15 USCS 78j SEC Rules

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TOC: United States Code Service; Code, Const, Rules, Conventions & Public Laws > TITLE 15. COMMERCE AND TRADE > CHAPTER 2B. SECURITIES EXCHANGES >
§ 78j. Manipulative and deceptive devices [Caution: See prospective amendment note below.] [Part 1 of 3]
Citation: 15 U.S.C. 78J
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15 USCS § 78j
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UNITED STATES CODE SERVICE
Copyright © 2011 Matthew Bender & Company, Inc. History
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Interpretive Notes and
All rights reserved. Decisions
*** CURRENT THROUGH PL 111-383, APPROVED 1/7/2011 *** History; Ancillary Laws and
Directives
TITLE 15. COMMERCE AND TRADE Code of Federal Regulations
CHAPTER 2B. SECURITIES EXCHANGES
Resources & Practice Tools
NITA Commentary
Go to the United States Code Service Archive Directory
Related Statutes & Rules
15 USCS § 78j
Research Guide
Federal Procedure:
> 2 Moore's Federal Practice
(Matthew Bender 3d ed.), ch 9,
NITA Commentary: Pleading Special Matters § 9.03.
> 4 Moore's Federal Practice
Review expert commentary from The National Institute for Trial Advocacy (Matthew Bender 3d ed.), ch 20,
Permissive Joinder of Parties §
20.04.
THE CASE NOTES SEGMENT OF THIS DOCUMENT HAS BEEN SPLIT INTO 3 DOCUMENTS.
THIS IS PART 1. > 5 Moore's Federal Practice
(Matthew Bender 3d ed.), ch 23,
USE THE BROWSE FEATURE TO REVIEW THE OTHER PART(S). Class Actions §§ 23.45, 23.190.
Forms:
§ 78j. Manipulative and deceptive devices [Caution: See prospective amendment note below.] > 3 Bender's Federal Practice Forms,
Forms 8(VII):1, 8(VII):21,
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of 8(VII):23, 8(VII):31, 8(VII):32,
8(VII):50, Federal Rules of Civil
the mails, or of any facility of any national securities exchange-- Procedure.
(a) > 4 Bender's Federal Practice Forms,
(1) To effect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any security Form 15:8, Federal Rules of Civil
other than a government security, in contravention of such rules and regulations as the Commission may prescribe as necessary Procedure.
or appropriate in the public interest or for the protection of investors. > 5 Bender's Federal Practice Forms,
Forms 23:22, 23:210, Federal Rules
(2) Paragraph (1) of this subsection shall not apply to security futures products. of Civil Procedure.
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any Intellectual Property:
security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act [15
> 3 Milgrim on Trade Secrets
USCS § 78c note]), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the (Matthew Bender), ch 12, Public
Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Law Aspects of Trade Secrets:
Regulatory Agencies; Criminal
Prosecution § 12.02.
Rules promulgated under subsection (b) that prohibit fraud, manipulation, or insider trading (but not rules imposing or specifying
More...
reporting or recordkeeping requirements, procedures, or standards as prophylactic measures against fraud, manipulation, or
insider trading), and judicial precedents decided under subsection (b) and rules promulgated thereunder that prohibit fraud,
manipulation, or insider trading, shall apply to security-based swap agreements (as defined in section 206B of the Gramm-Leach-Bliley Act [15 USCS § 78c note]) to
the same extent as they apply to securities. Judicial precedents decided under section 17(a) of the Securities Act of 1933 [15 USCS § 77q(a)] and sections 9, 15, 16,
20, and 21A of this title [15 USCS §§ 78i, 78o, 78p, 78t, and 78u-1], and judicial precedents decided under applicable rules promulgated under such sections, shall
apply to security-based swap agreements (as defined in section 206B of the Gramm-Leach-Bliley Act [15 USCS § 78c note]) to the same extent as they apply to
securities.
(c) (1) To effect, accept, or facilitate a transaction involving the loan or borrowing of securities in contravention of such rules and regulations as the Commission
may prescribe as necessary or appropriate in the public interest or for the protection of investors.
(2) Nothing in paragraph (1) may be construed to limit the authority of the appropriate Federal banking agency (as defined in section 3(q) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q))), the National Credit Union Administration, or any other Federal department or agency having a responsibility under Federal law to
prescribe rules or regulations restricting transactions involving the loan or borrowing of securities in order to protect the safety and soundness of a financial
institution or to protect the financial system from systemic risk.
History:
(June 6, 1934, ch 404, Title I, § 10, 48 Stat. 891.)

(As amended Dec. 21, 2000, P.L. 106-554, § 1(a)(5), 114 Stat. 2763; July 21, 2010, P.L. 111-203, Title VII, Subtitle B, § 762(d)(3), Title IX, Subtitle B, § 929L(2),
Subtitle I, § 984(a), 124 Stat. 1761, 1861, 1932.)
History; Ancillary Laws and Directives:
1. Explanatory notes
2. Prospective amendment
3. Effective date of section
4. Amendments
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5. Transfer of functions
6. Other provisions
1. Explanatory notes:
The amendments made by § 1(a)(5) of Act Dec. 21, 2000, P.L. 106-554, are based on § 206(g) of Title II and § 303(d) of Title III of H.R. 5660 (114 Stat.
2763A-432, 454), as introduced on Dec. 14, 2000, which was enacted into law by such § 1(a)(5).
2. Prospective amendment:
Amendment of section, effective on the later of 360 days after enactment or not less than 60 days after publication of final rules. Act July 21, 2010,
P.L. 111-203, Title VII, Subtitle B, § 762(d)(3), 124 Stat. 1761 (effective on the later of 360 days after enactment or not less than 60 days after publication of final
rules implementing these provisions, as provided by § 774 of such Act, which appears as 15 USCS § 77b note), provides that this section is amended:
"(A) in subsection (b), by striking '(as defined in section 206B of the Gramm-Leach-Bliley Act),' each place that term appears; and
"(B) in the matter following subsection (b), by striking '(as defined in section 206B of the Gramm-Leach-Bliley Act), in each place that such terms appear';".
3. Effective date of section:

This section became effective on October 1, 1934, pursuant to § 34 of Act June 6, 1934, ch 404, which appears as 15 USCS § 78hh.
4. Amendments:
2000. Act Dec. 21, 2000, in subsec. (a), designated the existing provisions as para. (1), and added para. (2); in subsec. (b), inserted "or any securities-based swap
agreement (as defined in section 206B of the Gramm-Leach-Bliley Act),"; and added the concluding matter.
2010. Act July 21, 2010 (effective 1 day after enactment, as provided by § 4 of such Act, which appears as 12 USCS § 5301 note), in subsec. (a)(1), substituted
"other than a government security" for "registered on a national securities exchange"; and added subsec. (c).
5. Transfer of functions:
For transfer of executive and administrative functions of Securities and Exchange Commission to Chairman of that Commission with authority vested in Chairman
to delegate performance of functions, by Reorg. Plan No. 10 of 1950, see Transfer of functions note to 15 USCS § 78d.
6. Other provisions:
Rulemaking required. Act July 21, 2010, P.L. 111-203, Title IX, Subtitle I, § 984(b), 124 Stat. 1933, provides: "Not later than 2 years after the date of
enactment of this Act, the Commission shall promulgate rules that are designed to increase the transparency of information available to brokers, dealers, and
investors, with respect to the loan or borrowing of securities.".
Notes:
Code of Federal Regulations:
Securities and Exchange Commission--Form and content of and requirements for financial statements, Securities Act of 1933, etc., 17 CFR 210.1-01 et seq.
Securities and Exchange Commission--Standard instructions for filing forms under Securities Act of 1933, Securities Exchange Act of 1934, and Energy Policy and
Conservation Act of 1975-Regulation S-K, 17 CFR 229.10 et seq.
Securities and Exchange Commission--General rules and regulations, Securities Exchange Act of 1934, 17 CFR 240.0-1 et seq.
Securities and Exchange Commission--Regulations M, SHO, ATS, and AC and customer margin requirements for security futures, 17 CFR 242.100 et seq.
Securities and Exchange Commission--Regulation FD, 17 CFR 243.100 et seq.
Securities and Exchange Commission--Regulation G, 17 CFR 244.100 et seq.
Related Statutes & Rules:
Short sales by directors, officers, and principal stockholders, 15 USCS § 78p.

Rules and regulations, power of Commission and Board of Governors of Federal Reserve System to make, 15 USCS § 78w.
Effective date, 15 USCS § 78hh.
Sentencing Guidelines for the United States Courts, 18 USCS Appx §§ 2B1.1, 2B1.4.
This section is referred to in 15 USCS §§ 78k, 78u, 78aa-1, 78hh, 3904.
Research Guide:
Federal Procedure:
2 Moore's Federal Practice (Matthew Bender 3d ed.), ch 9, Pleading Special Matters § 9.03.
4 Moore's Federal Practice (Matthew Bender 3d ed.), ch 20, Permissive Joinder of Parties § 20.04.
5 Moore's Federal Practice (Matthew Bender 3d ed.), ch 23, Class Actions §§ 23.45, 23.190.
6 Moore's Federal Practice (Matthew Bender 3d ed.), ch 26, Duty to Disclose; General Provisions Governing Discovery § 26.46.
10 Moore's Federal Practice (Matthew Bender 3d ed.), ch 54, Judgment; Costs § 54.171.
15 Moore's Federal Practice (Matthew Bender 3d ed.), ch 100, The Structure of the Federal Judicial System § 100.22.
16 Moore's Federal Practice (Matthew Bender 3d ed.), ch 107, Removal § 107.14.
17 Moore's Federal Practice (Matthew Bender 3d ed.), ch 111, Change of Venue § 111.20.
17A Moore's Federal Practice (Matthew Bender 3d ed.), ch 124, The Erie Doctrine and Applicable Law § 124.41.
18 Moore's Federal Practice (Matthew Bender 3d ed.), ch 132, Issue Preclusion and Collateral Estoppel § 132.03.
5 Administrative Law (Matthew Bender), ch 42, Attorney Admission and Discipline in Administrative Practice § 42.02.
3 Fed Proc L Ed, Arbitration § 4:18.
5B Fed Proc L Ed, Bonds, Civil Fines, and Forfeitures § 10:151.
6A Fed Proc L Ed, Class Actions § 12:226.
8 Fed Proc L Ed, Creditors' Provisional Remedies § 21:5.
10 Fed Proc L Ed, Derivative Actions by Shareholders §§ 25:3, 180, 205, 206, 212.
29A Fed Proc L Ed, Securities Regulation §§ 70:258, 268, 290, 291, 304, 310-312, 352, 359, 405-407, 411, 413, 419, 423, 429, 430, 442, 446, 451, 452, 454.
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Am Jur:
9C Am Jur 2d, Bankruptcy § 2909.
18A Am Jur 2d, Corporations § 671.
19 Am Jur 2d, Corporations § 2147.
32B Am Jur 2d, Federal Courts § 1731.
60A Am Jur 2d, Pensions and Retirement Funds § 82.
61A Am Jur 2d, Pleading § 204.
69 Am Jur 2d, Securities Regulation--Federal §§ 18, 271, 277, 283, 375, 397-399, 405, 406, 414, 538, 585, 696, 719.
69A Am Jur 2d, Securities Regulation--Federal §§ 863, 872, 878, 917-920, 924, 928, 932, 1003, 1005, 1006, 1008-1011, 1014-1016, 1018, 1023, 1024, 1028,
1030, 1036, 1037, 1042, 1050, 1052, 1068, 1070, 1072, 1084, 1095, 1106, 1107, 1109, 1112, 1118, 1121, 1136, 1138-1140, 1142, 1152, 1153, 1158, 1160,
1161, 1163, 1165, 1166, 1167, 1169, 1177, 1187, 1188, 1190, 1205, 1215, 1216, 1219, 1222, 1334, 1386, 1388, 1390, 1394, 1395, 1402, 1403, 1411, 1414,
1416, 1418-1420, 1429, 1435, 1439, 1455, 1466, 1468, 1470, 1473, 1474, 1476, 1498, 1504-1506, 1613, 1619, 1635, 1641, 1650.
Am Jur Trials:
4 Am Jur Trials, Solving Statutes of Limitation Problems, p. 441.
45 Am Jur Trials, Third-Party Accountant Liability-Prospective Financial Statements Used in Securities Offerings, p. 113.
88 Am Jur Trials, Stockbroker Liability Litigation, p. 1.
89 Am Jur Trials, Arbitrating Securities Industry Disputes, p. 55.
108 Am Jur Trials, Arbitrating and Mediating Customer Securities Disputes at FINRA, p. 313.
Am Jur Proof of Facts:

28 Am Jur Proof of Facts 3d, Proof of Unsuitable and Unauthorized Trading by Securities Brokers, p. 87.
92 Am Jur Proof of Facts 3d, Arbitrability Disputes: Proving What Facts to Whom, p. 1.
109 Am Jur Proof of Facts 3d, Primary and Secondary Liability of Investment Promoters, p. 319.
5 Am Jur Proof of Facts 2d, Stockbroker's Churning of Customer's Account, p. 1.
Forms:
3 Bender's Federal Practice Forms, Forms 8(VII):1, 8(VII):21, 8(VII):23, 8(VII):31, 8(VII):32, 8(VII):50, Federal Rules of Civil Procedure.
4 Bender's Federal Practice Forms, Form 15:8, Federal Rules of Civil Procedure.
5 Bender's Federal Practice Forms, Forms 23:22, 23:210, Federal Rules of Civil Procedure.
9 Bender's Federal Practice Forms, Forms 51:120, 51:121, Federal Rules of Civil Procedure.
19 Bender's Federal Practice Forms, Form 37:1, Rules of the Supreme Court.
7 Rabkin & Johnson, Current Legal Forms, § 5.39, Sales of Stock and Business Assets.
28 Rabkin & Johnson, Current Legal Forms, Form 22A.02, Real Estate Securities.
5 Fed Procedural Forms L Ed, Class Actions (2006) § 11:63.
14A Fed Procedural Forms L Ed, Securities Regulation (2004) §§ 59:264, 396-399, 401, 402, 404, 405, 408, 414.
7B Am Jur Pl & Pr Forms (2002), Corporations, § 127.
15 Am Jur Pl & Pr Forms (2005), Investment Companies and Advisers, § 3.
22 Am Jur Pl & Pr Forms (2001), Securities Regulation, §§ 6, 23-28, 30, 31, 33, 35, 47.
22A Am Jur Pl & Pr Forms (2001), Securities Regulation, §§ 54, 55, 57, 60, 61, 64, 65, 69, 71, 74, 84.
23 Am Jur Pl & Pr Forms (2001), Stock and Commodity Exchanges, § 53.
Intellectual Property:
3 Milgrim on Trade Secrets (Matthew Bender), ch 12, Public Law Aspects of Trade Secrets: Regulatory Agencies; Criminal Prosecution § 12.02.
Criminal Law and Practice:

3 Criminal Defense Techniques (Matthew Bender), ch 56, Defense of a Securities Case § 56.03.
4 Criminal Defense Techniques (Matthew Bender), ch 79A, Cross-Examination in Business Crime Cases § 79A.05.
1 Business Crime (Matthew Bender), ch 2, Parallel Civil and Criminal Proceedings PP 2.03, 2.04.
4 Business Crime (Matthew Bender), ch 15, Appellate Practice P 15.05.
4 Business Crime (Matthew Bender), ch 17, Securities Fraud P 17.11.
Bankruptcy:
1 Collier Bankruptcy Practice Guide, ch 4, Issues for Consideration Prior to Filing P 4.03.
5 Collier Bankruptcy Practice Guide, ch 90, The Chapter 11 Plan P 90.08.
Corporate and Business Law:

