Chapter 10: Liability under the US federal securities laws

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A foreign private issuer becomes exposed to liability under the US federal securities laws in a variety of ways when it offers or lists its securities in the US. This liability can be civil or, in certain circumstances, criminal. Although litigation by private plaintiffs is more common, the SEC (and, in the case of criminal matters, the US Department of Justice) can initiate lawsuits, administrative proceedings and investigations. We summarize below the key areas of liability.

Registration – Section 5 of the Securities Act

Section 5 of the Securities Act effectively requires every US offer and sale of securities to be either registered with the SEC or made pursuant to an available exemption from registration. The terms "offer" and "sale" in the Securities Act are broadly construed. For example, an offer includes any attempt to dispose of a security for value.[744] As a result, publicity in the US about an impending offering, website disclosure of the offering or even an e-mail communication to "friends and family" announcing an offering can constitute an unregistered offer in violation of Section 5.

Violations of Section 5 can give rise to liability, as discussed below. They can also lead to the delay (or even abandonment) of a securities offering if the SEC imposes a cooling-off period. As a result of these onerous remedies, it is critical to control publicity and comply carefully with the requirements for any applicable exemptions from Section 5 registration.

Under Section 12(a)(1) of the Securities Act, an investor who buys securities issued in transactions violating Section 5 can rescind the sale and recover his or her purchase price (plus interest, less any amount received on the securities). If the investor no longer owns the securities, he or she can recover damages equal to the difference between the purchase and the sale price of the securities (again, plus interest, less any amount received on the securities).[745]

Section 12(a)(1) imposes strict liability, and an investor is not required to demonstrate any causal link between his or her damages and the violation of Section 5.[746] However, in order to be liable, a defendant must be a seller – that is, a person who successfully solicits the purchase, motivated at least in part by financial interest – and the plaintiff must actually have bought the securities from that defendant.[747]

Anti-fraud

(i) What is material?

The various anti-fraud provisions of the Securities Act and the Exchange Act discussed below impose liability for material misstatements or omissions in connection with an offer or sale of securities. The fundamental test for "materiality" is whether there is a substantial likelihood that a reasonable investor would consider the misstatement or omission important in deciding whether or not to purchase or sell a security.[748] As the US Supreme Court has explained, "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."[749]

The determination of materiality is a mixed question of law and fact,[750] and the SEC has made clear that there is no bright-line quantitative test for materiality.[751] In particular, the SEC has affirmatively rejected exclusive reliance on a commonplace rule of thumb that had developed in the preparation of financial statements, under which matters causing a numerical impact of less than 5% were generally not considered material.[752] Although the SEC addressed this point in the context of preparing of financial statements, its guidance should also be taken into account in the preparation of narrative disclosure.

The SEC has pointed to several qualitative factors that should be considered in assessing materiality, and that could render a quantitatively minor misstatement material:[753]

  • whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate;
  • whether the misstatement masks a change in earnings or other trends;
  • whether the misstatement hides a failure to meet analysts' consensus expectations;
  • whether the misstatement changes a loss into income or vice versa;
  • whether the misstatement concerns a segment or other portion of the issuer's business that has been identified as playing a significant role in the issuer's operations or profitability;
  • whether the misstatement affects the issuer's compliance with regulatory requirements;
  • whether the misstatement affects the issuer's compliance with loan covenants or other contractual requirements;
  • whether the misstatement has the effect of increasing management's compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation; or
  • whether the misstatement involves concealment of an unlawful transaction.

In adopting Regulation FD, the SEC indicated that the following subjects should be carefully reviewed to determine whether they are material:[754]

  • earnings information;
  • mergers, acquisitions, tender offers, joint ventures, or changes in assets;
  • new products or discoveries, or developments regarding customers or suppliers (for example, the acquisition or loss of a contract);
  • changes in control or in management;
  • change in auditors or auditor notification that the issuer may no longer rely on an auditor's audit report;
  • events regarding the issuer's securities – for example, defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits, or changes in dividends, changes to the rights of security holders, public or private sales of additional securities; and
  • bankruptcies or receiverships.

