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Securities Act - Liability. Section 11 Due diligence in “shelf” offering Shelf registration (Rule 415) Role of underwriter Reliance vs. due diligence. (last updated 14 Feb 13). Compare Securities Act liability to Rule 10b-5?. Rule 10b-5. §11. §12(a)(1). §12(a)(2). Transactional nexus.
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Securities Act - Liability Section 11 Due diligence in “shelf” offering Shelf registration (Rule 415) Role of underwriter Reliance vs. due diligence (last updated 14 Feb 13)
Rule 10b-5 §11 §12(a)(1) §12(a)(2) Transactional nexus “icw” purch/ sale security Part of RS Plaintiff Purchaser or seller Purchaser (tracing) Defendant Primary violator List (I, Ds, Os, UWs, expert) (1) Mat’l misrep Pl BOP (or duty to speak) Pl BOP (or omission) (2) Scienter Pl BOP (facts / strong E) Def BOP (“due diligence”) (3) Reliance Pl BOP (unless FOM) Def BOP (Pl “knew”) * (4) Causation Pl BOP (prox cause) Def BOP (“other than”) (5) Damages Pl BOP (O/P or rescission) Rescission (up to offering $) Court Federal Federal or state Limitations 2 yrs + 5yrs 1 yr + 3 yrs
In re WorldCom Sec Litigation(SDNY 2004) BALANCE SHEET • Accounting fraud • Shelf registration • Nature • Role of UW • Due diligence defense • Audited financial • Unaudited financials • Advice to UWs in “shelf” • ASSETS • Cash • Cap accounts LIABILITIES • SH EQUITY • Retainedearnings How did WorldCom account for “line costs”?
In re WorldCom Sec Litigation(SDNY 2004) Due diligence (comfort letter / unaudited financials) Reliance (audited financials)
Rule 176 -- Circumstances Affecting the Determination of What Constitutes Reasonable Investigation and Reasonable Grounds for Belief Under Section 11 of the Securities Act In determining whether or not the conduct of a person constitutes a reasonable investigation or a reasonable ground for belief meeting the standard set forth in section 11(c), relevant circumstances include, with respect to a person other than the issuer. • The type of issuer; • The type of security; • The type of person; • The office held when the person is an officer; • The presence or absence of another relationship to the issuer when the person is a director or proposed director; • Reasonable reliance on officers, employees, and others whose duties should have given them knowledge of the particular facts ; • When the person is an underwriter, the type of underwriting arrangement, the role of the particular person as an underwriter and the availability of information with respect to the registrant; and • Whether, with respect to a fact or document, incorporated by reference, the particular person had any responsibility for the fact or document at the time of the filing from which it was incorporated. SEC (1981): Underwriters should arrange their due diligence procedures over time for the purpose of avoiding last minute delays [in shelf offerings] … Nothing compels underwriter to do deal without due diligence.
Underwriters may not rely on an accountant’s comfort letters for interim financial statements. … Comfort letters do not “expertise any portion of the RS” Audited: prudent man in management of own $$ Unaudited: look at context (WorldCom deteriorating) Judge Denise Cote (SDNY) In re WorldCom Sec Litigation(SDNY 2004)