1 Liability of Corporate Officers and Directors (Matthew Bender), ch 1, Basic Duties §§ 1.04, 1.17.
1 Liability of Corporate Officers and Directors (Matthew Bender), ch 3, Duty of Diligence § 3.02.
1 Liability of Corporate Officers and Directors (Matthew Bender), ch 4, Duty of Loyalty § 4.08.
1 Liability of Corporate Officers and Directors (Matthew Bender), ch 5, Duty of Obedience § 5.12.
1 Liability of Corporate Officers and Directors (Matthew Bender), ch 9, Liability Under ERISA § 9.14.
1 Liability of Corporate Officers and Directors (Matthew Bender), ch 11, Depository Institutions: Directors and Officers §§ 11.04, 11.08.
1 Liability of Corporate Officers and Directors (Matthew Bender), ch 13, Federal Securities Laws §§ 13.02, 13.03, 13.06, 13.07, 13.09, 13.10, 13.14.
1 Liability of Corporate Officers and Directors (Matthew Bender), ch 15, Disclosure and Misuse of Business Information §§ 15.03, 15.08.
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2 Liability of Corporate Officers and Directors (Matthew Bender), ch 18, Actions § 18.02.
2 Liability of Corporate Officers and Directors (Matthew Bender), ch 19, Defense and Settlement of Litigation § 19.10.
2 Liability of Corporate Officers and Directors (Matthew Bender), ch 21, Allocation § 21.02.
2 Liability of Corporate Officers and Directors (Matthew Bender), ch 22, Indemnification § 22.01.
2 Liability of Corporate Officers and Directors (Matthew Bender), ch 23, Insurance: Directors and Officers Liability § 23.13.
2 Liability of Corporate Officers and Directors (Matthew Bender), ch 24, Insurance: Insuring Clauses and Major Provisions § 24.07.
2 Liability of Corporate Officers and Directors (Matthew Bender), ch 25, Insurance: Exclusions § 25.22.
1 Regulation of Investment Companies (Matthew Bender), ch 5, Registration of Investment Companies and Their Securities: Sections 8 and 24 § 5.13.
1 Regulation of Investment Companies (Matthew Bender), ch 9, Valuation, Sales Activities and UITs: Sections 21-27, 35-36 § 9.02.
1 Securities Law Techniques (Matthew Bender), ch 1, Overview of Federal Private Placement Exemptions § 1.01.
1 Securities Law Techniques (Matthew Bender), ch 3, Offerings of Securities Pursuant to Regulation A § 3.03.
1 Securities Law Techniques (Matthew Bender), ch 4, Securities Regulation of Sales of Oil and Gas Interests § 4.02.
1 Securities Law Techniques (Matthew Bender), ch 5, Section 3(a)(9): Recapitalizations § 5.03.
1 Securities Law Techniques (Matthew Bender), ch 6, Section 3(a)(10): Officially Sanctioned Exchanges § 6.03.
2 Securities Law Techniques (Matthew Bender), ch 22, The Process of Becoming "Effective" § 22.04.
3 Securities Law Techniques (Matthew Bender), ch 26, Regulation M § 26.01.
3 Securities Law Techniques (Matthew Bender), ch 30, Responsibilities for Registered Offerings §§ 30.01, 30.03-30.06, 30.09.
3 Securities Law Techniques (Matthew Bender), ch 37, Secondary Offerings § 37.02.
4 Securities Law Techniques (Matthew Bender), ch 48, Problems in Trading § 48.05.
4 Securities Law Techniques (Matthew Bender), ch 51, Preparation of Proxy Statements and Annual Reports to Shareholders § 51.04.
4 Securities Law Techniques (Matthew Bender), ch 55, Quarterly Reports on Form 10-Q or 10-QSB §§ 55.01, 55.04.
4 Securities Law Techniques (Matthew Bender), ch 56, Current Reports on Form 8-K §§ 56.04, 56.05.
5 Securities Law Techniques (Matthew Bender), ch 65, Preparing the Business Combination Registration Statement § 65.07.
5 Securities Law Techniques (Matthew Bender), ch 70, Williams Act--An Overview § 70.03.
6 Securities Law Techniques (Matthew Bender), ch 80, Insider Trading Under Section 10(b) of the Securities Exchange Act §§ 80.01-80.07, 80.09-80.12, 80.15,
80.17.
6 Securities Law Techniques (Matthew Bender), ch 82, Complying with the Foreign Corrupt Practices Act § 82.06.
6 Securities Law Techniques (Matthew Bender), ch 86, Arbitration § 86.04.
6 Securities Law Techniques (Matthew Bender), ch 87, SEC Proceedings--An Overview § 87.07.
6 Securities Law Techniques (Matthew Bender), ch 90, SEC Injunctive Proceedings §§ 90.03, 90.05, 90.07, 90.10.
7 Securities Law Techniques (Matthew Bender), ch 91, Litigation--An Overview §§ 91.02-91.07.
7 Securities Law Techniques (Matthew Bender), ch 92, Class Actions §§ 92.03, 92.04, 92.10, 92.12, 92.13.
7 Securities Law Techniques (Matthew Bender), ch 93, Blue Sky Litigation § 93.03.
7 Securities Law Techniques (Matthew Bender), ch 107, The Uses and Functions of Experts in Securities Litigation § 107.03.
Labor and Employment:

5 National Labor Relations Act: Law and Practice (Matthew Bender), ch 40, NLRB Deferral to Arbitration § 40.09.
Federal Taxation:
2 Federal Income Taxation of Retirement Plans (Matthew Bender), ch 14, Statutory Standards for Deferral Under IRC Section 409A § 14.02.
1 Tax Controversies: Audits, Investigations, Trials (Matthew Bender), ch 4, Tax Preparers and Practitioners § 4.03.
Annotations:
Liability for Backdating of Stock Options Under Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b) [15 USCS § 78j(b)], and 17 C.F.R. § 240.10b-5.
32 ALR Fed 2d 85.
Application of Equitable Estoppel by Nonsignatory to Compel Arbitration--Federal Cases. 39 ALR Fed 2d 17.
Liability Under Federal Securities Laws of Sellers of Subprime Mortgage Loans. 43 ALR Fed 2d 47.
Who is an "insider" within § 10(b) of the Securities Exchange Act of 1934 (15 USCS § 78j(b))--and SEC Rule 10b-5 promulgated thereunder--making unlawful
corporate insider's nondisclosure of information to seller or purchaser of corporation's stock. 2 ALR Fed 274.
Acquisition by corporate insider of corporation's stock as manipulative or deceptive device prohibited by § 10(b) of the Securities Exchange Act of 1934 (15 USCS
§ 78j(b)). 3 ALR Fed 294.
Fraud or deceit as "in connection with" purchase or sale of securities within meaning of Securities Exchange Act of 1934 § 10(b) (15 USCS § 78j(b)) and SEC
Rule 10b-5. 3 ALR Fed 819.
What is a "purchase or sale" of securities within the antifraud provisions of § 10(b) of the Securities Exchange Act of 1934 (15 USCS § 78j(b)) and of SEC Rule
10b-5 promulgated thereunder. 4 ALR Fed 1048.
Construction and application of § 14 of Securities Act of 1933 (15 USCS § 77n) and § 29(a) of Securities Exchange Act of 1934 (15 USCS § 78cc(a)), voiding
waiver of compliance with statutory provisions or rules or regulations. 26 ALR Fed 495.
In pari delicto as defense in private action for violation of Securities Act or Securities Exchange Act. 26 ALR Fed 682.
Construction and application of provision of Rule 9(b), Federal Rules of Civil Procedure, that circumstances constituting fraud or mistake be stated with
particularity. 27 ALR Fed 407.
Civil liability of employer for violation by employee of § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) or of Rule 10b-5 of Securities and Exchange
Commission (17 CFR § 240.10b-5). 32 ALR Fed 714.
What constitutes recklessness sufficient to show necessary element of scienter in civil action for damages under § 10(b) of Securities Exchange Act of 1934 (15
USCS § 78j(b) and Rule 10b-5 of the Securities and Exchange Commission. 49 ALR Fed 392.
Who is "forced seller" for purposes of maintenance of civil action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5. 59
ALR Fed 10.
"Purchase or sale" requirement as to defendant or victim in criminal prosecutions for violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC
Rule 10b-5. 66 ALR Fed 848.
When is it unnecessary to show direct reliance on misrepresentation or omission in civil securities fraud action under § 10(b) of Security Exchange Act of 1934
(15 USCS § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5). 93 ALR Fed 444.
Attorney's liability for nondisclosure or misrepresentation to third-party nonclients in private civil actions under federal securities laws. 112 ALR Fed 141.
Who may be liable under "misappropriation theory" of imposing duty to disclose or abstain from trading under § 10(b) of Securities Exchange Act of 1934 (15
USCS § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5). 114 ALR Fed 323.
"Bespeaks caution" doctrine under federal securities law. 130 ALR Fed 119.
Scienter requirement in actions under antifraud provision of Investment Advisers Act (15 U.S.C.A. § 80b-6 [15 USCS § 80b-6]). 133 ALR Fed 549.
Limitation of Actions With Respect to Actions For Contribution Under § 10(b) of Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) and SEC Rule 10b-5 (17
CFR § 240.10b-5). 146 ALR Fed 643.
Attorneys, Accountants, Consultants, of the Like As "Insiders" Within § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b) [15 USCS §
78j(b)]--and SEC Rule 10b-5 Promulgated Thereunder--Making Unlawful Corporate Insider's Use of Manipulative or Deceptive Device in Connection With Purchase or
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Sale of Securities. 191 ALR Fed 623.

Contribution Between Joint Tortfeasors as Affected by Settlement with Injured Party by One or More Tortfeasors. 17 ALR6th 1.
Remedies of Purchasers and Bidders on Internet Auction Web Sites. 61 ALR6th 207.
Duty and liability of closely held corporation, its directors, officers, or majority stockholders, in acquiring stock of minority shareholder. 7 ALR3d 500.
Corporate insider's nondisclosure of information to seller or purchaser of corporation's stock as manipulative or deceptive device prohibited by § 10(b) of the
Securities Exchange Act of 1934 (15 USCS § 78j(b)). 22 ALR3d 793.
Stockbroker's liability for allegedly "churning" or engaging customer's account in excessive activity. 32 ALR3d 635.
Dominant shareholder's accountability to minority for profits, bonus, or the like, received on sale of stock to outsiders. 38 ALR3d 738.
Recipients of Corporate Information Other than Directors, Officers, Substantial Shareholders, or Associated Professionals as Subject to Liability for Trading on
Material, Nonpublic Information, Sometimes Referred to as "Insider Trading,", Within § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b) [15 USCS
§ 78j(b)])--and SEC Rule 10b-5 Promulgated Thereunder--Making Unlawful Corporate Insider's Nondisclosure or Manipulation of Information to Seller or Purchaser of
Corporation's Stock. 14 ALR Fed 2d 401.
Texts:
3 Banking Law (Matthew Bender), ch 80, Examination and Supervision of State Member Banks § 80.21.
4 Banking Law (Matthew Bender), ch 96, Bank Services § 96.11.
4 Banking Law (Matthew Bender), ch 97, Trust Investment Services Operation Control § 97.07.
4 Banking Law (Matthew Bender), ch 98, Bank Trading Obligations § 98.06.
4 Banking Law (Matthew Bender), ch 100, Registration and Regulatory Requirements of the Securities Exchange Act of 1934 and Other Securities Statutes §§
100.02-100.04, 100.08.
4 Banking Law (Matthew Bender), ch 102, Application of Fraud Provisions of the Federal Securities Laws §§ 102.02, 102.03, 102.06.
4 Banking Law (Matthew Bender), ch 103, Fraudulent Activities: Bases of Liability §§ 103.02, 103.03.
4 Banking Law (Matthew Bender), ch 104, Insider Trading, Control, and Aiding and Abetting § 104.04.
Cohen's Handbook of Federal Indian Law (Matthew Bender), ch 21, Economic Development § 21.03.
4 Computer Law (Matthew Bender), ch 7, Privileges § 7.05.
1 Energy Law & Transactions (Matthew Bender), ch 7, FERC Compliance and Enforcement Developments Affecting the Energy Industry § 7.05.
3 Energy Law & Transactions (Matthew Bender), ch 59, Energy Policy Act of 2005 § 59.03.
3 The Law of Advertising (Matthew Bender), ch 44, Liabilities of Advertising Agencies § 44.02.
3 The Law of Advertising (Matthew Bender), ch 52, Advertising by Financial Institutions § 52.09.
3 The Law of Advertising (Matthew Bender), ch 55, Lotteries, Games of Chance, Sweepstakes, and Similar Promotional Marketing Schemes § 55.07.
4 The Law of Advertising (Matthew Bender), ch 57, Securities Advertising § 57.02.
Law Review Articles:

O'Hare. Preemption Under the Securities Litigation Uniform Standards Act: If It Looks Like a Securities Fraud Claim and Acts Like a Securities Fraud Claim, Is It a
Securities Fraud Claim? 56 Ala L Rev 325, Winter 2004.
Wang. An Outsider's Guide To Insider Trading Liability Under Rule 10b-5. 22 Am Bus L J 569, Winter 1985.
Bagby. The Evolving Controversy Over Insider Trading. 24 Am Bus L J 571, Winter 1987.
Prentice; Richardson; Scholz. Corporate Web Site Disclosure and Rule 10b-5: An Empirical Evaluation. 36 Am Bus LJ 531, Summer 1999.
Epstein et al. Securities Fraud. 35 Am Crim L Rev 1167. Spring 1998.
Anthony et al. Securities Fraud. 36 Am Crim L Rev 1095, Summer 1999.
Hall; Schoeberlein. Securities Fraud. 37 Am Crim L Rev 941, Spring 2000.
Cronin; Evansburg; Garfinkle-Huff. Securities Fraud. 38 Am Crim L Rev 1277, Summer 2001.
Amchen; Cordova; Cicero. Securities Fraud. 39 Am Crim L Rev 1037, Spring 2002.
Conahan; Ivanova; Nolette; Young. Securities Fraud. 40 Am Crim L Rev 1041, Spring 2003.
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Thel. Statutory Findings and Insider Trading Regulation. 50 Vand L Rev 1091, October 1999.
Sale. Securities Fraud as Corporate Governance: Reflections upon Federalism. 56 Vand L Rev 859, April 2003.
Langevoort; Gulati. The Muddled Duty to Disclose Under Rule 10b-5. 57 Vand L Rev 1639, October 2004.
Application of Antifraud Provisions of the Securities Laws to Compulsory, Noncontributory Pension Plans After Daniel v. International Brotherhood of Teamsters,
64 Virginia L Rev 305, March 1978.
O'Brien; Moye. The Sale of Business Doctrine: Landreth Adds New Life to the Anti-Fraud Provisions of the Securities Acts. 11 Vt L Rev 1, Spring 1986.
Securities Law--Consideration of Tax Benefits in Private Damage Actions Under Rule 10b-5--Salcer v Envicon Equities, 744 F.2d 935 (2d Cir. 1984). 8 W New Eng
L Rev 275, 1986.
Gelb. Rule 10b-5 and Santa Fe--Herein of Sue Facts, Shame Facts, and Other Matters. 87 W Va L Rev 189, Winter 1984-85.
Swanson. Reinventing Insider Trading: The Supreme Court Misappropriates the Misappropriation Theory. 32 Wake Forest L Rev 1157. Winter 1997.
Hazen. Corporate Insider Trading: Reawakening the Common Law. 39 Wash & Lee L Rev 845, Summer 1982.
Birnbaum Rule Rejected: Will Analysis of Right to Bring Private Action under § 10(b) be Simplified? 31 Wash & Lee L Rev 757.
Brodsky. Insider Trading and the Insider Trading Sanctions Act of 1984: New Wine Into New Bottles? 41 Wash & Lee L Rev 921, Summer 1984.
Lerach. "The Private Securities Litigation Reform Act of 1995--27 Months Later": Securities Class Action Litigation Under the Private Securities Litigation Reform
Act's Brave New World. 76 Wash U LQ 597, Summer 1998.
Corporations: Expansion of the Common Law Fiduciary Concept via 10b-5. 13 Washburn L J 534.
Trust Beneficiary's Standing to Sue under Rule 10b-5. 20 Wayne L Rev 1401.
Banoff; DuVal, Jr. The Class Action as a Mechanism for Enforcing the Federal Securities Laws: An Empirical Study of the Burdens Imposed. 31 Wayne L Rev 1, Fall
1984.
Knepper. Future-Priced Convertible Securities and the Outlook for "Death Spiral" Securities-Fraud Litigation. 26 Whittier L Rev 359, Winter 2004.
SEC Rule 10b-5: A Recent Profile. 13 Wm & Mary L Rev 860.
Kripke. Fifty Years of Securities Regulation in Search of a Purpose. 1984-1985 Corp Prac Comm 545.
Emerging Issues Analysis
1. James M. Wilson Jr. on the Liability Faced by Financial Institutions from Their Exposure to Subprime Mortgage Related Investments
Several publicly-traded financial institutions have disclosed write downs in the billions of dollars to reflect the decline in the value of their mortgage-related
investments and, in some cases, revealed additional exposure due to off-balance-sheet investments. Investors have filed class actions under the anti-fraud rule of
the federal securities laws against some of the companies. James M. Wilson discusses this ongoing issue in this commentary.
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2. Wiltenburg on Court's "Reliance" Test for ' 10(b) Private Causes of Action
At first blush, the Supreme Court's closely watched decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. appears to proclaim the demise of
so-called "scheme liability." But in basing its holding on the plaintiff's inability to prove it relied on defendants' alleged deceptive conduct, the Court actually left the
door ajar for colorable claims against a secondary actor. This commentary, written by David Wiltenburg, explores how the Court's attempt to draw a bright line
between the "realm of financing" and the "realm of ordinary business" may be challenged by future plaintiffs in § 10(b) private actions.
3. Davis, Lowenthal, & Ruskin on Stoneridge Investment v. Scientific Atlanta, Inc.
The Supreme Court may not have shut the door on so-called "scheme liability" as decisively as it might have in Stoneridge Investment Partners, LLC v. Scientific-
Atlanta, Inc., but the stringent test the opinion fashions for proving reliance in a §10(b) claim makes it difficult to imagine how a private suit could ever prevail
against "secondary actors" in an alleged securities fraud. This commentary, written by Evan A. Davis, Mitchell A. Lowenthal, and Nancy I. Ruskin of Cleary Gottlieb
Steen & Hamilton LLP, traces the Court's determination to constrain the limits of judicially implied private §10(b) claims.
4. Stengel, Fink, & Fournier on Stoneridge Investment v. Scientific Atlanta, Inc.
Although the Supreme Court's closely watched decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. would appear to toll the death knell for
so-called "scheme liability," it leaves a narrow opening for plaintiffs to argue that "secondary actors" who do not themselves make actionable misrepresentations or
omissions may still be liable in some circumstances. But the Court's opinion may also raise the bar for proving the reliance element in a §10(b) claim in a way that
was not anticipated by the Court. This commentary, written by James Stengel, Steven Fink, and Kristen Fournier of Orrick, Herrington & Sutcliffe, LLP, explores those
ambiguities and their potential impact on future §10(b) and Rule 10b-5 litigation.
5. Professor James Fanto on Insider Trading and the Misappropriation Theory
In his Emerging Issues Analysis, Professor James Fanto of Brooklyn Law School examines the special problem family members who are not employed by a
corporation, but, due to their personal relationship with the insider, have posed for the enforcement of the federal securities laws prohibiting trading on insider
information.
6. Wald on Aiding and Abetting Liability under the Federal Securities Law
In In re Refco, Inc.the district court for the Southern District of New York held that secondary actors are not liable for aiding and abetting violations of the federal
securities statutes. This Emerging Issues Analysis, written by Professor Eli Wald, a legal ethics expert, summarizes the pertinent legal issues decided by the court and
provides important insights for practitioners.
Interpretive Notes and Decisions:
I.IN GENERAL
A.In General
1. Generally
2. Purpose
3.--Full disclosure
4.--Protecting market integrity
5. Constitutionality
6. Construction
7. Applicability to exempt securities
B.Relation to Other Laws
1.Other Securities and Exchange Act Provisions

