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
[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).