biz org class 20

section 11 of securities act of 1933 - materially misleading statements or omissions in a registration statement leads to liability under this section, due diligence is required. if you're a director and sued for a misleading statement that was prepared by an expert, you still are liable potentially, but you're able to rely on experts and your due diligence defense is easier to prove.

barchris.
see p. 434 problem 1: how does peat marwick's potential liability differ from that of the directors? why should it differ? directors should know what's going on at the compnay and what's in the registration statements, but if it's in the expertised portion, the due diligence burden is lower. for the unexpertised portion, they have the highest liability.

2. signs the registration agreement, and barchris does not have a defense

3. should a director who also serves as GC to the issuer be held to a different standard than the other directors? requirement of confidentiality under rule 1.6 and so GC can't disclose info as director of the company. there's internal tension.

4. how should a law firm respond from a request that a partner serve on the board of directors? potential conflict of interest

5. who was harmed by the defendant's misconduct? did anyone benefit from it? the investors were harmed.

basic v. levinson
fraud on the market theory
rebuttal presumption of reliance in securities fraud cases
rule 10(b)(5) is a section of the securities of 1933 act that is a response to the great depression

basic was having conversations with another company about an acquisition, and asked NYSE to stop trading its stock in anticipation of this merger. the company president publicly denied the merger. the next day, the merger happened. the plaintiffs brought a class action suit saying that they were injured by the freeze which created artificially reduced market prices and the reliance on misinformation given by the company president, and that the misrepresentation violated 10(b)(5). district court found that the plaintiffs were entitled to a reliance on basic's claim, but found that the argument was essentially immaterial.

the purpose of the securities act of 1933 is to protect investors against manipulation of stock prices, and 10(b)(5) is to protect against fraud. requiring a showing of actual reliance would be impossible for a class to prove. instead, to prove fraud in this case, it must show:
1. recklessness
2. standard of materiality:
a. a materially omitted fact
b. substantial likelihood that;
c. reasonable shareholder would use in deciding how to vote
3. reliance: party harmed materially relied on the manipulation, omission or misrepresentation
4. causation: the D's act caused the P's harm
5. standing: the P's have to have an actual injury in connection with purchase or sale of a security, as defined by 10(b)(5)

average investor does not have the sophistication to understand what's misleading in a market statement. what's wrong with the fraud-on-the-market theory? the idea that the


section 12 deals with the liability of any issuer or person who sells securities without registering them.

section 5

section 2(1); howey

section 4(2) - private placements/exempt transactions