8. 15 USCS § 78i
9. 15 USCS § 78m
10. 15 USCS § 78n
11. 15 USCS § 78o
12. SEC Rule 10b-5
13. Miscellaneous
2.Securities Act
14. Generally
15. 15 USCS § 77k
16. 15 USCS § 77l
17. 15 USCS § 77q
18. Miscellaneous
3.Other Laws
19. ERISA
20. State law
21. Miscellaneous
II.INTERSTATE COMMERCE
22. Generally
23. Mail
24. Telephone
25.--To arrange meeting in furtherance of scheme
26.--Intrastate calls
27. Travel
III.SHORT SALES OR STOP LOSS ORDERS [15 USCS § 78j(a)]

28. Applicability
29. What is "short sale"
30. Prohibited short sales
31. Requirement that orders be marked "long" or "short"
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IV.FRAUD PROVISIONS, GENERALLY [15 USCS § 78j(b)]
A.In General
32. Generally
B.Scienter
33. Generally
34.--Showing of scienter not necessary
35.--Showing of scienter necessary
36.--Pleading
37.--Jury Instructions
38.--Miscellaneous
39. Intent to deceive, manipulate or defraud, generally
40.--Intent required
41.--Not an indispensable element
42.--Requirements in particular circumstances
43.--What constitutes "intent to deceive"
44. Specific intent to defraud
45. Actual knowledge or reckless disregard, generally
46.--Pleading
47.--In particular circumstances
48.--What constitutes recklessness, generally
49.----Acting on reasonable belief not reckless
50.----In particular circumstances
51. Negligence
52.--Standard of duty for various parties
54. Duty to investigate
55. Reliance on advice or expertise of others
56. Strict liability
57. Effect of good faith
58. "Aiding and abetting"
59. SEC disciplinary cases
C.Materiality
60. Generally
61. Materiality as distinct from duty to disclose
62. Test of materiality
63.--Balancing of probability and magnitude
64.--Test as objective
65.--Failure to disclose; omission
66.--Misstatement or misrepresentation
67.--Inside information
68.--Merger discussions or plans
69.--New products
70.--Sale of corporation
71.--Tender offers
72. Question of fact
73. Effect of other party's knowledge
74. Effect of availability of information
75. Effect of investment sophistication of other party
76. Relation to reliance
77. Miscellaneous
D.Fraud in Connection With Purchase or Sale of Securities
1.In General
78. Generally
79. Necessity of causal reliance
80.--In "market fraud" cases
81.--Timing of fraud
82.--Intervening causes
83.--Superseding causes
84.--In particular cases
85. Acts incidentally inducing sale or purchase
86.--Non-stock connected to stock exchanges
2."In Connection With"

87. Generally
88. Agreements to sell or purchase
89.--Uncompleted agreements
90.----"Aborted" sales or purchases
91. Accountant's opinions and advise
92. Audit reports
93. Broker's activities, generally
94.--Brokerage fees
95. Contributions to capital
96. Financing of securities purchases
97. Fraud noncoterminous with sale or purchase
98.--Fraud in connection with other event
99.--Purchase prior to disclosure of material information
100.--Purchase prior to issuance of prospectus
101.--Purchase prior to misrepresentation
103. Misappropriation of information
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104. Misrepresentations of SEC actions

105. Payment for securities ordered
106. Publicly disseminated information
107. Refusal to deal in stock matters
108. Retention or non-purchase of securities due to fraud
109. Schemes to increase value of stock
110. Transfer of custodial control
111. Miscellaneous
3."Purchase or Sale"
112. Generally
113. Acquisition of treasury stock
114. Agreements affecting prior sales
115. Conversion options
116.--Supplemental indentures
117. Corporate acquisition of own stock
118.--Redemptions of corporate issues
119. Corporate takeover transactions
120. Custodial transfer of stock
121. Issuance of bills of exchange
122. Issuance of stock
123.--As indicia of ownership
124.--In merger
125.--In liquidation
126. Loan and pledge transactions
127. Modification of partnership
128.--Forfeiture of partnership rights
129. Parent-subsidiary exchanges
130. Pension plan contributions
131. Recapitalization transactions
132. Transactions outside stock exchange channels
V.FALSE OR MISLEADING STATEMENTS OR OMISSIONS
A.In General
133. Generally
134. Affirmative misrepresentation not necessary
135. Deceptive conduct
136. Duty to disclose
137. Knowledge assumed of reasonable investors
138. Materiality
139. Effectiveness of disclosure
140. Effect of means of publication or omission
141.--Speeches
142.--Corporate reports and proxies
143.--Press statements
144.--Prospectus statements
145. Statements not controlled by issuer
146. Opinions or predictions
147. Miscellaneous
B.Particular Misstatements or Omissions As to Issuer
1.Issuer's Potential
148. Generally
149. Earnings and profits predictions
150.--Statements made without basis or knowledge
151.--Cautionary language used
153. Financing
154. Imminent business expansion
155. Imminent loss of business
156. Increases in overhead
157. Nature and size of operation
158. Product information
159. Violations of law
2.Issuer's Financial Condition

160. Generally
161. Ability to pay dividends
162. Availability of financial statement
163. Corporation's credit rating
164. Earnings and profits
165. Outstanding obligations
166. Reduction in minimum capital
167. Value of assets
168. Value of contracts held by corporation
169. Value of contributions to capital
3.Others
170. Bonus agreements
171. Control group plans
172. Issuer's identity
173.--"Silent" owners
174. Investment history
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175. Legality of corporate restructuring

176. Maintenance of funds
177. Management interest in investments
178. Modification of bylaws
179. Resignation of directors
180. Use of corporate funds
C.Particular Misstatements or Omissions As to Security or Transaction

181. Generally
182. Ability to redeem notes
183. Broker's qualifications
184. Broker's fees
185. Conversion rights
186. Dividend and interest payments
187. Existence of options
188. Factors affecting underlying capitalization
189. Financing of purchase
190. Identity of purchaser
191.--Insiders
192.--Purchaser's plans
193. Identity of seller
194.--Seller in short position
195. Inability to timely pay for stock redemption
196. Inducing shareholder to retain stock
197. Inducing stock agreement with no intent to perform
198. Market manipulation
199. Other investors
200.--Rights granted other investors
201. Possible legal problems
202. Possible tax consequences
203. Quality of stock
204. Quantity of stock
205. Redemption rights
206. Registration of stock
207. Safety of investment
208. Suspension of trading
209. Takeovers and mergers
210.--Conflict of interest
211.--Financial statement or condition
213.--Special rights given target's officers
214.--Tender offers
215.--Value of stock or corporation
216.--Appraisal alternatives
217.--Other particular circumstances
218. Value and price of stock
219.--Anticipated changes
220. Others
VI.CONDUCT NOT INVOLVING FALSE OR MISLEADING STATEMENTS OR OMISSIONS

221. Generally
222. Auditor's negligence
223. Breach of securities-related contracts
224. Failure to use or improper use of prospectus
225. High pressure sales
226. Loan transactions
228. Non-exempt distributions
229. Obtaining stock for inadequate or no consideration
230. Obtaining stock redemption agreements
231. Protecting control position
232. Purchase of securities during distribution period
233. Restricting dividends
234. Sale of unregistered stock
235. Securing purchase price with purchased stock
236. Selling stock at favored price
237. Selling trust assets
238. Short tendering
239. Stock restrictions
240. Theft
241. Use of confidential information
VII.INSIDER DUTIES AND VIOLATIONS
A.Special Duty of Disclosure

242. Generally
243. Necessity of insider trading
244. Disclosure to officers
245. Duty as applicable to incomplete information
246. Duty as dependent on relationship
247. Duty as extending to contemporaneous traders
248. Duty as owed to public
250. Effect of prior disclosures
251. Effect of fairness of transaction
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252. Effect of insider's diligence and good faith

253. Effect of other insider trading
254. Effect of passivity
255. Effect of trading forum used
256. Selective disclosure
257. Timeliness of disclosure
258.--Timing of release as discretionary
259. Time between disclosure and use
260. When disclosure would be detrimental to corporation
261. When information is readily available
262. When dealing with minority shareholders
263. When dealing with non-shareholders
264. When dealing with other insiders
265. When dealing with sophisticated investors
B.Who Are Insiders

266. Generally
267. Auditors
268. Banks
269. Brokers, dealers, and underwriters
270. Consultants
271. Corporations
272. Employees
273. Executives and directors
274.--Relatives and friends
275. Printers
276. Shareholders
277. "Tippees"
278. Others
C.False or Misleading Statements or Omissions Pertaining to Inside Information
1.In General
279. Generally
2.Financial Status of Corporation

280. Generally
281. Change in accounting method
282. Declining business
283. Dividends
284. Employee bonus program
286. Product demand
287. Projected earnings
288. Stock's value and quality
3.Business Status or Activities

289. Acquisition of assets
290. Dissatisfaction with management
291. Intent to go public
292. Mergers or consolidations
293.--Preliminary discussions
294.--Fairness of merger terms
295. Mineral discoveries
296. Sale or liquidation of business
297.--Of subsidiary
298. Violation of industry standards
4.Others
299. Insider's analysis and predictions
300. Insider's interest in transaction
301. Purpose of corporate transactions
D.Insider Violations Not Involving False or Misleading Statements or Omissions

302. Breach of fiduciary duty
303. Corporate mismanagement
304.--Mishandling funds
305. Issuance of shares to insiders for less than fair value
306.--Effect of shareholder ratification
307. Sale of securities to corporation for excessive price
308. Manipulation of stock price
309. Squeezing out minority shareholders
310.--Omitting minority shareholders from deals
VIII.BROKER-DEALER DUTIES AND VIOLATIONS
A.Duty of Fair Dealing

311. Generally
B.False or Misleading Statements or Omissions

312. Generally
313. "Boiler room" operations
314. Broker's qualifications and status
315. Failure to disclose account transactions
316. Failure to disclose interest in transactions
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317. Failure to disclose investment advisor's fraud

318. Failure to disclose market making activities
319. Failure to disclose market manipulation
320. Failure to disclose market value of securities
321. Failure to disclose risk involved in transactions
322. Failure to disclose SEC sanctions
323. Failure to investigate issuer
324.--Reliance on brochures or information provided by others
325. Failure to provide statement of required collateral
326. Issuer's financial condition
327. Opinions and predictions
328. Quality and quantity of stock
329. Others
C.Violations Not Involving False or Misleading Statements or Omissions

330. Churning
331.--Elements
332.--Factors considered
333.----Broker's control over account
334.--Customer's failure to object
335. Concealment of unsound financial condition
336. Continuation of operations while insolvent
337. Conversion
338. Excessive or unfair profits or commissions
339. Failure to obtain margin agreement
340. Failure to implement customer's orders
341. Funds mismanagement
342. Giving preference to transactions on own behalf
344. Recommendations contrary to customers' best interests
345. Recommendations without reasonable basis
346. Rules violations
347. "Switching"
348. Unauthorized customer account transactions
IX.CIVIL ACTIONS FOR DAMAGES UNDER 15 USCS § 78j(b)
A.Private Right of Action

349. Generally
350. Right of action implied
351. Policy underlying right
352. To whom action accrues
353. Against whom action may be brought
354. Relation to other provisions
355.--SEC Rule 10b-16
356. Under SEC Rule 10b-13
357. Under exchange rules
358. Effect of availability of other remedies
359.--State law remedies
360. Exempt securities
361. Miscellaneous
B.Standing
1.In General
362. Generally
363. Purchasers and sellers
364.--Forced sale
365.--Security not connected with fraudulent scheme
366. Non-contemporaneous purchasers and sellers
367. Parties to sell or purchase agreements
368. Non-purchasers due to fraud
369. Non-sellers due to fraud
370. Derivative standing
371. Corporate issuers
372.--Issuers for no or inadequate consideration
373. Miscellaneous
2.Particular Classes of Persons

374. Investors, generally
375. Banks
376. Brokers
377. Conservators
378. Corporations
379. "Finders"
380. Guarantors
381. Lenders and borrowers
382. Option recipients
383.--Recipient's nominees
384. Options traders
385. Partners
386. Pledgors and pledgees
387. Shareholders
388. Tender offerors
389. Trustees
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390.--Bankruptcy trustees
391. Trust beneficiaries
392.--Voting trust
393. Others
3.Forced Seller Doctrine

394. Generally
395. Corporations
396. Investors in bankrupt business
397. Joint venturers
398. Partnerships
399. Persons prevented from bidding at sheriff's sale
400. Persons whose interests may be affected by lawsuits
401. Pledgees
402. Receivers
403. Shareholders of merging corporations
404. Shareholders who dissent from corporate action
405. Shareholders whose equities in stock are diluted
407. Others
C.Prerequisites to Relief
1.Due Care
408. Generally
409. Investigation required
410. Effect of sophistication
411. Effect of intentional fraud
412. Insider's duty
2.Causation
a.In General
413. Generally
414. Nature of connection
415. Required elements
417.--Under "fraud on the market" theory
418. Miscellaneous
b.Loss Causation
419. Generally
420. Injury to corporation
421. Losses not contemporaneous to fraud
422. Intervening or superseding causation
423. Forced sellers
424. Limited partnerships
425. Mergers and tender offers
427. Unauthorized trading
428. Use of inside information
429. Other particular circumstances
c.Transaction Causation
430. Generally
3.Reliance
431. Generally
432. Relation to due care
433. Relation to causation
434. False representation cases
435. Nondisclosure cases
436.--"Reasonable investor" test
437.--Presumption of reliance
438.--"Fraud created the market" doctrine
439.--Limited partnerships
440.--Particular circumstances
441. Effect of sophistication
442. Reliance on sources other than defendant
443. Minority stockholder freeze-outs
444. Prospectus
445. Proxy statements
446. Presumption of reliance
447.--Arising from materiality of misstatement or omission
448.--Rebutting presumption
449.--Effect of presumption on causation
450.--"Fraud on the market" cases
451.--Open market transactions
4.Actual Loss
453. Generally
454. Profit as eliminating injury
455. Derivative shareholder injury
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D.Persons Liable
1.In General
456. Generally
457. Applicability of agency
458. Applicability of privity
459. Applicability of respondent superior
460. Contribution
461.--Who may be liable
462.----Attorneys
463.--Effect of settlement
465. Indemnification
2.Aiders and Abettors
a.In General
466. Generally
467. Knowledge
468. Level of participation
469. Liability based on silence or inaction
470. Timing of fraud
471. Miscellaneous
b.Particular Parties
472. Accountants
473.--Failure to expose fraud
474.--Auditing or certification activity
475.--Misleading statements
476.--Connection with prospectus preparation
477. Attorneys
478. Banks
479. Brokers and dealers
480. Corporations
481. Investment advisors
482. Security analysts
483. Securities clearing houses
484. Stock exchange
485. Others
3.Principals
486. Accountants
487.--Auditing or certification activity
488.--Opinion letters
489.--Preparation of statements or reports
490. Attorneys
491. Banks
492. Brokers, dealers, and underwriters
493. Co-conspirators
494. Corporations
495. Corporate advisors
496. Corporate officers and directors
497. Creditors
498. Employees
499. Financial journalists
500. Governments
501. Investment advisors
502. Investors, generally
503. Shareholders
504.--Controlling shareholders
505. Stock exchange
507. "Tippees"
508. Trustees
E.Practice and Procedure
1.Jurisdiction
509. Generally
510. Arbitration as prerequisite
511.--Agreement to arbitrate
512.----Validity
513.----Scope and construction
514.----Waiver
515.--State law claims
516.--Preclusive effect of arbitration
517. Extraterritorial transactions
2.Pleading
518. Generally
519. Elements to be plead
520. Timing of events
521. Particularity requirement
522. Documents
523. Disqualification of attorney
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524. Breach of fiduciary duty