(ii) Rule10b-5 – Purchase or sale of securities

Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 provide a broad (and heavily litigated) basis for liability in securities transactions. Rule 10b-5 prohibits:

  • employing "any device, scheme, or artifice to defraud;"
  • making "any untrue statement of material fact" or omitting "to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading;" or
  • engaging in any "act, practice, or course of business which operates or would operate as a fraud or deceit."

(a) Elements of a claim under Rule 10b-5

The elements of a claim under Rule 10b-5 are:

  • a misrepresentation or omission;[755]
  • of a material fact;
  • made with scienter - that is, either intent to deceive, manipulate or defraud,[756] or recklessness (beyond mere negligence);[757]
  • upon which the plaintiff relied; and
  • which caused the injury.

Rule 10b-5 requires that the alleged fraud must have been in connection with the purchase or sale of securities – in other words, that there was some nexus but not necessarily a close relationship.[758] As a consequence, a private plaintiff must show that he or she actually purchased or sold stock;[759] a plaintiff cannot succeed on a claim that he or she would have sold had the truth been known. But Rule 10b-5 does not require privity between the defendant and the plaintiff,[760] and accordingly a plaintiff need not show that he or she actually bought securities from the person who made the misleading statements.

(b) Scope of Rule 10b-5

Rule 10b-5 is not limited to public offerings of securities, and applies to unregistered transactions and secondary market trading. In addition, Rule 10b-5 covers oral and written statements, whether or not relating to a registration statement or prospectus.[761] These would potentially include statements made:

  • in an offering memorandum for a Rule 144A offering;
  • during a press conference or an interview, or in a press release;
  • in an annual report on Form 20-F; and
  • in a document submitted on Form 6-K.

In addition while an issuer is generally not liable for the statements of others, there may be exceptions if, for example, a corporate insider participates sufficiently in the preparation of an analyst's report or circulates the report to prospective investors.[762]

(c) Insider trading

Insider trading is also prosecuted under Rule 10b-5. Generally speaking, Rule 10b-5 prohibits a person from buying or selling securities on the basis of material non-public information in violation of a duty owed to the shareholders of the issuer or where the information has been otherwise misappropriated.[763] Rule 10b-5 imposes an obligation to disclose (or abstain from trading) on:

  • corporate insiders, such as directors, officers and controlling shareholders, who owe a fiduciary duty to the issuer's shareholders;[764]
  • temporary insiders, such as lawyers, accountants or investment bankers;[765] and
  • outsiders who "misappropriate" confidential information for trading purposes in breach of a duty owed to the source of the information.[766]

Bear in mind that a person can be liable under Rule 10b-5 even if he or she did not actually trade on the material non-public information, but instead passed it to a third party (a practice sometimes known as "tipping"). In addition to the "tipper" (the person who discloses the information), a "tippee" (the person to whom the information is disclosed and who had reason to know the information came from an insider who had violated a duty) may also be liable under Rule 10b-5 if he or she trades on the basis of the tipped information.[767]

(d) Damages under Rule 10b-5

Violations of Rule 10b-5 can lead to rescission or damages.[768] Damages for violations of Rule 10b-5 in private actions comprise a purchaser's out-of-pocket loss, essentially limited to the difference between the purchase or sale price the plaintiff paid or received and the mean trading price of the security during the 90-day period beginning on the date on which the information correcting the misstatement or omission that is the basis for the action is disseminated to the market.[769] Civil or criminal penalties (including imprisonment, fines or disgorgement orders) and injunctions and administrative proceedings are also possible.[770] Punitive damages are, however, not available under Rule 10b-5.[771]

