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

biz org class 19

Form S-1 - SEC registration statement

avoiding security registration:
the process is very expensive so there will likely be an argument that its not a security or that it's a private placement offering (an exemption) - there are many exemptions under 1933 act.
first should look at the instrument and determine if its actually a security. becuase if there is then the offering must be registered under s.5 of the 1933 act. if it should be but isn't registered, there will be civil liability under s.12.

doran v. petroleum:
if you offer securities to just a handful of sophisticated people, you may have a private offering.
doran is both an offeree and purchaser. the company's argument is that not only was doran sophisticated, he also had access to information that a person might get from a form S-1 and therefore he didn't need the protection of registration. the court rejected the argument. why? because the company has to determine sophistication in regard to not only the handful of purchasers, but in regards to public offering that happened with respect to all offerees.

what are the arguments and provisions per the 33 ACT?
s. 5 -- requires registration of securities.
whenever s.5 is violated, there's cause of action for recovery, civil liability under s.12
s. 4(2) -- private placement exemption states that a small offering for small money is potentially exempt

the lower court said that this was a private placement because doran had sophisticated knowledge.

4 factors:
1. offerees (number, level of sophistication and access to assess and evaluate the offered securities, relationship between offerees)
2. number of units
3. size of offering
4. manner of offering

escott v. barchris

the document at issue is the registration statement: the statement was filed at the same time the company was going bankrupt and omitted and affirmatively changed and misstated misinformation.
was the statement misleading?
if so, who is liable? anyone who signs the statement including directors, experts who prepared the doc, and also underwriters of the debentures.

what this case clarifies is the identity of the experts. if we say that experts are potentially liable then we have to be clear of who those parties are. in escott v. barchris there's three examples of experts: accountants, appraisers and engineers. what about lawyers?
escott says that they're not.
but why did the defendants argue that the lawyers were experts? what argument did the court reject?
the court says that the only portion that experts prepared is the "expertised portion" prepared by the accountants

due diligence defense, s. 11 of 1933 Act. the burden of proving this for non-experts with respect with the expertised portion is low, and just have to show that counsel did due diligence. barchris is strictly liable and cannot defend against that, but the other parties have responsibilities of due diligence and that defense is available to barchris.

due diligence defense standard for non-experts for the non-expertised portion of the statement.
1. establish reasonable investigation
2. reasonable grounds
3. believed the statement was true

the expert accountants are only responsible for hte expertised portion. their defense is basically the same as the other defendants with respect to the docs that they prepared:
1. had reasonable grounds to believe the statements provided were true
2. reaosnable investigation
3. believed the statements provided were true

but now with respect to the expertised portion, what's the defense for non-experts? they don't have to show reasonable investigation - instead they get to rely on the experts' info and opinion.