. 1567, 1567-81 (1993); Rush Loving, Jr., How Cortes Randell Drained the Fountain of Youth, Fortune, Apr. 1970, at 94; Gail Sindell, Securities Lawyers Watching Their Backs, Legal Times, Nov. 12, 1990, at 51; Sherry R. Sontag, Harder to Sue, Nat'l L.J., June 17, 1991, at 1; see, e.g., DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990); Adams v. Standard Knitting Mills, Inc., 623 F.2d 422 (6th Cir.), cert. denied, 449 U.S. 1067 (1980); Meyerhofer v. Empire Fire & Marine Ins. Co., 497 F.2d 1190 (2d Cir. 1974); George C. Kern, Jr., SEC Securities Exchange Act Release No. 29,356 (June 21, 1991), reprinted in 49 SEC DOCKET 422 (1991).

 

[7] FEDERAL SECURITIES CODE 1301 (1980).

[8] See JAMES D. COX, ROBERT W. HILLMAN & DONALD C. LANGEVOORT, SECURITIES REGULATION 1103-1104 (1991).

[9] See JAMES D. COX, ROBERT W. HILLMAN & DONALD C. LANGEVOORT, SECURITIES REGULATION 1095-1096 (1991).

 

[10] See LOUIS LOSS & JOEL SELIGMAN, FUNDAMENTALS OF SECURITIES REGULATION 1109-1124 (3d ed. 1995).