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Securities Litigation - Claims and Defenses

The federal securities laws are complex. If you have questions about these laws and the various types of securities abuses, contact an attorney.

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Securities Litigation - Claims and Defenses

There are a variety of claims that private plaintiffs can bring under federal securities laws. The following briefly describes claims under various sections of the federal securities laws, as well as the defenses that may be available. Because of the complexity of these claims and the federal securities laws in general, it is important to have an experienced securities attorney at Kaufmann Gildin & Robbins LLP in New York, NY evaluate your situation.

Claims and Defenses Under the Securities Act of 1933

Section 11 provides for a private right of action, based on strict liability, for fraud in public offerings. A plaintiff must have bought a security, which was issued pursuant to a false or misleading registration statement. A registration statement is false or misleading if any part of it contains an untrue statement of material fact, fails to state a material fact required to be disclosed in the statement or leaves out a material fact that is needed to make the information in the statement not misleading.

Section 11(a) lists the categories of potential defendants:

  • Individuals who signed the registration statement
  • Directors or partners at the time of the filing
  • Individuals who agree to be named in the statement as being or about to become a partner or director
  • Experts who agree to be named in the statement as having prepared or certified the filings
  • Underwriters.

Control persons and co-conspirators may face secondary liability. Section 11(e) sets forth a scheme for damages.

A plaintiff's knowledge of a falsity or omission in the registration is an affirmative defense under Section 11. A defendant may also escape liability if it can establish that the plaintiff's damages were caused by other factors besides the misrepresentation or omission. A person's resignation from the role described in the registration statement and advising the SEC and issuer in writing that he or she is not responsible for the registration is a defense. Due diligence and good faith are also defenses.

Sections 5 and 12(a)(1) establish a private right of action when a plaintiff buys a security that is not properly registered under Section 5. Section 12(a)(1) provides for strict liability; the plaintiff does not need to show any negligent or intentional conduct by the seller. If the plaintiff is successful and is still holding the security, upon tender of it the plaintiff can recover the money paid for the security and interest. If the plaintiff no longer owns the security, he or she can recover damages and interest.

The exemptions from registration outlined in Sections 3 and 4 of the Securities Act provide affirmative defenses. One of the most significant is Section 4(2), which provides that transactions by an issuer not involving a public offering are exempt.

Section 12(a)(2) establishes a private right of action for fraud in the sale of securities. A person who buys a security can bring suit for a misrepresentation or omission in a prospectus or oral communication. "Prospectus" is defined as any notice, circular, advertisement, letter or communication that is written or broadcast through radio or TV that offers a security for sale or confirms the sale of a security. The plaintiff must prove that he or she did not know of the falsity or omission The defendant has the burden of establishing that it did not act negligently. Section 12(a)(2) provides for rescission or damages if the plaintiff no longer owns the security.

Section 12(a)(2) establishes that it is an affirmative defense if the party can prove that he or she did not know, or by using reasonable care could not have known, of any falsity or omission.

Section 15 establishes joint and several liability for control persons for the acts of the people they control who are liable under Sections 11 and 12. Good faith is an affirmative defense and the defendant has the burden of proving good faith.

Claims and Defenses Under the Securities Exchange Act of 1934

Section 10(b) and Rule 10b-5 provide an implied right of action for actual purchasers or sellers of securities to sue under these general antifraud provisions. Claims under the rule must involve some fraud, deception, misrepresentation, nondisclosure or omission in connection with the purchase or sale of a security. If based on an omission, the defendant must have had a duty to disclose in the first place. The misrepresentation or other fraud must have been material, meaning that there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision. The plaintiff must also prove that he or she relied on the misrepresentation, that the fraud caused the plaintiff's purchase or sale and that the plaintiff's loss was caused by the fraud and not external market factors. In order to be liable, the defendant (including primary violators and control persons) must have acted with the intent to deceive, manipulate or defraud. Damages are limited to actual damages.