525. Causation
526. Churning
527. Conspiracy
528. Deception
529. Duty of disclosure
530. Exchange's breach of rules
531. Fraud
532.--Device, scheme or artifice
533.--Scienter
534.----Knowledge or intent
535.----Recklessness
536.----Negligence
537.----Aiding and abetting
538.----Particularity requirement
539.------Facts supporting inference of fraud
540.----Other particular circumstances
541.--Insider trading
542.--Limited partnership investments
543.--Mergers or takeovers
544.--Over-valuation of corporate assets
545.--Quality or success of product
546.--Statements as to corporate earnings
547.--Statements as to corporation's financial condition
548.--Suitability of investments by broker
549.--Unauthorized trading by broker; churning
550.--Particularity requirement
551.--Sufficiency of factual allegations
552.--Identity of actors
553.--"Fraud on the market" cases
555. Interstate commerce
556. Nondisclosure
557. Purchase or sale
558. Purchases for inadequate consideration
559. Reliance
560. Tolling of statute of limitations
561. Amendments to pleading
3.Class Actions
562. Generally
563.--Common questions of law and fact predominate
564.----Reliance
565.----Other particular matters
566.--Adequacy of class representatives
567.----Typicality
568.--Membership of class
569.--Notice and opportunity to opt out
570.--Settlement
571.--Attorneys' fees and costs
572.--Miscellaneous
4.Defenses
573. Generally
574. Collateral estoppel
575. Estoppel
576. Failure of due care and diligence
577. Laches
578. Pari delicto
579.--Unclean hands
580. Statute of frauds
581. Waiver or release
582. Unintentional waiver
583. Others
5.Limitation of Actions
584. Generally
585. Effect of change of venue
586. Limitations under federal securities laws
587.--1-year/3-year limitations period
588.----Retroactive application
589.----Timeliness of particular actions
590.------Time of discovery
591. State borrowing statutes
592. State blue-sky laws applied
593.--Based on common purpose
594.--Based on similarity of language
595.----Scienter
597. State fraud laws applied
598.--Based on similarity to federal claim
599.--Remedies most appropriate
600. State general statutes applied
601. When statute begins to run
602.--Time of violation or transaction
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603.--Actual or constructive discovery or knowledge