(iii) Section 11 of the Securities Act – registered offerings

Section 11(a) of the Securities Act imposes liability if any part of a registration statement, at the time it became effective, "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." Section 11 liability only covers statements made in a registration statement, and does not reach other documents that are not considered part of a registration statement (such as road show materials, free writing prospectuses or research reports).[772] In addition, Section 11 does not extend to unregistered transactions, since these do not involve a "registration statement."[773]

Practice point

The trend in the case law is to allow secondary-market purchasers who can trace their securities to the offering to bring claims under Section 11, at least to the extent that the only shares in the market are those subject to the registration statement.[774]

A Section 11 claim can be brought against:

  • each person who signed the registration statement, including the issuer and members of management;[775]
  • each member of the issuer's board of directors, or similar governing body, regardless of whether he or she signed the registration statement;[776]
  • any expert named as responsible for a portion of the registration statement, such as an issuer's auditors; and
  • each underwriter.

Issuers are strictly liable under Section 11. Potential defendants other than the issuer[777] have statutory defences to Section 11 liability, by virtue of Section 11(b)(3):

  • Due diligence defence: in the case of a non-expert with respect to the non-expertized portions of the registration statement, or in the case of an expert with respect to the expertized portions (for example, the financial statements that include the auditors' opinion), a defendant must show that he or she had, after reasonable investigation, reasonable grounds to believe and did believe that the included information was true and that no material facts were omitted;[778] and
  • Reliance defence: in the case of a non-expert with respect to expertized portions of the registration statement, a defendant must show he or she had no reasonable ground to believe, and did not believe, that the registration statement contained a material misstatement or omission.[779]

Damages for violation of Section 11 are generally limited to:[780]

  • the difference between the price paid for a security and its value at the time a plaintiff brings a lawsuit;
  • if the security has already been sold at the time a lawsuit is brought, the amount paid for the security, less the price at which the security was sold in the market; or
  • if the security was sold after the lawsuit was brought but before judgment, the lesser of (i) the amount the plaintiff paid for the security, less the price at which the security was sold in the market, or (ii) the amount the plaintiff paid for the security, less the value of the security as of the time the suit was brought.

Punitive damages are not available under Section 11.[781]

(iv) Section 12(a)(2) of the Securities Act – registered offerings

Section 12(a)(2) of the Securities Act imposes liability on any person who offers or sells a security by means of a prospectus, or any oral communication, which contains "an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading." Section 12(a)(2) overlaps with Section 11, but covers oral statements, free writing prospectuses and statements in a prospectus, rather than the registration statement alone (of which the prospectus is a part). The US Supreme Court has interpreted the reference to "prospectus" in Section 12(a)(2) as a term of art meaning a prospectus in connection with a public offering under the Securities Act. As a result, it has ruled that Section 12(a)(2) does not apply to private unregistered transactions, secondary offerings or secondary market transactions.[782]

Section 12(a)(2) provides a statutory due diligence defence if the seller can show he or she "did not know, and in the exercise of reasonable care could not have known", of the material misstatements or omissions.

Under Section 12(a)(2), a person who buys securities on the basis of a prospectus that contains a material misstatement or omission – like a person who buys securities issued in violation of Section 5 of the Securities Act – can rescind the sale and recover his or her purchase price (plus interest, less any amount received on the securities). And if the investor no longer owns the securities, he or she can recover damages equal to the difference between the purchase and the sale price of the securities (again plus interest, less any amount received on the securities).

(a) Rule 159A – issuer as seller under Section 12(a)(2)

As with Section 12(a)(1), to be liable under Section 12(a)(2) a defendant must be a seller – that is, a person who successfully solicits the purchase, motivated at least in part by financial interest.[783] 1933 Act Rule 159A provides that for purposes of Section 12(a)(2), regardless of the underwriting method used to sell securities, the term seller will include the issuer of the securities sold to a person as part of the initial distribution of those securities.[784] Under Rule 159A, the issuer will be deemed to offer or sell securities by means of:

  • any preliminary prospectus or prospectus required to be filed under Rule 424;
  • any free writing prospectus relating to the offering prepared by or on behalf of the issuer or used or referred to by the issuer;
  • the portion of any other free writing prospectus relating to the offering containing material information about the issuer or its securities provided by or on behalf of the issuer; and
  • any other communication that is an offer made by or on behalf of the issuer.