Section 9 prohibits trading a security in a manner that gives a false impression of the nature of the market. The following are prohibited: wash sales and matched orders which create a misleading appearance of active trading, transactions which create actual or apparent active trading or which raise or lower the price so as to cause another to buy or sell the security and transactions with the purpose of pegging, fixing or stabilizing a security's price. Section 9(e) expressly provides for a private right of action by purchasers or sellers of a security registered on a national exchange. The plaintiff must prove that at the time he or she bought or sold the security, the price was affected by some manipulative conduct and that the defendant acted willfully. The plaintiff may recover the damages that he or she incurred as a result of the manipulative conduct, generally the difference between the price paid and the actual value.

Section 14(a) applies to fraud in connection with proxy statements. There is an implied private right of action for a shareholder whose shares entitle him or her to vote and who was a shareholder at the time of the vote that is subject to the alleged fraud. This section applies only to securities registered under Section 12 of the 1934 Act. Rule 14a-9 prohibits the use of a proxy solicitation which is false or misleading or which fails to state a material fact so that it is not false or misleading. This rule also prohibits a proxy solicitation that fails to include information needed to correct an earlier solicitation covering the same subject, which is now false or misleading. The plaintiff must prove that the fraud was material and that the fraud was the proximate cause of his or her injury. Under Section 14(a), all persons who are substantially connected with the proxy violation, aiders, abettors and control persons can be held liable. The plaintiff can recover actual damages if successful.

Section 14(e) relates to fraud in connection with tender offers. Courts have recognized an implied private right of action under Section 14(e). Section 14 does not define "tender offer," but one general definition that has been accepted by courts is a public offer or solicitation by a company, individual or group to purchase all or a portion of a class of securities of a publicly held company during a certain time period, at a certain price or upon set terms for cash and/or securities. Section 14(e) prohibits making a false statement of material fact or an omission and participating in any deceptive, manipulative or fraudulent activities. The plaintiff must prove that he or she relied on the statement, that the fraud proximately caused the plaintiff's loss and that the defendant acted willfully or recklessly. The plaintiff can obtain compensatory damages or rescission.

Section 16(b) covers short-swing trading and is meant to prevent insider trading. There is a private right of action by the corporation/issuer whose shares are traded to recover all profits made by insiders from any purchase or sale of any security of the issuer, except for exempted securities. Individual shareholders can bring a derivative suit under this section if the corporation fails to bring suit within 60 days after being requested to do so or if the corporation fails to diligently pursue the litigation after initiating it. A derivative plaintiff need not have been a shareholder at the time of the alleged wrongful conduct; he or she must simply be a shareholder when the suit is initiated. This is a strict liability action and the defendant's motive does not matter. Insider defendants who can be held liable under Section 16 include officers and directors of the issuing corporation and beneficial owners of at least 10 percent of any class of the security at the time of the purchase and sale.

Section 18(a) applies to claims for materially fraudulent statements in a company's SEC filings that caused an investor to invest. Section 18(a) provides for a private right of action for actual purchasers or sellers of the security at issue. The plaintiff must prove that he or she did not know that the statement was false or misleading, that he or she actually relied on the statement when buying or selling the security and that the price of the security was affected by the fraudulent statement. Any person who made a false statement or caused it to be made, as well as aiders, abettors and control persons can be held liable. Good faith is an affirmative defense to a claim under Section 18(a). The burden is on the defendant to prove that he or she acted in good faith with no knowledge that any statement was false or misleading.

Section 20 establishes joint and several liability for controlling persons for the acts of the people they control. The plaintiff must plead and prove all elements of a claim against the controlled person and the existence of a control relationship. Good faith is an affirmative defense and the defendant has the burden of proving good faith.

Section 20A provides for a private cause of action for insider trading.

Non-statutory Defenses

In addition to the statutory defenses mentioned above, there are a number of common law and equitable defenses that courts have recognized in securities cases including:

  • In pari delicto (where the plaintiff has at least equal responsibility for the violation and preclusion of the suit would not significantly interfere with effective enforcement of the securities laws)
  • Due diligence
  • Estoppel, waiver, ratification and laches (where the plaintiff has failed to object to a transaction in a timely fashion)
  • Good faith reliance on counsel
  • Contributory fault/contributory negligence
  • Assumption of risk
  • Intervening cause

Conclusion

Securities cases involve complex issues and can be difficult to prove. It is important for you to be represented by an attorney at Kaufmann Gildin & Robbins LLP in New York, NY who has experience with securities litigation.

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