604.----Publicly available information
605.----Investor exercising reasonable diligence
606.----Warnings received
607.----Presence of litigation
608.----Abrupt decline in stock price
609.----Churning of securities account
610.----Limited partnership investment
611.--Tolling
612.----Relation to state limitations statutes
613.----Class actions
614.----Pendency of administrative proceedings
615.----Fraudulent concealment
616.----Lack of due diligence
617.----Insanity
6.Summary Judgment
618. Generally
619. Materiality and failure to disclose
620. Scienter
621. Reliance
622. Statute of limitations
623. Churning
624. Other particular cases
7.Evidence
625. Burden of proof, generally
626. Evidentiary standards
627. Aiding and abetting
628. Causation
629.--Reliance
630. Churning
631. Scienter
632. Statute of limitations
633. Questions of fact
634. Instructions
8.Damages
635. Generally
636. Measure
637.--"Out of pocket" rule
638.--Rescissory damages
639. Churning
640. Forced sales
641. Mergers and takeovers
642. Computation
643.--Time as factor
644. Actual damages
645. Consequential damages
646.--Lost profits
647. Punitive damages
648. Unjust enrichment
649. Disgorgement of profits, generally
650.--Policy considerations
651.--Amount not due to special efforts of buyer
652.--As punitive relief
653.--Broker's profits
655. Mitigation
656. Interest
657. Attorney's fees
658.--Lack of statutory authorization
659.--Bad faith or frivolous defense
660.--Rule of proportionality
661.--Lodestar and upward adjustments
662.----Paralegal time
X.OTHER REMEDIES UNDER 15 USCS § 78j(b)
A.Equitable Relief
664. Generally
665. Injunctions, generally
666. Prerequisites to injunctive relief
667.--Likelihood of recurrence
668.--Scienter
669.--Purchase or sale
670.--Causation
671. Preliminary injunction
672. Ancillary relief
673. Rescission
674.--Necessity of due diligence
675. Declaratory judgment
B.Criminal Prosecution
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676. Generally
C.SEC Sanctions
677. Generally
I.IN GENERAL
A.In General
1. Generally
There is no affirmative indication in Securities and Exchange Act of 1934 that § 10(b) (15 USCS § 78j(b)) of Exchange Act applies extraterritorially, and therefore it
does not. Morrison v Nat'l Austl. Bank Ltd. (2010, US) 130 S Ct 2869, 177 L Ed 2d 535, CCH Fed Secur L Rep P 95776, 22 FLW Fed S 575.
It is only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) (15 USCS § 78j(b)) of Securities and
Exchange Act of 1934 applies. Section 10(b) reaches use of manipulative or deceptive device or contrivance only in connection with purchase or sale of security listed
on American stock exchange, and purchase or sale of any other security in United States. Morrison v Nat'l Austl. Bank Ltd. (2010, US) 130 S Ct 2869, 177 L Ed 2d
535, CCH Fed Secur L Rep P 95776, 22 FLW Fed S 575.
Antifraud provisions of federal securities laws apply to many transactions which are neither within registration requirements nor on organized American markets.
Bersch v Drexel Firestone, Inc. (1975, CA2 NY) 519 F2d 974, CCH Fed Secur L Rep P 95080, 20 FR Serv 2d 340, cert den (1975) 423 US 1018, 46 L Ed 2d 389, 96 S
Ct 453.
Applicability of fraud provisions of SEC Rule 10b-5 is not limited to insiders; precedence established in civil cases interpreting SEC Rule 10b-5 are applicable in
criminal prosecutions under Rule. United States v Charnay (1976, CA9 Nev) 537 F2d 341, CCH Fed Secur L Rep P 95560, cert den (1976) 429 US 1000, 50 L Ed 2d
610, 97 S Ct 527, 97 S Ct 528.
Language of SEC Rule 10b-5 is broad enough to include fraud which relates not to particular securities transaction but to course of dealing in securities regardless of
their identity. Arthur Lipper Corp. v SEC (1976, CA2) 547 F2d 171, CCH Fed Secur L Rep P 95796, reh den (1976, CA2) 551 F2d 915, CCH Fed Secur L Rep P 96001
and cert den (1978) 434 US 1009, 54 L Ed 2d 752, 98 S Ct 719.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) applies to transactions in securities of closely held or family-owned corporations. Schine v Schine (1966,
SD NY) 250 F Supp 822.
Where transaction involves purchase of securities in addition to nonsecurities, purchase of nonsecurities are not covered by fraud provisions of § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)). Hirsch v Du Pont (1975, SD NY) 396 F Supp 1214, CCH Fed Secur L Rep P 95210, affd (1977, CA2 NY) 553 F2d 750, CCH Fed
Secur L Rep P 96011.
Section 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j) applies to transactions in municipal securities. In re Washington Public Power Supply System Sec.
Litigation (1985, WD Wash) 623 F Supp 1466, CCH Fed Secur L Rep P 92465.
Face-to-face agreement to transfer promissory notes as part of assets and liabilities from sole limited partner to limited partnership created to develop, finance and
sell condominium units is commercial transaction and neither promissory notes themselves nor agreement to and subsequent transfer of promissory notes involves
transaction in securities under 1934 Act. Roark v Belvedere, Ltd. (1985, SD Ohio) 633 F Supp 765, CCH Fed Secur L Rep P 92538.
2. Purpose
Purpose of SEC Rule 10b-6, prohibiting issuers of stock in process of distribution from market tampering by purchasing stock in market during distribution, is to
prevent stimulative trading by issuer in its own securities in order to create unnatural and unwarranted appearance of market activity. Piper v Chris-Craft Indus.
(1977) 430 US 1, 51 L Ed 2d 124, 97 S Ct 926, CCH Fed Secur L Rep P 95864, reh den (1977) 430 US 976, 52 L Ed 2d 371, 97 S Ct 1668 and reh den (1977) 430
US 976, 52 L Ed 2d 371, 97 S Ct 1668 and reh den (1977) 430 US 976, 52 L Ed 2d 371, 97 S Ct 1668 and (criticized in Lerro v Quaker Oats Co. (1996, CA7 Ill) 84
F3d 239, CCH Fed Secur L Rep P 99239, 34 FR Serv 3d 974).
Section 10(b)of Securities Exchange Act of 1934 (15 USCS § 78j(b) covers oral sales contracts as there is no convincing reason to interpret the Act (15 USCS §§ 78a
et seq.) to exclude oral contracts as a class, and any exception for oral sales of securities would significantly limit the Act's coverage, thereby undermining its basic
purpose. Wharf (Holdings) Ltd. v United Int'l Holdings, Inc. (2001) 532 US 588, 149 L Ed 2d 845, 121 S Ct 1776, 2001 CDOS 4046, 2001 Daily Journal DAR 4983,
CCH Fed Secur L Rep P 91425, 2001 Colo J C A R 2505, 44 UCCRS2d 569, 14 FLW Fed S 245.
Purpose of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, is to protect investors from fraud. Travis v Anthes Imperial, Ltd. (1973, CA8
Mo) 473 F2d 515, CCH Fed Secur L Rep P 93718.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is meant to bar deceptive devices and contrivances in purchase or sale of securities whether conducted
in organized markets or face to face. Spilker v Shayne Laboratories, Inc. (1975, CA9 Cal) 520 F2d 523, CCH Fed Secur L Rep P 95244.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) was intended to operate, after rule making by SEC, as broad prohibition against deceptive devices.
United States v Charnay (1976, CA9 Nev) 537 F2d 341, CCH Fed Secur L Rep P 95560, cert den (1976) 429 US 1000, 50 L Ed 2d 610, 97 S Ct 527, 97 S Ct 528.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 were not intended to bring within their ambit simple corporate mismanagement or
every imaginable breach of fiduciary duty in connection with securities transaction. St. Louis Union Trust Co. v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977, CA8
Mo) 562 F2d 1040, CCH Fed Secur L Rep P 96151, cert den (1978) 435 US 925, 55 L Ed 2d 519, 98 S Ct 1490.
§ 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 were promulgated to prevent fraudulent practices in securities trading and trading on
inside information, and were not intended to require, under normal circumstances, disclosure of individual's motives or subjective beliefs, or his deductions reached
from publicly available information. Alabama Farm Bureau Mut. Casualty Co. v American Fidelity Life Ins. Co. (1979, CA5 Fla) 606 F2d 602, CCH Fed Secur L Rep P
97192, reh den (1980, CA5 Fla) 610 F2d 818 and cert den (1980) 449 US 820, 66 L Ed 2d 22, 101 S Ct 77.
15 USCS § 78j(b) was not designed to regulate corporate mismanagement. Acito v IMCERA Group (1995, CA2 NY) 47 F3d 47, CCH Fed Secur L Rep P 98667, 31 FR
Serv 3d 581 (criticized in In re Sirrom Capital Corp. Secs. Litig. (1999, MD Tenn) 84 F Supp 2d 933).
Principal concern of 15 USCS § 78j(b) is protection of purchasers and sellers of securities. United States v Bryan (1995, CA4 W Va) 58 F3d 933, CCH Fed Secur L Rep
P 98787 (criticized in United States v Brumley (1996, CA5 Tex) 79 F3d 1430).
Purpose of SEC Rule 10a-1(a)(2), regulating prices at which short sales may be made, is to prevent speculation in falling market. United States v Mandel (1969, SD
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NY) 296 F Supp 1038.
SEC Rule 10b-5 was formulated for protection of sellers; SEC, in promulgating rule, was not trying to protect buyers, whom it regarded as already adequately
sheltered. Stewart v Bennett (1973, DC Mass) 359 F Supp 878, CCH Fed Secur L Rep P 94140.
General antifraud provisions of 15 USCS § 78j(b), and SEC Rule 10b-5 are designed to protect public from deceitful or misleading statements or omissions in
connection with purchase or sale of securities. SEC v M. A. Lundy Associates (1973, DC RI) 362 F Supp 226.
Purpose of Securities Exchange Act is protect innocent investor, not one who loses his innocence and then waits to see how his investment turns out before he
decides to invoke provisions of Act. Chelsea Associates v Rapanos (1974, ED Mich) 376 F Supp 929, affd (1975, CA6 Mich) 527 F2d 1266, CCH Fed Secur L Rep P
95374; Black v Riker-Maxson Corp. (1975, SD NY) 401 F Supp 693.
Congress did not intend § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) to be remedy for all investors injured by any fraudulent practices. Ingenito v Bermec
Corp. (1974, SD NY) 376 F Supp 1154, CCH Fed Secur L Rep P 94548.
Basic purpose of SEC Rule 10b-5 is to safeguard investors by policing devices inimical to climate of fair dealing. Fox v Prudent Resources Trust (1974, ED Pa) 382 F
Supp 81, CCH Fed Secur L Rep P 94826, 19 FR Serv 2d 447.
Principal objective of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is protection of American purchasers who are exposed to fraudulent
offers of sales of securities in interstate commerce. SEC v Kasser (1975, DC NJ) 391 F Supp 1167, CCH Fed Secur L Rep P 95062.
Federal Securities Laws were not created to recompense shareholders who claim merely that they have received inadequate consideration for shares they have
traded in merger, nor do securities laws address any injuries that can fairly be said to result from corporate mismanagement rather than from transactional fraud.
Dixon v Ladish Co. (1984, ED Wis) 597 F Supp 20, CCH Fed Secur L Rep P 91804, affd (1986, CA7 Wis) 792 F2d 614, CCH Fed Secur L Rep P 92764.
3.--Full disclosure
Fundamental purpose of Securities Exchange Act of 1934 (15 USCS §§ 78a et seq.), which was designed to protect investors against manipulation of stock prices, is
to implement philosophy of full disclosure, on theory that there cannot be honest markets without honest publicity. Basic Inc. v Levinson (1988) 485 US 224, 99 L Ed
2d 194, 108 S Ct 978, CCH Fed Secur L Rep P 93645, 24 Fed Rules Evid Serv 961, 10 FR Serv 3d 308.
One of primary purposes of antifraud provisions of Securities Exchange Act was to outlaw use of inside information by corporate officers and principal stockholders
for their own financial advantage to detriment of uninformed public securities holders. Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486.
By passage of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), Congress meant to prevent manipulation and control of prices at which securities are bought
and sold, fundamental purpose of statute being to substitute philosophy of full disclosure for philosophy of caveat emptor. Herpich v Wallace (1970, CA5 La) 430 F2d
792, CCH Fed Secur L Rep P 92714, 14 FR Serv 2d 833.
Major congressional policy behind securities laws in general, and antifraud provisions in particular, is protection of investors who rely on completeness and accuracy
of information made available to them. Chris-Craft Indus. v Piper Aircraft Corp. (1973, CA2 NY) 480 F2d 341, 25 ALR Fed 534, cert den (1973) 414 US 910, 38 L Ed
2d 148, 94 S Ct 231, 94 S Ct 232 and cert den (1973) 414 US 924, 38 L Ed 2d 158, 94 S Ct 234.
Underlying antifraud provisions of 15 USCS § 78j(b) is congressional judgment that full disclosure will help insure fair dealing in insider transactions. Arber v Essex
Wire Corp. (1974, CA6 Ohio) 490 F2d 414, CCH Fed Secur L Rep P 94357, 18 FR Serv 2d 847, cert den (1974) 419 US 830, 42 L Ed 2d 56, 95 S Ct 53.
Purpose of antifraud provisions of 15 USCS § 78j(b) and SEC Rule 10b-5 is to protect investing public and secure fair dealing in securities markets by promoting full
disclosure of inside information so that informed judgments can be made by all investors trading in such markets, and to prevent corporate insiders and their
"tippees" from taking unfair advantage of uninformed outsiders. Shapiro v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1974, CA2 NY) 495 F2d 228, CCH Fed Secur L
Rep P 94473.
Section 10(b) of Securities Exchange Act (15 USCS § 78j) and SEC Rule 10b-5 thereunder, were designed by Congress to protect purity of process of buying and
selling securities and to insure that investors will receive full disclosure of information they need if they are intelligently to make significant investment decisions. In
re Penn Cent. Sec. Litig. (1973, ED Pa) 357 F Supp 869, CCH Fed Secur L Rep P 93980.
Major congressional policy underlying antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) was protection of investors who rely on accuracy
and completeness of information made available to them in connection with purchase or sale of securities. Herzfeld v Laventhol, Krekstein, Horwath & Horwath
(1974, SD NY) 378 F Supp 112, CCH Fed Secur L Rep P 94574, affd in part and revd in part on other grounds (1976, CA2 NY) 540 F2d 27, CCH Fed Secur L Rep P
95660.
Intent of Congress in passing antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) was to provide equal access to material information;
provisions are intended to prevent inherent unfairness involved when party takes advantage of information intended to be available only for corporate purpose,
knowing that it is unavailable to those with whom he is dealing. Jackson v Oppenheim (1974, SD NY) 411 F Supp 659, CCH Fed Secur L Rep P 94894, affd in part
and revd in part on other grounds (1976, CA2) 533 F2d 826, CCH Fed Secur L Rep P 95497.
SEC Rule 10b-5 does not provide remedy for every claim of improper corporate conduct, but is designed in line with essential scheme of most federal securities
regulations to foster disclosure of material information to purchasers and sellers of securities in order to permit informed investment decision by investor, and
disclosure is mandated for this reason, not for its own sake in abstract. Kerrigan v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1978, SD NY) 450 F Supp 639, CCH
Fed Secur L Rep P 96446.
It is fundamental that securities laws do not penalize traders merely for failing or refusing to confess their "true" motives or characterize fairness of transaction.
Dixon v Ladish Co. (1984, ED Wis) 597 F Supp 20, CCH Fed Secur L Rep P 91804, affd (1986, CA7 Wis) 792 F2d 614, CCH Fed Secur L Rep P 92764.
Bank customers have standing to bring suit against bank and bank's vice-president under 15 USCS § 78j, where, at vice-president's suggestion, customers
authorized bank to transfer their savings into higher yield interest accounts or certificates of deposit, but vice-president invested their money in short-term notes of
fly-by-night oil company of which he was director, since customers' "lack of intention" to purchase securities is irrelevant to fact that bank's deceptive use of
customers' funds clearly contravenes Securities Act's fundamental purpose of full disclosure. Bachmeier v Bank of Ravenswood (1987, ND Ill) 663 F Supp 1207, CCH
4.--Protecting market integrity
Although § 10(b) of Securities Exchange Act (15 USC § 78j(b)), is not intended to regulate transactions which comprise no more than internal corporate
mismanagement, nevertheless § 10(b) is intended to bar use of deceptive devices and contrivances by stockholder with regard to purchase or sale of securities by
corporation; preservation of integrity of securities markets is included among purposes of § 10(b). Superintendent of Ins. v Bankers Life & Casualty Co. (1971) 404
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US 6, 30 L Ed 2d 128, 92 S Ct 165, CCH Fed Secur L Rep P 93262.
Overriding purpose of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 was to protect purity of securities market, and private claims for
relief thereunder are means to that end. Rochelle v Marine Midland Grace Trust Co. (1976, CA9 Cal) 535 F2d 523, CCH Fed Secur L Rep P 95562.
Section 10(b) of Securities Exchange Act (15 USCS § 78j) and SEC Rule 10b-5 thereunder, were designed by Congress to protect purity of process of buying and
selling securities and to insure that investors receive full disclosure of information they need if they are intelligently to make significant investment decisions. Re Penn
Cent. Secur. In re Penn Cent. Sec. Litig. (1973, ED Pa) 357 F Supp 869, CCH Fed Secur L Rep P 93980.
5. Constitutionality
Fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 are not unconstitutionally vague. United States v Persky (1975, CA2
NY) 520 F2d 283, CCH Fed Secur L Rep P 95209; United States v Mandel (1969, SD NY) 296 F Supp 1038.
Congress did not exceed its Commerce Clause authority when it enacted 15 USCS § 78j(b). United States v Kunzman (1997, CA10 Colo) 125 F3d 1363, 1997 Colo J
C A R 2137, cert den (1998) 523 US 1053, 140 L Ed 2d 523, 118 S Ct 1375.
Due process clause does not establish in securities fraud prosecutions same kind of scienter requirement that 15 USCS § 78j(b) and Rule 10b-5 contain. Mueller v
Sullivan (1998, CA7 Wis) 141 F3d 1232, CCH Blue Sky L Rep P 74161, CCH Blue Sky L Rep P 74161.
Investment newsletter editor was properly found to have violated 15 USCS § 78j(b) because his mass solicitation e-mails falsely touting insider information, which
induced investors to buy a report divulging the details of a proposed Russian uranium sale, was made in "connection with" a sale of securities, even though the
parties did not enjoy a trading relationship; the First Amendment' free speech protections did not apply because fraud was unprotected speech. United States SEC v
Pirate Investor LLC (2009, CA4 Md) 580 F3d 233.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) does not violate due process clause of Fifth Amendment since language used is not unreasonable,
arbitrary, or capricious in character. Speed v Transamerica Corp. (1951, DC Del) 99 F Supp 808.
Language of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and Rule 10b-5 are sufficient to apprise any person of ordinary intelligence that obtaining of
money from customers of securities dealer purportedly for purposes of investment followed by conversion of all or portion of funds to dealer's own use operates as
deceit upon customer in connection with purchase or sale of security so that it constitutes criminal act; thus, neither § 10(b) nor Rule 10b-5 are unconstitutionally
vague; § 10(b) contains adequate standards for governing SEC's rule-making powers which have been delegated to it, and fact that SEC has been given some power
to regulate criminal activity is not by itself sufficient to render securities laws unconstitutional. United States v Pray (1978, MD Pa) 452 F Supp 788, CCH Fed Secur L
Rep P 96463.
6. Construction
Section 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) must be read flexibly, not technically and restrictively. Superintendent of Ins. v Bankers Life &
Casualty Co. (1971) 404 US 6, 30 L Ed 2d 128, 92 S Ct 165, CCH Fed Secur L Rep P 93262; Santa Fe Industries, Inc. v Green (1977) 430 US 462, 51 L Ed 2d 480,
97 S Ct 1292, CCH Fed Secur L Rep P 95914.
Settling defendants in original suit based on implied private right of action under 15 USCS § 78j(b) and Rule 10b-5 have right, as matter of federal law, to seek
contribution from other parties who have joint responsibility for violation. Musick, Peeler & Garrett v Employers Ins. (1993) 508 US 286, 124 L Ed 2d 194, 113 S Ct
2085, 93 CDOS 3923, CCH Fed Secur L Rep P 97456, 7 FLW Fed S 343, request gr, motion to strike den, claim dismissed (1994, SD Cal) 871 F Supp 381, amd, on
reconsideration, in part, reconsideration den, in part, claim dismissed (1995, SD Cal) 948 F Supp 942, CCH Fed Secur L Rep P 99464 and (criticized in In re Rent-Way
Secs. Litig. (2002, WD Pa) 209 F Supp 2d 493, CCH Fed Secur L Rep P 91946).
Operative terms of SEC Rule 10b-5--"fraud", "deceit", "purchase", "sale", and "security", as well as phrase "in connection with"--are infused with special meaning;
their construction must be broad and flexible so that remedial purposes of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and Rule will be effectuated. Dupuy
v Dupuy (1975, CA5 La) 511 F2d 641, CCH Fed Secur L Rep P 95079.
SEC Rule 10b-5 must be interpreted flexibly so as to prevent fraud; in applying rule, there is no room for doctrine of caveat emptor. Resort Car Rental System, Inc. v
Chuck Ruwart Chevrolet, Inc. (1975, CA10 Colo) 519 F2d 317.
Requirement that fraudulent act use instrumentality of interstate commerce in order to be violative of § 10 of Securities Exchange Act (15 USCS § 78j) and SEC Rule
10b-5 should not be construed in narrow and highly technical fashion so as to narrowly circumscribe scope of its operations. Spilker v Shayne Laboratories, Inc.
(1975, CA9 Cal) 520 F2d 523, CCH Fed Secur L Rep P 95244.
Section 10(b) of Securities Exchange Act, 15 USCS § 78j, and SEC Rule 10b-5 thereunder, must be read flexibly, not technically and restrictively, and this is
especially true with respect to requirement that to have standing under section plaintiff must have purchased or sold securities. In re Penn Cent. Sec. Litig. (1973,
ED Pa) 357 F Supp 869, CCH Fed Secur L Rep P 93980.
Requirement of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) that conduct, to be violative of section, must be in connection with purchase or sale of
security must be construed liberally to further purpose of Act. Allen Organ Co. v North American Rockwell Corp. (1973, ED Pa) 363 F Supp 1117, CCH Fed Secur L
Rep P 94156, 1973-2 CCH Trade Cases P 74713, 17 FR Serv 2d 1114.
Spirit of disclosure as required by antifraud provisions of 15 USCS § 78j(b) and SEC Rule 10b-5, is flexible, and sections are remedial in nature, prophylactic in
scope, and should be liberally construed to encompass devices that are alien to climate of fair dealing and full and adequate disclosure. Cant v A. G. Becker & Co.
(1974, ND Ill) 374 F Supp 36, CCH Fed Secur L Rep P 94747.
Impersonal business methods employed in securities investment industry result in actions for securities fraud which do not fit neatly into categories of
misrepresentation or nondisclosure; in such cases there are usually numerous misrepresentations and omissions to investors generally, and there is little actual face
to face fraud; when confronted with such occurrence in action alleging violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), court
should not construe remedies provided by Act technically and restrictively, but flexibly to effectuate remedial purpose of Act of achieving high standard of integrity in
securities industry. Sargent v Genesco, Inc. (1977, MD Fla) 75 FRD 79, CCH Fed Secur L Rep P 96119, 25 FR Serv 2d 956.
Loan participation agreement between banks is commercial transaction rather than investment and, therefore, is not subject to regulation by federal securities laws
in fraud action where (1) transaction was negotiated one-on-one between parties rather than publicly offered and was subject to federal banking regulations, (2)
investor was not unsophisticated, (3) loan was collateralized, (4) transaction only lasted 6 months, and (5) atmosphere in which loan participation was made, despite
involving investment hysteria in oil and gas exploration, does not change commercial nature of transaction. Citizens State Bank v Federal Deposit Ins. Corp. (1986,
WD Okla) 639 F Supp 758, CCH Fed Secur L Rep P 92891.
15 USCS § 78j does not apply to "pigeon drop" game in which victims are persuaded to withdraw money from their bank accounts and give it to confidence man who
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purportedly would invest in securities for victim, because no actual securities existed and no genuine transactions in securities occurred or were contemplated. United
States v Jones (1986, SD NY) 648 F Supp 225, affd in part and revd in part, vacated, in part, remanded sub nom United States v Blackmon (1988, CA2 NY) 839 F2d
900, 24 Fed Rules Evid Serv 1123.
Defendants are granted summary judgment on plaintiff's allegations that sale of "art master" to plaintiff's decedent violated 15 USCS §§ 77q and 78j(b) where sale
of "art master" was not "security," because decedent could have marketed "art master" himself but chose not to do so. Faircloth v Jackie Fine Arts, Inc. (1988, DC
SC) 682 F Supp 837, CCH Fed Secur L Rep P 93781, affd in part and revd in part (1991, CA4 SC) 938 F2d 513.
Defendants are granted summary judgment in securities fraud action under 17 C.F.R. § 240.10b-5, 15 USCS §§ 77l , 77j in defendants management of discretionary
commodity futures trading accounts even though defendants' newsletter mentioned term "units" and made statement that "all accounts do the same thing," where
(1) reference to "units" refers to minimum investment figure rather than limited number of units that form whole, and (2) statement that "all accounts do the same
thing" does not give rise to inference of pooling or contractual tying to support plaintiffs' assertion that discretionary commodities accounts were "securities."
Poindexter v Merrill Lynch, Pierce, Fenner & Smith (1988, ED Mich) 684 F Supp 478, CCH Fed Secur L Rep P 93902.
Presence of Treasury Bills in discretionary commodities account does not constitute securities transaction bringing broker's commodity program within purview of
securities laws where incidental trading of Treasury Bills to finance discretionary account does not convert account into "security." Poindexter v Merrill Lynch, Pierce,
Fenner & Smith (1988, ED Mich) 684 F Supp 478, CCH Fed Secur L Rep P 93902.
Mortgage note issued to secure financing of purchase of business was not security, as note was not offered to any other party, there was no common trading, and
note was not exchanged for investment purposes. Eagle Trim, Inc. v Eagle-Picher Indus. (2002, ED Mich) 205 F Supp 2d 746.
While participants in strategic partnership claimed that all private actions under Securities Exchange Act of 1934 § 10(b), 15 USCS § 78j, and its implementing
regulation, S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, were foreclosed against persons whose actions in scheme to defraud did not directly impact securities market,
court concluded that § 10(b) and Rule 10b-5 imposed primary liability on any person who substantially participated in manipulative or deceptive scheme by directly
or indirectly employing manipulative or deceptive device, such as creation or financing of sham entity, intended to mislead investors, even if material misstatement
by another person created nexus between scheme and securities market. Filler v Lernout (In re Lernout & Hauspie Sec. Litig) (2003, DC Mass) 236 F Supp 2d 161.
Trustee's § 10(b) claim under Securities Exchange Act failed since trading in commodity options was not subject to private action under securities laws. Lesavoy v
Lane (2004, SD NY) 304 F Supp 2d 520.
Section 10(b) (15 USCS § 78j(b)) of Securities Act should be construed, not technically and restrictively, but flexibly to effectuate its remedial purposes. SEC v C.
Jones & Co. (2004, DC Colo) 312 F Supp 2d 1375.
Liability of drug marketer and two corporate officers under 15 USCS § 78j(b) was based solely on statements directly attributable to them, rather than statements
attributable to group, as group pleading doctrine permitted inference of wrongdoing not based on their conduct, but based solely on their status, which contravened
Private Securities Litigation Reform Act's pleading requirements. In re Immune Response Secs. Litig. (2005, SD Cal) 375 F Supp 2d 983.
Civil actions such as those brought under § 10(b), 15 USCS § 78j, did not give rise to substantial risk of forfeiture under 26 USCS § 83 and could not be considered
as grounds for consideration of appropriate valuation date under § 83. Gudmundsson v United States (2009, WD NY) 665 F Supp 2d 227, 2009-2 USTC P 50722, 104
AFTR 2d 7093.
7. Applicability to exempt securities
Antifraud provisions of SEC Rule 10b-5 are applicable to fraudulent sales of securities even though such securities may fall within intrastate exemption of 15 USCS §
77c(a)(11). Nor-Tex Agencies, Inc. v Jones (1973, CA5 Tex) 482 F2d 1093, CCH Fed Secur L Rep P 94086, 17 FR Serv 2d 970, 46 OGR 484, cert den (1974) 415 US
977, 39 L Ed 2d 873, 94 S Ct 1563.
Complaint under 15 USCS § 78u-4(b)(2) alleging with particularity that defendant acted with severely reckless state of mind suffices to state claim for civil liability
under 15 USCS § 78j(b) and Rule 10b-5. Bryant v Avado Brands, Inc. (1999, CA11 Ga) 187 F3d 1271, CCH Blue Sky L Rep P 90636, 45 FR Serv 3d 420, 12 FLW Fed
C 1245 (criticized in Branca v Paymentech, Inc. (2000, ND Tex) 1920 CCH Fed Secur L Rep P 90911) and (criticized in In re Eng'g Animation Sec. Litig. (2000, SD
Iowa) 110 F Supp 2d 1183, CCH Fed Secur L Rep P 90945) and (criticized in Coates v Heartland Wireless Communs., Inc (2000, ND Tex) 100 F Supp 2d 417, CCH
Fed Secur L Rep P 91015) and on remand, complaint dismd, motion to strike den (2000, MD Ga) 100 F Supp 2d 1368, CCH Fed Secur L Rep P 91014, revd,
remanded (2001, CA11 Ga) 252 F3d 1161, CCH Fed Secur L Rep P 91440, 49 FR Serv 3d 1113, 14 FLW Fed C 707 and (criticized in In re CDNOW, Inc. Sec. Litig.
(2001, ED Pa) 138 F Supp 2d 624, CCH Fed Secur L Rep P 91463) and (criticized in In re Party City Secs. Litig. (2001, DC NJ) 147 F Supp 2d 282, CCH Fed Secur L
Rep P 91487) and (criticized in Helwig v Vencor, Inc. (2001, CA6 Ky) 251 F3d 540, CCH Fed Secur L Rep P 91445, 2001 FED App 179P) and (criticized in City of
Philadelphia v Fleming Cos. (2001, CA10 Okla) 264 F3d 1245, CCH Fed Secur L Rep P 91525, 2001 Colo J C A R 4635) and (criticized in Kundrat v Chicago Bd.
Options Exch., Inc. (2002, ND Ill) CCH Fed Secur L Rep P 92217, 2002-2 CCH Trade Cases P 73888) and (criticized in Ottmann v Hanger Orthopedic Group, Inc.
(2003, CA4 Md) 353 F3d 338, CCH Fed Secur L Rep P 92645).
Fact that short term notes of railroad were exempt from registration requirements of Securities Act pursuant to § 3(a)(6) of that Act (15 USCS § 77c(a)(6)), did not
immunize transactions in those securities from operation of antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Welch
Foods, Inc. v Goldman, Sachs & Co. (1974, SD NY) 398 F Supp 1393, CCH Fed Secur L Rep P 94806.
Exemption of Government National Mortgage Association certificates and municipal bonds from requirements of Securities Act (15 USCS §§ 77a et seq.), provided by
§ 3(a)(2) of that Act (15 USCS § 77c(a)(2)), does not extend to anti-fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); exemption
provisions in one Act refer to securities exempted under that Act and not those exempted under other Act. Davidson v Dean Witter Reynolds, Inc. (1979, DC Colo)
478 F Supp 494, CCH Fed Secur L Rep P 97215.
Transactions in government securities are subject to antifraud provisions of § 78j and Rule 10b-5. In re Lake Securities, Inc., et al. (1992) 51 SEC 19.
B.Relation to Other Laws
1.Other Securities and Exchange Act Provisions