For purposes of Rule 159A, information and communications are provided "by or on behalf" of an issuer if an issuer or an agent or a representative of the issuer authorizes or approves the information or communication before use.[785] However, underwriters and dealers will not be treated as agents or representatives of the issuer (and hence will not be deemed to be acting by or on behalf of the issuer) solely by virtue of acting as offering participants. As a result, they will not be deemed to be a seller for Section 12(a)(2) purposes under these circumstances.

Rule 159A does not cover purchasers of the issuer's securities who buy in the aftermarket.[786]

(b) Rule 159 – timing of the investment decision under Section 12(a)(2)

According to the SEC, an investor makes an investment decision at the time of the contract of sale for securities (that is, at the time the offering is priced in most underwritten deals).[787] In turn, Rule 159 provides that, for purposes of determining whether a prospectus or oral statement included a material misstatement or omission at the time of the contract of sale under Section 12(a)(2) (and Section 17(a)(2)), "any information conveyed to the purchaser only after such time of sale" will not be taken into account.

The key implication of Rule 159 is that Section 12(a)(2) (and Section 17(a)(2)) liability will be determined by reference to the total package of information conveyed to the purchaser at or before the time of sale. Accordingly, a preliminary prospectus, a free writing prospectus or an oral communication at a road show may give rise to liability under Section 12(a)(2) (in suits by private plaintiffs) (and Section 17(a)(2) (in suits by the SEC)), even if later corrected or supplemented in a final prospectus that is filed or delivered after pricing. In other words, changes made to the disclosure after pricing and included in the final prospectus will not provide a liability shield for the issuer or its underwriters. The critical inquiry will be whether the preliminary prospectus, as supplemented at the time of pricing (including by way of one or more free writing prospectuses), included an untrue statement of material fact, or omitted to state a material fact necessary to make the statements, in light of the circumstances under which they were made, not misleading.

(v) Liability for free writing prospectuses

(a) Free writing prospectuses are not part of the registration statement but are subject to 12(a)(2) liability

A free writing prospectus is not considered to be part of a registration statement.[788] As a result, it will not be subject to liability under Section 11. But every free writing prospectus, regardless of whether it is filed, is subject to liability under Section 12(a)(2) (and other anti-fraud provisions of the federal securities laws, such as Section 17(a)(2) in the case of actions by the SEC). In addition, the SEC has explained that statements at road shows are subject to Section 12(a)(2) liability (to the extent the statements are an offer of securities), regardless of whether the road show constitutes a free writing prospectuses.[789] In other words, statements at live road shows will be subject to Section 12(a)(2).

(b) Cross-liability issues – Rule 159A

A key question for underwriters is which free writing prospectuses subject them to liability. To address this issue, 1933 Act Rule 159A provides that an offering participant will not be considered to offer or sell securities to a particular person "by means of" a free writing prospectus for Section 12(a)(2) purposes unless:[790]

  • the offering participant used or referred to the free writing prospectus in offering or selling securities to that person;
  • the offering participant sold securities to that person and participated in the planning for the use of the free writing prospectus that was used by another offering participant to sell securities to that person; or
  • the offering participant was otherwise required to file the free writing prospectus under Rule 433 (as in the case of a free writing prospectus that it distributes by broad unrestricted dissemination).

In addition, under Rule 159A an offering participant will not be considered to offer or sell securities by means of a free writing prospectus solely because another person has used or referred to the free writing prospectus or filed it with the SEC.[791]

Controlling person liability

Liability under the US federal securities laws potentially extends beyond issuers, underwriters and other direct participants in securities offerings to the persons who control those participants. In particular, Section 15 of the Securities Act and Section 20 of the Exchange Act provide that controlling persons may be jointly and severally liable with the persons they control. As a result, an issuer's significant shareholders, its board of directors (or similar governing body) and members of its management may be liable along with the issuer for violations of Section 11, Section 12 or Rule 10b-5.