8. 15 USCS § 78i
Trial court erred in permitting judgment for plaintiff under SEC Rule 10b-5 in action addressing activities prohibited under 15 USCS § 78i, involving alleged
misrepresentation or nondisclosure of fraudulent stock scheme and manipulation of stock prices, thus nullifying express remedy provided by § 78i, contrary to
Congressional intent, since stricter limitations of express statutory remedy controlled over requirements of implied remedy under Rule 10b-5. Chemetron Corp. v
Business Funds (1982, CA5 Tex) 682 F2d 1149, CCH Fed Secur L Rep P 98777, 11 Fed Rules Evid Serv 781, reh den (1982, CA5 Tex) 689 F2d 190 and vacated on
other grounds, remanded (1983) 460 US 1007, 75 L Ed 2d 476, 103 S Ct 1245 and cert den (1983) 460 US 1013, 75 L Ed 2d 483, 103 S Ct 1254.
Statute of limitations applicable to Rule 10b-5 action for contribution is one-year/three-year period provided in 15 USCS §§ 78i(e) and 78r(c); cause of action
accrues when defendant has satisfied judgment against it. Asdar Group v Pillsbury, Madison & Sutro (1996, CA9 Cal) 99 F3d 289, 96 CDOS 7680, 96 Daily Journal
DAR 12657, CCH Fed Secur L Rep P 99333, 146 ALR Fed 811.
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Statute of limitations applicable to Rule 10b-5 action for contribution is one-year/three-year period provided in 15 USCS §§ 78i(e) and 78r(c); cause of action
accrues when defendant has satisfied judgment against it. Asdar Group v Pillsbury, Madison & Sutro (1996, CA9 Cal) 99 F3d 289, 96 CDOS 7680, 96 Daily Journal
DAR 12657, CCH Fed Secur L Rep P 99333, 146 ALR Fed 811.
Because U.S. Supreme Court abolished private civil liability for aiding and abetting under § 10(b) of Securities Exchange Act of 1934, investors who sought to bring
federal securities fraud claims against clearing agency as secondary wrongdoer were required to exercise reasonable diligence in discovering facts establishing
agency's knowing participation in brokerage firm's market manipulation scheme before filing suit. Levitt v Bear Stearns & Co. (2003, CA2 NY) 340 F3d 94.
Implied right of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and Rule 10b-5 is not restricted to those claims that could not be brought under
one of express remedies contained in federal securities laws, so that where private civil action expressly authorized by § 9(e) of Act (15 USCS § 78i(e)) would afford
plaintiffs civil remedy for wrongs alleged, plaintiffs were not required to restrict their relief to that offered by § 9(e). Wolgin v Magic Marker Corp. (1979, ED Pa) 82
FRD 168, CCH Fed Secur L Rep P 96830, 27 FR Serv 2d 351.
Although price manipulation provisions of § 9(a) of Securities Exchange Act (15 USCS § 78i(a)) apply only to securities registered on national securities exchanges,
manipulation of prices of over-the-counter market is proscribed by § 10(b) of Securities Act (15 USCS § 78j(b)) and SEC Rule 10b-5. In re Edward J. Mawod & Co.
(1977) 46 SEC 865.
Manipulative activities expressly prohibited by 15 USCS § 78i(a)(1) and (2) with respect to listed security constitute violations of 15 USCS § 78j(b) and Rule 10b-5
when such activities involve trading in over-the-counter market. In re Sharon M. Graham, et al. (1995) 1995 SEC LEXIS 3457.
Manipulative activities expressly prohibited by 15 USCS § 78i(a)(1) and (2) with respect to listed security constitute violations of 15 USCS § 78j(b) and Rule 10b-5
when such activities involve trading in over-the-counter market. Re Richard D. Chema (1995) 1995 SEC LEXIS 2184; Re Adrian C. Havill (1995) 1995 SEC LEXIS
2255; Re Richard M. Kulak (1995) 1995 SEC LEXIS 2481; Re Carole L. Haynes (1995) 1995 SEC LEXIS 3134.
Manipulative activities of type prohibited by 15 USCS § 78i(a)(2) are also violations of 15 USCS §§ 77q(a), 78j(b) and 78o(c); accordingly, §§ 77q(a), 78j(b) and
78o(c) are deemed to prohibit manipulative activities with respect to over-the-counter securities. In re F.N. Wolf & Co., Inc., et al. (1996) 1996 SEC LEXIS 8.
9. 15 USCS § 78m
Individual's convictions under 15 USCS § 78j(b) estopped him from challenging his civil liability under 15 USCS § 78m(d), despite his contention that jury in criminal
case did not necessarily find that his misrepresentations were material, since individual appealed his criminal convictions on ground that his misrepresentations and
omissions were not material, and appellate court rejected his argument, explaining that after hearing evidence, jury had concluded that misstatements and
omissions were material. SEC v Bilzerian (1994, App DC) 308 US App DC 43, 29 F3d 689, CCH Fed Secur L Rep P 98325, cert den (1995) 514 US 1011, 131 L Ed 2d
210, 115 S Ct 1350.
Stockholder states claim under 15 USCS § 78j(b) against corporation and investment group, where stockholder alleges group filed false and misleading 15 USCS §
78m(d) statement and amendments, and that corporation and group failed to disclose ongoing discussions concerning stock buy-back plan which enabled group to
sell stock back to corporation at artificially inflated price, because complaint adequately pleads material omission, scienter, reliance and loss causation. Seagoing
Uniform Corp. v Texaco, Inc. (1989, SD NY) 705 F Supp 918, CCH Fed Secur L Rep P 94306.
10. 15 USCS § 78n
Existence or nonexistence of regulation of proxy solicitations under § 14 of Securities Exchange Act (15 USCS § 78n) does not affect scope of § 10(b) of Act (15 USC
§ 78j(b)) and Rule 10b-5; SEC § 10(b) applies to all proscribed conduct in connection with purchase or sale of any security, and § 14 applies to all proxy solicitations,
whether or not in connection with purchase or sale. SEC v National Sec., Inc. (1969) 393 US 453, 21 L Ed 2d 668, 89 S Ct 564, CCH Fed Secur L Rep P 92334.
Enactment of § 14(e) of Securities Exchange Act § 14(e), (15 USCS § 78n(e)), prohibiting use of misstatements or omissions in tender offers, may be interpreted as
recognition of inadequacy of other provisions of securities laws, especially § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 thereunder, to
provide comprehensive and sure remedy in cases involving misstatements or omissions in tender offers, at least for those who are not purchasers or sellers of
securities. H. K. Porter Co. v Nicholson File Co. (1973, CA1) 482 F2d 421, CCH Fed Secur L Rep P 94083.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 and § 14(a) and (e) of Act (15 USCS § 78n(a) and (e)) are aimed at same general
evils in field of corporate ownership, management, and finance, are in pari materia, and should be similarly construed; provisions tend to overlap because fraudulent,
manipulative, or deceptive devices that may be used in connection with purchase or sale of securities in violation of Rule 10b-5 may be deceptive, inaccurate, or
insufficient proxy statements prohibited by Rule 14a-9; decision which is rendered in context of Rule 10b-5 suit may well be applicable in case involving § 14(a) in
Rule 14a-9. Golub v PPD Corp. (1978, CA8 Mo) 576 F2d 759, CCH Fed Secur L Rep P 96450.
Plaintiff could not bring action under 15 USCS §§ 78j(b) and 78n(e) and SEC Rule 10b-5 on grounds that 2 railroads had designed and executed scheme to allow 1
railroad to acquire other at dishonestly low price where ICC had approved merger of railroads as required by 49 USCS § 11341(a), since § 11341(a) exempted
transaction from attack under all other laws, including federal securities laws, once merger had been approved by ICC, and in this case tender offer which was basis
of suit was part of merger agreement approved by ICC. Deutsch v Flannery (1989, CA9 Cal) 883 F2d 60, CCH Fed Secur L Rep P 94552, cert den (1990) 498 US 818,
112 L Ed 2d 37, 111 S Ct 62.
One-year/three-year uniform limitations period for actions brought under 15 USCS § 78j(b) applies to cause of action under 15 USCS § 78n(a). Westinghouse Elec.
Corp. v Franklin (1993, CA3 NJ) 993 F2d 349, CCH Fed Secur L Rep P 97455.
Individual's convictions under 15 USCS § 78j(b) estopped him from challenging his civil liability under 15 USCS § 78n(d) and (e), despite his contention that jury in
criminal case did not necessarily find that his misrepresentations were material, since individual appealed his criminal convictions on ground that his
misrepresentations and omissions were not material, and appellate court rejected his argument, explaining that after hearing evidence, jury had concluded that
misstatements and omissions were material. SEC v Bilzerian (1994, App DC) 308 US App DC 43, 29 F3d 689, CCH Fed Secur L Rep P 98325, cert den (1995) 514 US
1011, 131 L Ed 2d 210, 115 S Ct 1350.
Carrier company has standing to raise claims regarding illegal tender offers for its stock under 15 USCS § 78n and possibly under 15 USCS § 78j, where investment
group almost certainly violated § 78n(d) and (e) disclosure provisions by making public announcement of offer to purchase company's stock which identified bidder,
target, amount and class of securities sought and for what price without making appropriate SEC filings, because it is clear that shareholders will benefit by obtaining
necessary information that should have been made public and there is no evidence that company is suing for injunction solely to prevent legitimate takeover attempt
by group. American Carriers, Inc. v Baytree Investors, Inc. (1988, DC Kan) 685 F Supp 800, CCH Fed Secur L Rep P 94154.
Where shareholder alleged that proxy statement issued in connection with merger contained numerous material misrepresentations and omissions, dismissal was not
warranted as to several allegations, because, inter alia, pleading requirements were satisfied and some of proxy's alleged misrepresentations or omissions were
materially false or misleading. Lane v Page (2008, DC NM) 581 F Supp 2d 1094.
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11. 15 USCS § 78o
Amended complaint states aiding and abetting securities fraud claims against brokerage house managers under 15 USCS § 78j(b), even though aider and abettor
liability is not statutory private action under 15 USCS § 78o(b)(4)(E), because plaintiffs properly allege primary securities law violations committed by broker--
defendants substantially assisted in violations. Snyder v Newhard, Cook & Co. (1991, DC Colo) 764 F Supp 612, CCH Fed Secur L Rep P 96047.
Criminal conviction, whether by jury verdict or guilty plea, constitutes estoppel in favor of United States in subsequent civil or administrative proceeding as to those
matters determined by judgment in criminal case; thus, individual, who pled guilty to conspiracy to commit securities fraud in violation of 18 USCS § 371, securities
fraud in violation of 15 USCS § 78j(b) and Rule 10b-5, and structuring financial transactions to avoid reporting requirements in violation of 18 USCS § 2 and 31 USCS
§§ 5322 and 5324(3), was collaterally estopped from refuting, in SEC proceedings instituted pursuant to 15 USCS §§ 78o(b) and 78s(h), validity of his criminal
conviction based upon his guilty plea in other proceedings. In re Victor H. Strevel (1995) 1995 SEC LEXIS 3030.
12. SEC Rule 10b-5
Liability under Securities and Exchange Commission Rule 10b-5, 17 CFR § 240.10b-5, does not extend beyond conduct encompassed by prohibition of § 78j(b).
United States v O'Hagan (1997) 521 US 642, 138 L Ed 2d 724, 117 S Ct 2199, 97 CDOS 4931, 97 Daily Journal DAR 7991, CCH Fed Secur L Rep P 99482, 1997 Colo
J C A R 1354, 11 FLW Fed S 154, on remand, remanded (1998, CA8 Minn) 139 F3d 641, CCH Fed Secur L Rep P 90178.
Central Bank requires plaintiff to allege that each and every defendant committed its own independent primary violation of securities laws in order to state claim,
while 17 CFR § 240.10b-5 makes it unlawful for any person to employ any scheme to defraud in connection with any security; where there are many participants in
"scheme," there may be primary violators and secondary violators; those who actually "employ" scheme to defraud investors are primary violators, while those who
merely participate in or facilitate scheme are secondary violators. In re Homestore.com, Inc. Sec. Litig. (2003, CD Cal) 252 F Supp 2d 1018.
Scope of SEC Rule 10b-5 is coextensive with coverage of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b); liability under Rule 10b-5 does not extend
beyond conduct encompassed under § 78j(b). United States v Knueppel (2003, ED NY) 293 F Supp 2d 199.
Violation of Rule 10b-5(a), (c) (17 C.F.R. § 240.10b-5(a), (c)), was stated against Italian law firm because complaint sufficiently alleged that firm and one of its
partners were primary violators of § 10(b) (15 USCS § 78j); there were allegations that firm and partner used or employed transactions that were inventions,
projects, or schemes with tendency to deceive because they created appearance of conventional sale and loan when reality was quite different, and that creation and
use of shell entities was evidence of conscious misbehavior; moreover, requirements of causation and of connection to purchase and sale of securities were satisfied
for purposes of relevant allegations against partner. In re Parmalat Sec. Litig. (2005, SD NY) 383 F Supp 2d 616.
In securities fraud suit brought by Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), New York State mercantile, and
bank against trader, his supervisor, and certain third-party brokerages (defendants), court denied respective motions to dismiss filed by defendants because
complaint sufficiently set forth allegations that defendants engaged in fraudulent scheme to overvalue oil and natural gas derivative options at bank, resulting in
extensive losses to meet heightened pleading requirements of Fed. R. Civ. P. 9, 15 USCS § 78u-4(b)(1), and other statutes, including bank's claims under State of
New York law; bank's complaint detailed 61 e-mail and instant message communications between October 21, 2003, and September 28, 2006, that involved trader
sending pipeline volatility reports and price quotations that were inflated by millions of dollars to third party brokerages designed to circumvent bank's fraud
prevention mechanisms; complaints presented sufficient factual allegations that aiding and abetting fraud and breach of fiduciary duties occurred by showing that
quotes provided were not, under any reasonable definition of such terms, as independent or derived from market, as what parties bargained for; SEC's complaint
sufficiently set forth allegations that defendants colluded to deceive bank's market risk division into believing that quotes originating with trader and u-turned by one
of third party brokerages were independent quotes; and CFTC sufficiently set forth allegations of fraud based on scheme to satisfy heightened pleading requirements
necessary for such claims. SEC v Lee (2010, SD NY) 720 F Supp 2d 305.
13. Miscellaneous
Aider and abettor of criminal violation of any provision of Securities Exchange Act of 1934 (15 USCS §§ 78a et seq.) violates 18 USCS § 2. Central Bank, N.A. v First
Interstate Bank, N.A. (1994) 511 US 164, 128 L Ed 2d 119, 114 S Ct 1439, 94 CDOS 2687, 94 Daily Journal DAR 5160, CCH Fed Secur L Rep P 98178, 8 FLW Fed S
33, on remand, remanded sub nom First Interstate Bank v DBLKM, Inc. (1994, CA10 Colo) 1994 US App LEXIS 16507 and (superseded by statute as stated in United
States SEC v Fehn (1996, CA9 Nev) 97 F3d 1276, 96 CDOS 7516, 96 Daily Journal DAR 12375, CCH Fed Secur L Rep P 99330) and (superseded by statute as stated
in United States v Irwin (1998, CA7 Ill) 149 F3d 565) and (superseded by statute as stated in Trustees of Boston Univ. v ASM Communs., Inc. (1998, DC Mass) 33 F
Supp 2d 66, RICO Bus Disp Guide (CCH) P 9642) and (criticized in Grubaugh v DeCosta (1999, Ariz App) 1999 Ariz App LEXIS 35) and (superseded by statute as
stated in Scachitti v Prudential Sec., Inc. (1999, ND Ill) 1999 US Dist LEXIS 19391).
Plaintiffs could rely on implied right of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) even as to conduct for which they may have had express
private cause of action under § 18 of Securities Exchange Act (15 USCS § 78r). Ross v A. H. Robins Co. (1979, CA2 NY) 607 F2d 545, CCH Fed Secur L Rep P 97115,
28 FR Serv 2d 25, cert den (1980) 446 US 946, 64 L Ed 2d 802, 100 S Ct 2175, reh den (1980) 448 US 911, 65 L Ed 2d 1140, 100 S Ct 3057.
Application of 15 USCS § 78j(b) to bank directors does not burden them with duties or responsibilities which conflict with directives of Bank Act (12 USCS § 93).
Harmsen v Smith (1982, CA9 Cal) 693 F2d 932, CCH Fed Secur L Rep P 99010, cert den (1983) 464 US 822, 78 L Ed 2d 97, 104 S Ct 89 and (criticized in
Washington Mutual Bank v Superior Court (2001) 24 Cal 4th 906, 103 Cal Rptr 2d 320, 15 P3d 1071, 2001 CDOS 712, 2001 Daily Journal DAR 925).
In enacting provisions of National Housing Act allowing mutual savings banks owned by depositors to convert from mutual to stock form of organization (12 USCS §§
1725(j) and 1730a(k)), Congress, while providing for review in United States Court of Appeals of final action of Federal Home Loan Bank Board or Corporation
concerning such conversion, did not deprive United States District Court of jurisdiction to hear complaint alleging violations of §§ 12(2) and 17(a) of Securities Act of
1933 (15 USCS §§ 77l(2) and 77q(a)), violations of § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)), and violations of state securities laws,
common-law fraud, and negligence. Rembold v Pacific First Federal Sav. Bank (1986, CA9 Or) 798 F2d 1307, CCH Fed Secur L Rep P 92903, cert den (1987) 482 US
905, 96 L Ed 2d 373, 107 S Ct 2480.
Action regarding T-bond futures traded on "board of trade" raised no claim under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) or SEC Rule 10b-5
promulgated thereunder, since to allow such action would defeat fundamental congressional design in revamping Commodity Exchange Act and granting exclusive
jurisdiction to new Commodities Futures Trading Commission, that is, to avoid duplicative or contradictory regulatory structure. Messer v E.F. Hutton & Co. (1988,
CA11 Fla) 847 F2d 673, CCH Fed Secur L Rep P 93813.
United Kingdom's Theft Act of 1968 was analogous, in pertinent part, to SEC Rule 10b-5, making it unlawful to use fraud or deceit in sales of securities, so as to
satisfy "dual criminality" doctrine, which provides that person shall not be extradited unless offense with which he is charged is punishable as serious crime in both
requesting and requested states. Peters v Egnor (1989, CA10 Colo) 888 F2d 713.
Regardless of whether "D'Oench doctrine" should be expanded to preserve all assets of failed savings institution, whether actually possessed or receivable, acquired
by federal insurer or its successor in interest, from all claims tending to diminish those assets, save those claims clearly supported by records of insolvent bank,
purchasers of stock of now failed S & L would not be permitted to sue newly created association to which FSLIC, as receiver for failed S & L, had transferred some of
assets and liabilities of failed association, for alleged violations of Securities and Exchange Act, RICO, or state statutes. Vernon v Resolution Trust Corp. (1990, CA11
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Fla) 907 F2d 1101.
In enacting FIRREA, Congress did not impliedly amend Securities Exchange Act so as to subordinate latter to former; thus, FIRREA is not violated by permitting
stockholder of bank (currently under RTC's receivership) to recover on direct fraud claim under 15 USCS § 78j(b) against bank's officers and directors. Hayes v Gross
(1992, CA3 Pa) 982 F2d 104, CCH Fed Secur L Rep P 97384.
15 USCS § 78j(b) does not provide independent jurisdictional basis for petition to vacate arbitration award filed under Federal Arbitration Act (9 USCS § 10). Garrett
v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1993, CA9 Cal) 7 F3d 882, 93 CDOS 7725, 93 Daily Journal DAR 13181, 8 BNA IER Cas 1645.
Violation of stock exchange or NASD (National Association of Securities Dealers) rule will not support private claim; further, violation of exchange rules governing
disclosure may not be imported as surrogate for straight materiality analysis under 15 USCS § 78j(b) and Rule 10b-5. Halkin v VeriFone Inc. (In re VeriFone Sec.
Litig.) (1993, CA9 Cal) 11 F3d 865, 93 CDOS 8485, 93 Daily Journal DAR 14496, CCH Fed Secur L Rep P 97820.
Individual's previous criminal conviction for securities fraud, combined with civil judgment in favor of SEC requiring individual to disgorge fraudulently obtained
profits, satisfies requirements for application of 11 USCS § 523(a)(2)(A), which excepts from discharge in bankruptcy debts for money obtained by fraud; thus,
collateral estoppel bars such individual from challenging action by SEC to except disgorgement award from discharge in individual's bankruptcy proceeding. SEC v
Bilzerian (In re Bilzerian) (1998, CA11 Fla) 153 F3d 1278, 33 BCD 226, 40 CBC2d 1312, CCH Bankr L Rptr P 77842, CCH Fed Secur L Rep P 90308, 12 FLW Fed C 58,
reh, en banc, den (1998, CA11 Fla) 166 F3d 355 and subsequent app (2000, CA11 Fla) 208 F3d 1011, reh, en banc, den (2000, CA11) 213 F3d 650.
Although maintaining private right of action under 15 USCS § 78j(b) requires plaintiff to prove reliance and damages, 15 USCS § 78cc(b) only requires violation of 15
USCS § 78j(b), not maintenance of private suit thereunder; thus, individual violates 15 USCS § 78j(b), and therefore triggers 15 USCS § 78cc(b), when he employs
manipulative or deceptive devices in connection with purchase or sale of securities. GFL Advantage Fund, Ltd. v Colkitt (2001, CA3 Pa) 272 F3d 189, CCH Fed Secur L
Rep P 91634, cert den (2002) 536 US 923, 153 L Ed 2d 778, 122 S Ct 2588.
Investor could not avoid federal preemption under Securities Litigation Uniform Standards Act (SLUSA) by claiming that, because his claims related solely to
retention of securities, as opposed to purchase or sale, claims were not cognizable under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and SEC
Rule 10b-5, 17 CFR § 240.10b-5, and thus were not preempted by SLUSA; it would have been more than little strange if Supreme Court's decision in Blue Chip
Stamps to block private litigation by non-traders became opening by which that very litigation could be pursued under state law, despite judgment of Congress
(reflected in SLUSA) that securities class actions were required to proceed under federal securities law or not at all. Disher v Citigroup Global Mkts., Inc. (2005, CA7
Ill) 419 F3d 649, CCH Fed Secur L Rep P 93335.
Court denied motion for rehearing of its decision affirming dismissal of claims asserted against two individuals under § 10(b) of Securities Exchange Act of 1934, 15
USCS § 78j(b) and SEC Rule 10b-5 (17 CFR § 240.10b-5) and simultaneously vacating dismissal of "controlling persons" claims against individuals under § 20(a) of
Act, 15 USCS § 78t(a); dismissed Rule 10b-5 claims were not predicates for § 20(a) claims; § 20(a) claims were based on alleged fraud by corporation, so 15 USCS
§ 78u-4(b)(2) did not require appellants to plead facts showing strong inference of scienter on part of individuals. Brody v Stone & Webster, Inc. (In re Stone &
Webster, Inc., Sec. Litig.) (2005, CA1 Mass) 424 F3d 24, CCH Fed Secur L Rep P 93351.
Where defendants were convicted under 15 USCS §§ 78j(b) and 78ff(a) for committing securities fraud by failing to disclose commissions they received for selling
investment interests in limited liability companies (LLCs) that were formed to finance production and distribution of motion pictures, finding that investment units
sold by defendants were investment contracts within meaning of 15 USCS § 78c(a)(10) was supported by evidence showing that investors' managerial rights did not
accrue until LLCs were fully organized, that investors did not negotiate any terms of LLC agreements, that investors had no experience in film or entertainment, and
that investors were particularly dependent on centralized management; thus, although LLCs' organizational documents suggested otherwise, there was no reasonable
expectation of investor control. United States v Leonard (2008, CA2 NY) 529 F3d 83, CCH Fed Secur L Rep P 94746.
To avoid preclusion under 15 USCS § 78bb(f)(1) claim for relief should clearly state ground on which it is based, and that ground cannot be one that is "in connection
with purchase or sale" of security under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j, and Securities Litigation Uniform Standards Act of 1998; if single
claim premises liability on multiple factual theories, then that claim would be precluded if at least one of those theories hinges on representations made in connection
with purchase or sale of security. Instituto de Prevision Militar v Merrill Lynch (2008, CA11 Fla) 546 F3d 1340, CCH Fed Secur L Rep P 94888.
Because former state treasurer had fiduciary duty with regard to investing state retirement trust funds subject only to authority of Governor under Conn. Gen. Stat.
§ 3-13b(c), he was fiduciary for purposes of Conn. Gen. Stat. § 45a-199; thus, his violation of § 10(B) of Securities Exchange Act of 1934, 15 USCS § 78j(B), and
S.E.C. Rule 10-5 as principal was adequate basis for finding former state senator liable for violating Act as aider and abettor. SEC v DiBella (2009, CA2) 587 F3d 553.
Where corporation's founder engaged in Ponzi scheme and receiver sued defendants, including firm owner and bank vice-president, for corporation's losses, firm
owner could not be liable, because even if firm owner did breach duty to supervise founder's activities, it was duty owed to investors, not to corporation through
which securities were sold. Marion v TDI, Inc. (2010, CA3 Pa) 591 F3d 137, CCH Fed Secur L Rep P 95565.
Numerous differences between § 16 of Securities Exchange Act (15 USCS § 78p) and § 10(b) of Act (15 USCS § 78j(b)) clearly indicate that provisions of former
impose no limitation on enforcement of latter. Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, SD NY) 258 F Supp 262, affd in part and revd in part on
other grounds (1968, CA2 NY) 401 F2d 833, CCH Fed Secur L Rep P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
In determining whether consideration flowing to acquiring corporation in its acquisition of investment company, principal assets of which were stock in acquiring
corporation, were so inadequate as to constitute violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, SEC
practice in dealing with transactions between affiliates under Investment Company Act must be taken into consideration; § 10(b) of Act and Rule 10b-5 were not
violated through use of asset value of investment company in determination of exchange ratio, rather than market value of stock of investment company, in view of
fact that SEC consistently utilized net asset value as controlling factor in proceedings under § 17 of Investment Company Act (15 USCS § 80a-17(b)). Harriman v E.
I. Du Pont de Nemours & Co. (1975, DC Del) 411 F Supp 133, CCH Fed Secur L Rep P 95386.
Potential liability of New York Stock Exchange to public investors is limit of exchange's duties under § 6 of Securities Exchange Act (15 USCS § 78f); there is no
justification for imposing liability under § 10(b) of Act (15 USCS § 78j(b)) and Rule 10b-5 which cannot be asserted § 6. Aldrich v New York Stock Exchange, Inc.
(1977, SD NY) 446 F Supp 348, CCH Fed Secur L Rep P 96171.
Plaintiff's motion in Rule 10b-5 securities fraud action to amend complaint to add 15 USCS § 78t(a) claim was denied, since amendment would be futile, as § 78t(a)
has no relationship to any of many other types of claims that can be maintained under 15 USCS § 78j(b). Fujisawa Pharm. Co. v Kapoor (1996, ND Ill) 165 FRD 79.
Investors are denied reconsideration of decision limiting their claims against tender offeror to period ending April 15, 1998, where they erroneously contend that
potential "control person" liability of 2 officers creates direct liability for offeror under 15 USCS § 78j(b), because investors have it backwards since it is underlying §
78j(b) liability which must be present in order for there to be control person liability under § 78t(a). P. Schoenfeld Asset Mgmt. LLC v Cendant Corp. (2001, DC NJ)
161 F Supp 2d 349.
Accounting firm, investment advisor, and law firm were entitled to dismissal under Fed. R. Civ. P. 12(b)(6) of client's action alleging violation of Racketeer Influenced
and Corrupt Organizations Act (RICO), 18 USCS § 1961 et seq., which contended that firms fraudulently advised client to participate in tax-avoidance strategies that
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were questioned by IRS; Private Securities Litigation Reform Act, 15 USCS § 78u-4, barred client's RICO claim because conduct on which client relied was conduct
that would be actionable under 15 USCS § 78j(b). Loftin v KPMG LLP (2002, SD Fla) 16 FLW Fed D 712.
In action filed by liquidating trustee for alleged violations committed by former brokers and traders under Securities Investor Protection Act of 1970, 15 USCS §
78aaa-111, summary judgment was granted in favor of trustee on issue of liability of brokers and traders because their liability had been clearly established in earlier
bankruptcy proceeding and in criminal proceedings for violations of federal and state law, including violations of 15 USCS § 78j(b). Mishkin v Ageloff (2004, SD NY)
299 F Supp 2d 249, motion gr, judgment entered (2004, SD NY) 314 F Supp 2d 354.
Because primary securities claims under § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), were dismissed, control person claims under § 20(a) of
Securities and Exchange Act of 1934, 15 USCS § 78t(a), which were predicated on those claims had to be dismissed as well. ATSI Communs., Inc. v Shaar Fund, Ltd.
(2005, SD NY) 357 F Supp 2d 712, CCH Fed Secur L Rep P 93121.
Promissory note that was issued as part of consideration for sale and purchase of business did not constitute "security" for purposes of § 3(a)(10) of Securities
Exchange Act 1934; because promissory note did not constitute "security," and no other securities were issued or exchanged as part of sale, business sellers could
not assert actionable claims under § 10b of Securities Exchange Act 1934, 15 USCS § 78j(b), or violations of S.E.C. Rule 10b-5, 17 CFR § 240.10b-5(b), arising out
of sale. Robyn Meredith, Inc. v Levy (2006, DC NJ) 440 F Supp 2d 378, CCH Fed Secur L Rep P 93940.
Claim that shareholders filed under § 20(a) of Securities Exchange Act of 1934, 15 USCS § 78t(a), was dismissed because shareholders failed to state claim for
primary violation of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b). In re IAC/InterActiveCorp Secs. Litig. (2007, SD NY) 478 F Supp 2d 574.
Current and former high-level officers of company were not liable as controlling persons under § 20(a) of Securities and Exchange Act of 1934, because there was no
underlying violation of § 10(b) of Securities and Exchange Act of 1934, to base claim under 15 USCS § 78t(a). Frank v Dana Corp. (2007, ND Ohio) 525 F Supp 2d
922.
Because plaintiffs had adequately alleged that defendant board of directors possessed scienter, it had also adequately pleaded culpable participation required by their
§ 20(a) of Securities Exchange Act of 1934, 15 USCS § 78t(a), claim. In re Comverse Tech., Inc. Sec. Litig. (2008, ED NY) 543 F Supp 2d 134.
As plaintiffs failed to establish primary violation of 15 USCS § 78j(b) and S.E.C. Rule 10b-5 against founder and chief financial officer due to inadequate pleading of
scienter, plaintiffs' 15 USCS § 78t(a) claim against them also failed. 380544 Can., Inc. v Aspen Tech., Inc. (2008, SD NY) 544 F Supp 2d 199, CCH Fed Secur L Rep P
94608.
Unpublished Opinions
Unpublished: Since summary judgment in favor of appellees on appellant's 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5 claims was proper, district court's summary
judgment in favor of appellees on appellant's 15 USCS § 78t(a) claim was affirmed because it depended on primary violation by controlled person. Steed Fin. LDC v
Nomura Sec. Int'l, Inc. (2005, CA2 NY) 148 Fed Appx 66, CCH Fed Secur L Rep P 93352.
2.Securities Act
14. Generally
Remedies provided by § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), as well as other sections of securities acts, are cumulative and not mutually exclusive.
Schaefer v First Nat'l Bank (1975, CA7 Ill) 509 F2d 1287, CCH Fed Secur L Rep P 94967, 1975-1 CCH Trade Cases P 60137, cert den (1976) 425 US 943, 48 L Ed 2d
186, 96 S Ct 1682.
Court of Appeals for Seventh Circuit holds that Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 USCS §§ 77p, 78bb, is as broad as 15 USCS § 78j(b)
itself and that limitations on private rights of action to enforce § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, do not open door to litigation about securities
transactions under state law; where plaintiffs' claims are connected to their own purchases of securities, they are blocked by SLUSA, whose preemptive effect is not
confined to knocking out state-law claims by investors who have winning federal claims; it covers both good and bad securities claims--especially bad ones. Kircher v
Putnam Funds Trust (2005, CA7 Ill) 403 F3d 478, CCH Fed Secur L Rep P 93204, reh den, reh, en banc, den (2005, CA7 Ill) 2005 US App LEXIS 7914.
Remedies afforded by Securities Act of 1933 and by Securities Exchange Act of 1934 are not mutually exclusive but are cumulative, and where given act or activity
gives rise to civil action by person wronged thereby under more than one provision of Acts and where one potential action is subject to limitation period which is
shorter than that of other potential action, fact that shorter limitation period has expired does not preclude injured party from bringing action which is subject to
longer limitation period. Rotstein v Reynolds & Co. (1973, ND Ill) 359 F Supp 109, CCH Fed Secur L Rep P 94179.
Although short-term commercial paper is subject to anti-fraud provisions of Securities Act, definition of "security", as contained in Securities Exchange Act, exempts
such paper from all provisions of latter Act. Tri-County State Bank v Hertz (1976, MD Pa) 418 F Supp 332, CCH Fed Secur L Rep P 95772.
Section 12 of Securities Act makes clear that "offers or sells security" directly modifies "any person"; in contrast, § 17(a) of Securities Act, is not as limited--it
imposes liability on "any person" who commits particular actions "in offer or sale" of securities; while, on its face, distinction appears obscure, one need only refer to
§ 10(b) of Securities Exchange Act to realize that it also applies to more than just sellers when it refers to any person in connection with purchase or sale of any
security. SEC v Durgarian (2007, DC Mass) 477 F Supp 2d 342.
15. 15 USCS § 77k
Availability of express remedy under 15 USCS § 77k does not preclude defrauded purchasers of registered securities from maintaining action under 15 USCS §
78j(b). Herman & MacLean v Huddleston (1983) 459 US 375, 74 L Ed 2d 548, 103 S Ct 683, CCH Fed Secur L Rep P 99058.
In determining whether to apply scienter or negligence standard of liability, § 14(a) of Securities Exchange Act (15 USCS § 78n(a)) and SEC Rule 14a-9(a) may be
more closely analogized to § 11 of Securities Act (15 USCS § 77k) than with § 10(b) of Securities Exchange Act (15 USCS § 78j), since § 14(a), as implemented by
Rule 14a-9(a), and § 11 proscribe type of disclosure or lack of it, false or misleading statements or omissions of material facts, and since each enumerates specific
classes of individuals who bear responsibility to meet required standard of disclosure; moreover, each involves specific documents which are of primary importance in
fundamental areas of securities regulation. Gould v American-Hawaiian S.S. Co. (1976, CA3 Del) 535 F2d 761, CCH Fed Secur L Rep P 95512.
Although there is some overlap between § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and §§ 11 and 12(2) of Securities Act of 1933 (15 USCS §§
77k and 77l (2)), provisions involve distinct causes of action and are intended to address different types of wrongdoing, and upon application for certification of class