The term control generally means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.[792] This is not a bright-line test, and instead depends on the facts and circumstances of any particular case. A defendant generally will be found to have controlled an issuer if he or she actually participated in (that is, exercised control over) the operations of the issuer and possessed the power to control the specific transaction or activity from which the issuer's primary liability derives.[793] Some courts have held that the defendant must be a "culpable participant" in the issuer's wrongful conduct in order to trigger liability.[794]

The controlling person has a defence to liability under Section 15 if he or she "had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist," and a defence under Section 20 if he or she "acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." This analysis is obviously quite fact-specific,[795] and may depend on such factors as whether the defendant is an inside or outside director.

Practice point

Potential controlling persons such as members of an issuer's board of directors should familiarize themselves generally with the disclosure used in connection with an offering, and should pay particular attention to any high-level statements about an issuer's strategy, business or financial performance. They should also review carefully any statements about themselves (for example, disclosure about a controlling shareholder).

Liability issues relating to Sarbanes-Oxley

The Sarbanes-Oxley Act has a wide-ranging impact on liability under the US federal securities laws. It creates new US federal criminal offences relating to securities, substantially increases the penalties for existing offences and increases the SEC's enforcement powers in various ways.[796] Among other things, the Sarbanes-Oxley Act:

  • adds a new section to the US federal criminal code outlawing the alteration, destruction or concealment of records to impede a US federal investigation;[797]
  • amends existing law to provide for fines and imprisonment of up to 20 years for corruptly altering, destroying or concealing documents with the intent of obstructing an official proceeding;[798]
  • amends existing law to provide for fines and imprisonment of up to 10 years for anyone who knowingly takes any action to retaliate against a person for providing information to US federal law enforcement officials relating to violations or potential violations of US federal law;[799]
  • creates a new securities fraud crime (with penalties of up to 25 years imprisonment plus fines) of knowingly executing a scheme or artifice to defraud any person in connection with any security of an issuer or to obtain, by means of false or fraudulent representations, any money in connection with the purchase or sale of a security;[800]
  • increases the maximum individual penalty for violations of the Exchange Act from $1 million and 10 years imprisonment to $5 million and 20 years imprisonment, and raises the maximum corporate fine from $2.5 million to $25 million;[801]
  • gives the SEC the ability, after notice and a hearing, to force an issuer subject to an SEC investigation to put extraordinary payments to directors, officers, partners, controlling persons, agents or employees into temporary escrow;[802]
  • gives the SEC the administrative authority to impose a ban on a person from acting as a director or an officer of an issuer (the so-called officer and director bar);[803] previously, the SEC could only impose the officer and director bar by means of a court order;[804]
  • lowers the standard for judicial imposition of the officer and director bar to "unfitness" to serve as an officer and director, from the previous "substantial unfitness" threshold;[805]
  • prohibits an issuer from retaliating against whistleblowing employees who provide information or assist an investigation regarding violations of US federal securities law, SEC regulations or US federal law on shareholder fraud;[806] and
  • amends the US federal bankruptcy laws to prohibit the discharge in bankruptcy of debts resulting from judgments, settlements or court orders in cases involving securities fraud.[807]

Enforcement

The SEC has wide-ranging powers to investigate any conduct that could constitute a violation of the US federal securities laws.[808] SEC investigations are conducted by the Division of Enforcement, which also has responsibility for prosecuting civil violations of the US federal securities laws.[809] In addition to bringing charges under the causes of action described elsewhere in this Overview, the SEC can bring enforcement actions against participants in the securities markets (such as broker-dealers, investment advisers, issuers and their officers, directors, lawyers and accountants) using causes of action and remedies unavailable to private litigants. Charges may be brought administratively, or in a US federal district court.

While the SEC has civil enforcement authority only, Section 24 of the Securities Act and Section 32(a) of the Exchange Act make it a felony for any person to willfully violate any provision of those acts or a rule promulgated under the acts. Consequently, the SEC also works closely with criminal law enforcement agencies throughout the US to develop and bring criminal cases when the misconduct warrants more severe action.

(i) Enforcement against foreign private issuers and non-US nationals

The SEC actively enforces the US federal securities laws against foreign private issuers and non-US nationals.[810] The SEC takes a very expansive view of its jurisdiction under the US federal securities laws, and the US courts have generally supported that view.[811]

The SEC's power to enforce the US federal securities laws against foreign private issuers and non-US nationals is limited by its ability to obtain evidence from outside the US and to establish jurisdiction. In order to facilitate its ability to obtain information from outside the US, the SEC has entered into over 30 information-sharing arrangements (often called Memoranda of Understanding, or MOUs) with foreign financial regulators.[812] These MOUs establish procedures for sharing information and providing assistance in instances where key evidence lies outside of the US. Another, more formal, negotiated mechanism used to obtain information is a Mutual Legal Assistance Treaty (MLAT) between the US and another country. The SEC must make a MLAT request through the US Department of Justice.[813]

Particular difficulties may arise for foreign private issuers and non-US nationals who have legal obligations in both the US and in their home countries. While every jurisdiction prohibits fraud, there is no universally accepted definition of fraud and thus activities that comply with local laws may violate the US federal securities laws under certain circumstances. For example, in E.On AG,[814] the SEC brought an enforcement action against a German company whose shares were listed on the NYSE. The SEC charged that the company had denied falsely that it was involved in merger negotiations and that the denials (issued in both English and German) violated Rule 10b-5. While acknowledging that disclosure practices regarding the existence of negotiations may differ in other jurisdictions, the SEC nevertheless asserted that it would not apply a different standard to foreign private issuers for commenting on pending merger negotiations than to US domestic issuers.[815]


Endnotes

[744]

1933 Act Section 2(a)(3).

[745]

David M Brodsky & Daniel J Kramer, Federal Securities Litigation, 4-16 to 4-17 (1st ed. 1997) [Federal Securities Litigation].

[746]

Id. at 4-2 to 4-3.

[747]

Id. at 5-20 (citing Pinter v Dahl, 486 US 622, 641-54 (1988)).

[748]

See TSC Indus Inc v Northway Inc, 426 US 438, 449 (1976); see also Securities Act Rule 405 (material information is "matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered"). TSC involved the interpretation of Section 14(a) of the Exchange Act and Rule 14a-9. The Supreme Court has, however, explicitly extended TSC's definition of materiality to Rule 10b-5, Basic Inc v Levinson, 485 US 224, 231-32 (1988), and the lower US federal courts have generally used the TSC standard in all contexts involving the anti-fraud provisions of the US federal securities laws. Louis Loss & Joel Seligman, Securities Regulation 2074-75 (3rd ed, 1992) [Loss & Seligman].

[749]

TSC, 426 US at 449.

[750]

Id. at 450.

[751]

SAB 103, Topic 1.M.1 (SAB 103 recodifies Staff Accounting Bulletin 99).

[752]

Id.

[753]

Id.

[754]

Selective Disclosure and Insider Trading, Securities Act Release 7881, Exchange Act Release 43154, Investment Company Act Release 24599, [2000 Transfer Binder] Fed Sec L Rep (CCH) ¶ 86,319, at 83,676, 83,684 (August 15 2000) [Regulation FD Release].

[755]

In the case of an omission, a plaintiff must show that there was a duty to disclose the material facts; merely being in possession of material non-public information does not, of itself, create a duty to disclose. Federal Securities Litigation, at 6-4.

[756]

Ernst & Ernst v Hochfelder, 425 US 185, 193 (1976).

[757]

Federal Securities Litigation, at 6-13 to 6-14.

[758]

Id. at 6-26 to 6-27.

[759]

Blue Chip Stamps v Manor Drug Stores, 421 US 723, 754-55 (1975).

[760]

Loss & Seligman, at 3679 n.553.

[761]

See Loss & Seligman, at 3688 (explaining that "[t]he Rule may be violated by feeding misinformation into the marketplace, or even withholding information too long," regardless of whether the defendants themselves bought or sold securities) (citation omitted).

[762]

Federal Securities Litigation, at 6-30 to 6-31. The SEC has stated that an issuer may be "fully liable" if it disseminates and adopts false third-party reports "even if it had no role whatsoever in the preparation of the report." Use of Electronic Media Release, ¶ 86,304, at 83,374, 83,381, n.54 (citing In the Matter of Presstek, Inc, Exchange Act Release 39472 (December 22 1997)).

[763]

Federal Securities Litigation, at 6-32; see also Regulation FD Release, ¶ 86,319, at 83,682 (defining a temporary insider as "a person who owes a duty of trust or confidence to the issuer," such as an attorney, investment banker or accountant).

[764]

Federal Securities Litigation, at 6-32 to 6-33.

[765]

Id. at 6-34.

[766]

Id. at 6-34 to 6-35 (citing United States v O'Hagan, 521 US 642 (1997)). The SEC has added two rules to clarify issues that have arisen in insider trading cases. First, Rule 10b5-1 provides that trading "on the basis of" material non-public information includes all trading while in possession of that information, except certain trades previously contracted for in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1. Second, Rule 10b5-2 fleshes out the meaning of a "duty of trust or confidence" for purposes of the misappropriation theory.

[767]

Federal Securities Litigation, at 6-34.

[768]

Id. at 6-42.

[769]

1934 Act Section 21D(e)(1); see also Federal Securities Litigation, at 6-43 to 6-45 (discussing damages under 1934 Act Section 10(b)).

[770]

See, for example, 1934 Act Sections 21(d)(3) (providing for money penalties in SEC civil actions), 32(a) (providing for criminal penalties for willful violations of the 1934 Act).

[771]

Federal Securities Litigation, at 6-42; see also 1934 Act Section 28(a) (limiting recovery for damages in actions under the Exchange Act to actual damages).

[772]

Federal Securities Litigation, at 3-1.

[773]

See Loss & Seligman, at 4217-18.

[774]

See Federal Securities Litigation, at 3-8 to 3-10.

[775]

Id. at 3-11 (citing 1933 Act Section 6(a)).

[776]

Id. at 3-12.

[777]

Id. at 3-14.

[778]

1933 Act Sections 11(b)(3)(A) and (B).

[779]

1933 Act Section 11(b)(3)(C).

[780]

1933 Act Section 11(e).

[781]

Federal Securities Litigation, at 3-19 to 3-20.

[782]

Gustafson v Alloyd Co, 513 US 561, 564, 584 (1995). There is some question whether Section 12(a)(2) liability extends to offshore public offerings under Regulation S. One lower US federal court has held that, despite Gustafson, "an offering issued pursuant to Regulation S is subject to" Section 12(a)(2) liability "if it is a public offering." Sloane Overseas Fund Ltd v Sapiens Int'l Corp, 941 F Supp 1369, 1376 (SDNY 1996).

[783]

Federal Securities Litigation, at 5-20 (citing Pinter v Dahl, 486 US 622, 641-54 (1988)).

[784]

1933 Act Rule 159A(a).

[785]

1933 Act Rule 159A, Notes to paragraph (a).

[786]

Securities Act Reform Release, Section IV.B, at 190.

[787]

Securities Act Reform Release, Section IV.A.1, at 175.

[788]

Securities Act Reform Release, Section III.D.3.b.iii(G)(1), at 148.

[789]

Id. Section III.D.3.b.iii(D)(2), at 131.

[790]

1933 Act Rule 159A(b)(1).

[791]

1933 Act Rule 159A(b)(2).

[792]

1933 Act Rule 405; see also 1934 Act Rule 12b-2.

[793]

Federal Securities Litigation, at 11-5.

[794]

Id. at 11-5 to 11-7.

[795]

See generally id. at 11-7 to 11-10 (discussing the defence).

[796]

See id. at I-187.

[797]

See Sox § 802(a) (adding new Section 1519 of 18 USC); see also Huber Outline at I-187.

[798]

See Sox § 1102 (amending 18 USC Section 1512); see also Huber Outline at I-190.

[799]

See Sox § 1107 (amending 18 USC Section 1513); see also Huber Outline at I-190.

[800]

See Sox § 807 (adding new Section 1348 to 18 USC); see also Huber Outline at I-190, I-191.

[801]

See Sox § 1106 (amending 1934 Act Section 32(a)); see also Huber Outline at I-191, I-192.

[802]

See Sox § 1103 (amending 1934 Act Section 21C(c)); see also Huber Outline at I-192, I-193.

[803]

See Sox § 1105 (amending 1934 Act Section 21C and 1933 Act Section 8A); see also Huber Outline at I-193.

[804]

See Huber Outline at I-193.

[805]

See SOX § 305 (amending 1934 Act Section 21(d)(2) and 1933 Act Section 20(e)); see also Huber Outline at I-193.

[806]

See SOX § 806 (adding new Section 1514A to 18 USC); see also Huber Outline at I-195.

[807]

See SOX § 803 (adding new Section 523(a) to 11 USC); see also Huber Outline at I-195, I-196.

[808]

See SEC v Murphy, [1983-84 Transfer Binder] Fed Sec L Rep (CCH) ¶ 99,688 (CD Ca 1983).

[809]

For a comprehensive discussion of SEC Enforcement practice, see, for example, The Securities Enforcement Manual: Tactics and Strategies (Richard M Phillips, ed 1997); William R McLucas, J Lynn Taylor & Susan A Mathews, A Practitioner's Guide to the SEC's Investigative and Enforcement Process, 70 Temp L Rev 53 (1997).

[810]

See, for example, SEC v Lernout & Hauspie Speech Products NV, Litigation Release 17782 (October 10 2002) (charging Belgian corporation quoted on Nasdaq National Market System with financial fraud), available at www.sec.gov/litigation/litreleases/lr17782.htm; SEC v ACLN Ltd, Litigation Release 17776 (October 8 2002) (charging NYSE-listed Cypriot corporation and its Cypriot auditor with financial fraud), available at www.sec.gov/litigation/litreleases/lr17776.htm; SEC v Millennium Financial Ltd, Litigation Release 17528 (May 22 2002) (charging Uruguayan securities firm with securities fraud), available at www.sec.gov/litigation/litreleases/lr17528.htm.

[811]

See, for example, SEC v Unifund SAL, 910 F2d 1028, 1033 (2d Cir 1990) (upholding preliminary injunction barring insider trading against Lebanese investment company that purchased stock in a New York Stock Exchange-listed company through Beirut office of US broker-dealer). See also Federal Securities Litigation, at 1-5 to 1-8 (discussing the extra-territorial reach of the US federal securities laws).

[812]

2002 SEC Annual Report at 13, available at www.sec.gov/pdf/annrep02/ar02full.pdf.

[813]

For a discussion of MLATs, see Symposium, Mann, Mari & Lavdas, International Agreements and Understandings for the Production of Information and Other Mutual Assistance, 29 Int'l Law 780, 781 n.248 and accompanying text (1995).

[814]

In the Matter of E.On AG, Exchange Act Release 43372, Administrative Proceeding File 3-10318 (September 28 2000), available at www.sec.gov/litigation/admin/34-43372.htm [E.On].

[815]

Id.