action in suit under all 3 provisions, separate consideration should have been given to each statutory provision. Kirkpatrick v J.C. Bradford & Co. (1987, CA11 Ga)
827 F2d 718, CCH Fed Secur L Rep P 93383, 9 FR Serv 3d 276, reh den, en banc (1987, CA11 Ga) 832 F2d 1267 and reh den, en banc (1987, CA11 Ga) 832 F2d
1267 and reh den, en banc (1987, CA11 Ga) 832 F2d 1267 and cert den (1988) 485 US 959, 99 L Ed 2d 421, 108 S Ct 1220.
Implied right of private action under 15 USCS § 78j(b) and Rule 10b-5 complements civil enforcement function provided by 15 USCS §§ 77k and 77l (2) by reaching
beyond statements and omissions made in registration statement, prospectus, or in connection with initial distribution of securities, to create liability for false or
misleading statements or omissions of material fact in connection with trading in secondary market. Shaw v Digital Equip. Corp. (1996, CA1 Mass) 82 F3d 1194, CCH
Fed Secur L Rep P 99217, 35 FR Serv 3d 55 (criticized in Greebel v FTP Software, Inc. (1999, CA1 Mass) 194 F3d 185, CCH Fed Secur L Rep P 90658).
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SEC Rule 10b-5 is general anti-fraud rule which covers broad range of conduct and by its terms covers conduct specifically proscribed by other provisions of federal
securities statutes, including §§ 11 and 12 of Securities Act of 1933 (15 USCS §§ 77k and 77 l), but § 11 of Securities Act is available only to buyers in connection
with registered public offering or alleged omissions or misstatements in prospectus distributed under Securities Act while Rule 10b-5 is not subject to such
limitations, and § 11 contains certain procedural restrictions not applicable to Rule 10b-5 actions. Orn v Eastman Dillon, Union Sec. & Co. (1973, CD Cal) 364 F Supp
352, CCH Fed Secur L Rep P 94189.
Section 11 of Securities Act (15 USCS § 77k) and § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) are different causes of action directed at remedying
different types of wrongdoings; private right of action under § 10(b) was created to provide right of recovery for fraudulent misrepresentations in connection with
purchase or sale of securities and, regardless of whether § 11 provides remedy for other types of misrepresentations, § 10 still provides only right of recovery for
fraud; fact that plaintiffs alleged wrongdoing by defendants which entitled them to recovery under both causes of action does not nullify more stringent requirements
of § 11 since requirements of that section still apply to portion of suit brought thereunder, and not involving allegations of fraud, but plaintiffs are entitled to bring
suit under § 10(b) as well where fraud is alleged. Beecher v Able (1975, SD NY) 435 F Supp 397, CCH Fed Secur L Rep P 96104.
Fact that stock purchasers' claims under §§ 11 and 12 of Securities Act of 1933, 15 USCS §§ 77k, 77l, claims were dismissed for failure to plead material
misstatements or omissions compelled conclusion that purchasers also failed to state claim under § 10(b) of Securities and Exchange Act of 1934 because pleading
requirements for § 10(b) claim significantly exceeded those for §§ 11 and 12. In re Infonet Servs. Corp. Secs. Litig. (2003, CD Cal) 310 F Supp 2d 1080.
Unpublished: Appellants' complaint, which alleged violations of, inter alia, 15 USCS § 77k in connection with corporation's initial public offering of common stock, was
not subject to Fed. R. Civ. P. 9(b)'s heightened pleading requirements because allegations in complaint did not "sound in fraud"; complaint did not rely upon unified
course of conduct where appellants did not allege claim under § 10(b) of Securities Exchange Act, which would require allegation of fraud, and appellants did not
allege facts in complaint that necessarily constituted fraud. Safron Capital Corp. v Leadis Tech., Inc. (2008, CA9 Cal) CCH Fed Secur L Rep P 94647.
16. 15 USCS § 77l
Although civil action for damages may be available for violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 independent of relief
provided for in § 12(a) of Securities Act (15 USCS § 77 l (2)), where recovery is sought under both provisions, conflicts between them are resolved in favor of §
12(a), where statutory remedy is explicit. Gilbert v Nixon (1970, CA10 Kan) 429 F2d 348, 37 OGR 20.
Although there is some overlap between § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and §§ 11 and 12(2) of Securities Act of 1933 (15 USCS §§
77k and 77l (2)), provisions involve distinct causes of action and are intended to address different types of wrongdoing, and upon application for certification of class
action in suit under all 3 provisions, separate consideration should have been given to each statutory provision. Kirkpatrick v J.C. Bradford & Co. (1987, CA11 Ga)
827 F2d 718, CCH Fed Secur L Rep P 93383, 9 FR Serv 3d 276, reh den, en banc (1987, CA11 Ga) 832 F2d 1267 and reh den, en banc (1987, CA11 Ga) 832 F2d
1267 and reh den, en banc (1987, CA11 Ga) 832 F2d 1267 and cert den (1988) 485 US 959, 99 L Ed 2d 421, 108 S Ct 1220.
Implied right of private action under 15 USCS § 78j(b) and Rule 10b-5 complements civil enforcement function provided by 15 USCS §§ 77k and 77l (2) by reaching
beyond statements and omissions made in registration statement, prospectus, or in connection with initial distribution of securities, to create liability for false or
misleading statements or omissions of material fact in connection with trading in secondary market. Shaw v Digital Equip. Corp. (1996, CA1 Mass) 82 F3d 1194, CCH
Fed Secur L Rep P 99217, 35 FR Serv 3d 55 (criticized in Greebel v FTP Software, Inc. (1999, CA1 Mass) 194 F3d 185, CCH Fed Secur L Rep P 90658).
SEC Rule 10b-5 is general anti-fraud rule which covers broad range of conduct and by its terms covers conduct specifically proscribed by other provisions of federal
securities statutes, including §§ 11 and 12 of Securities Act of 1933 (15 USCS §§ 77k and 77 l), but § 11 of Securities Act is available only to buyers in connection
with registered public offering or alleged omissions or misstatements in prospectus distributed under Securities Act while Rule 10b-5 is not subject to such
limitations, and § 11 contains certain procedural restrictions not applicable to Rule 10b-5 actions. Orn v Eastman Dillon, Union Sec. & Co. (1973, CD Cal) 364 F Supp
Action is not precluded under 15 USCS § 78j(b) merely because remedy exists under 15 USCS § 77 l. Summer v Land & Leisure (1983, SD Fla) 571 F Supp 380, CCH
Elements of claim under 15 USCS § 77l (2) differ from those under Rule 10b-5 in at least one important respect, namely § 77l (2) imposes strict liability for material
false statements or omissions, subject to statutory defenses, whereas Rule 10b-5 requires scienter; consequently § 77l (2) claim need not contain averments of
fraud and may not be subject to pleading requirements of FRCP 9(b), but if § 77l (2) claim in complaint alleges scienter on defendants' part, such that fraud is
substantively alleged, then FRCP 9(b) applies and such claim is assessed by same standard as Rule 10b-5 claim. Neubauer v Eva-Health USA (1994, SD NY) 158 FRD
False allegations that enable stock to be publicly traded are reasonably calculated to influence investing public and, hence, are made "in connection with" purchase or
sale of security; where company owner hid fact that he controlled company in connection with having company stock publicly traded, SEC adequately pled connection
between misrepresentations and purchase or sale of security because false allegations enabling stock to be publicly traded were reasonably calculated to influence
investing public and were, therefore, made in connection with purchase or sale of security. SEC v C. Jones & Co. (2004, DC Colo) 312 F Supp 2d 1375.
17. 15 USCS § 77q
Since plaintiff purchaser must allege and prove more in action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), alleging violation of SEC Rule 10b-5(2),
than in action alleging violation of § 17(a)(2) of Securities Act (15 USCS § 77q(a)(2)), he is privileged to maintain action under Rule 10b-5(2) to right same wrong as
is dealt with by § 17(a)(2) if he undertakes to bear greater burden of proof imposed upon him in action under § 10(b). Trussell v United Underwriters, Ltd. (1964, DC
Colo) 228 F Supp 757, 8 FR Serv 2d 9B.1, Case 1.
Section 17(a) (15 USCS § 77q(a)) of Securities Act is essentially same as § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, except that §
10(b) and Rule 10b-5 are broader in that they apply to purchase as well as sale of securities. Jackson v Oppenheim (1974, SD NY) 411 F Supp 659, CCH Fed Secur L
Rep P 94894, affd in part and revd in part on other grounds (1976, CA2) 533 F2d 826, CCH Fed Secur L Rep P 95497.
Section 17(a) of Securities Act (15 USCS § 77q(a)) is narrower than SEC Rule 10b-5 in that fraud must actually be in offer or sale itself in order to violate § 17(a),
whereas under Rule 10b-5 fraud need only be in connection with purchase or sale. Kogan v National Bank of North America (1975, ED NY) 402 F Supp 359.
Oil and gas venture investors' 15 USCS § 77q(a) claim is dismissed with prejudice, where claim is based on same allegations as 15 USCS § 78j(b) claim, because (1)
when allegations under § 78j(b) and § 77q(a) overlap, § 77q(a) claim adds nothing to plaintiffs' arsenal, and (2) there is no implied private right of action under §
77q(a). Bastian v Petren Resources Corp. (1988, ND Ill) 681 F Supp 530, CCH Fed Secur L Rep P 93721.
Securities buyers' 15 USCS § 77q(a) count will be ignored as duplicative of 15 USCS § 78j(b) claim, because Seventh Circuit has noted that claims under both
sections have same elements and therefore should be tried together as § 78j claim. Sharp v I.S., Inc. (1988, SD Ill) 685 F Supp 688, CCH Fed Secur L Rep P 93954
(criticized in Berson v Hardiman (1999, ND Ill) CCH Fed Secur L Rep P 90650).
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Stipulation in SEC administrative proceeding by SEC and respondent manager of branch office of firm that registered representative in branch office misappropriated
money from client accounts at branch office is tantamount to stipulation that there was willful violation of 15 USCS §§ 77q(a) and 78j(b) and Rule 10b-5. In re
Patricia A. Johnson (1994) 1994 SEC LEXIS 1137.
"In the offer or sale of securities" standard of 15 USCS § 77q(a) is at least as high as "in connection with the purchase or sale of any security" standard of 15 USCS §
78j(b) and Rule 10b-5. In re Orlando Joseph Jett (1998) 1998 SEC LEXIS 1501.
18. Miscellaneous
Existence of express remedy under 15 USCS § 77l (2) does not preclude resort to implied remedy under 15 USCS § 78j(b). Berger v Bishop Inv. Corp. (1982, CA8
Mo) 695 F2d 302, CCH Fed Secur L Rep P 99013; Woods v Homes & Structures, Inc. (1980, DC Kan) 489 F Supp 1270, CCH Fed Secur L Rep P 97616; Basile v
Merrill Lynch, Pierce, Fenner & Smith, Inc. (1982, SD Ohio) 551 F Supp 580, CCH Fed Secur L Rep P 99088.
District court erred in remanding to state court claims by investors in putative class actions seeking damages that resulted from mutual funds' practice of setting
prices in manner that could be exploited by arbitrageurs; investors' attempt to frame their complaints in manner that avoided any allegations of purchase or sale
failed because their claims were "connected" to their own purchases of securities; because Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 USCS §§
77p, 78bb, was as broad as 15 USCS § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, SLUSA blocked investors' class action litigation in state court. Kircher v
Putnam Funds Trust (2005, CA7 Ill) 403 F3d 478, CCH Fed Secur L Rep P 93204, reh den, reh, en banc, den (2005, CA7 Ill) 2005 US App LEXIS 7914.
Even though securities may be exempt from registration under § 4 of Securities Act (15 USCS § 77d), sale of such securities is nonetheless subject to fraud
provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Sohns v Dahl (1975, WD Va) 392 F Supp 1208.
Existence of express liability under 15 USCS § 77t(a) does not preclude liability under 15 USCS § 78j(b). In re Longhorn Sec. Litigation (1983, WD Okla) 573 F Supp
SEC may properly enforce antifraud provisions of federal securities laws, 15 USCS §§ 77a and 78j, despite contention that such enforcement authority was delegated
to Federal Home Loan Bank Board (FHLBB) by 15 USCS § 78 l (i), because § 78 l (i) grant limits FHLBB's jurisdiction to administration and enforcement of reporting
and proxy provisions of Securities and Exchange Act of 1934, and conspicuous absence of antifraud provision enforcement powers in grant leads to conclusion that
SEC must maintain authority to regulate savings and loan associations in event of fraud. SEC v Warner (1987, SD Fla) 652 F Supp 647, CCH Fed Secur L Rep P
93169.
3.Other Laws
19. ERISA
Antifraud provisions of federal securities laws have not been preempted by Employee Retirement Income Security Act of 1974 (29 USCS §§ 1001 et seq.). Daniel v
International Brotherhood of Teamsters, etc. (1977, CA7 Ill) 561 F2d 1223, 96 BNA LRRM 2057, CCH Fed Secur L Rep P 96141, 82 CCH LC P 10094, revd on other
grounds (1979) 439 US 551, 58 L Ed 2d 808, 99 S Ct 790, 1 EBC 1620, 100 BNA LRRM 2260, CCH Fed Secur L Rep P 96714, 85 CCH LC P 11004 and (criticized in
Schlifke v Seafirst Corp. (1989, CA7 Ill) 866 F2d 935, CCH Fed Secur L Rep P 94174, 106 OGR 446) and (ovrld as stated in Maldonado v Dominguez (1998, CA1
Puerto Rico) 137 F3d 1, CCH Fed Secur L Rep P 90159, 40 FR Serv 3d 134).
ERISA (29 USCS § 1001 et seq.) and securities acts should be construed as complimentary to each other, and ERISA does not preempt anti-fraud provisions of
securities acts in field of pensions. Schlansky v United Merchants & Mfrs., Inc. (1977, SD NY) 443 F Supp 1054, 1 EBC 1871, CCH Fed Secur L Rep P 96353.
Although ERISA plan participants argued that alleged misstatements made by defendant company insiders to company employees as part of conspiracy to
fraudulently induce them to retain and acquire company stock were not actionable under securities laws because they were not public statements intended to
artificially inflate stock's price under fraud on market theory, but that statements made within in-house publications or at employee meetings as part of fraudulent
scheme to convince employees to keep their retirement assets in, or to accept compensation in form of, over-valued company stock to free up cash for insiders'
personal enrichment were actionable, such arbitrary division between "non-public" statements made only to employees and statements of virtually identical import to
public at large constituted kind of manipulative pleading designed to circumvent Private Securities Litigation Reform Act and Securities Litigation Uniform Standards
Act that was not permitted by most courts. Tittle v Enron Corp. (In re Enron Corp. Sec. Derivative & ERISA Litig.) (2003, SD Tex) 284 F Supp 2d 511, 31 EBC 2281.
20. State law
Fact that applicable state statute, requiring state director of insurance to find that proposed merger of insurance companies would not substantially reduce security of
and service to be rendered to policyholders, clearly relates to "business of insurance", § 2(b) of McCarran-Ferguson Act (15 USCS § 1012(b))--which provides that no
act of Congress shall be construed to invalidate any state law enacted for purpose of regulating business of insurance unless such act specifically relates to business
of insurance--furnishes no reason for refusing remedies sought by Securities and Exchange Commission in action by it alleging violations of § 10(b) of the Securities
Exchange Act (15 USC § 78j(b)), and of SEC Rule 10b-5 in that defendants made fraudulent misrepresentations to stockholders of insurance company in seeking
their approval of merger of such company with another insurance company controlled by defendants, where remedies sought were injunction forbidding further
violations of Rule 10b-5, and court order unwinding merger, which had been approved by stockholders and state director of insurance, and where gravamen of
complaint was misrepresentation, not merger, Commission alleging that approval of merger was obtained through use of various fraudulent misrepresentations, and
not asking trial court to pass directly upon merger which state director of insurance had approved. SEC v National Sec., Inc. (1969) 393 US 453, 21 L Ed 2d 668, 89
S Ct 564, CCH Fed Secur L Rep P 92334.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, are designed to reach wide scope of deceptive activities in securities transactions
without regard to limitations of common law action for fraud, such act and rule being intended to prohibit all fraudulent schemes in connection with purchase and
sale of securities and novel or atypical transactions are not to be excluded from its ambit. James v Gerber Products Co. (1973, CA6 Mich) 483 F2d 944, CCH Fed
District Court should not have stayed action which, in addition to several common law counts, also included allegations of violations of § 10(b) of Securities Exchange
Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5, pending outcome of state court action in which some of defendants in federal suit were suing federal plaintiffs
for alleged contract breaches and interference with prospective economic advantage based on same matters which gave rise to federal suit, since deference of
federal courts to state proceedings does not extend to staying federal action over which federal courts have exclusive jurisdiction, and, pursuant to § 27 of 1934 Act
(15 USCS § 78aa), federal courts have exclusive jurisdiction of affirmative 1934 Act claims. Medema v Medema Builders, Inc. (1988, CA7 Ill) 854 F2d 210, CCH Fed
SEC Rule 10b-5 will be applied regardless of any cause of action that may exist under state law. Fox v Prudent Resources Trust (1974, ED Pa) 382 F Supp 81, CCH
Fed Secur L Rep P 94826, 19 FR Serv 2d 447.
Existence of proceeding under state law for liquidation of bank did not preclude prosecution in federal court of action against bank and officers alleging violation of
fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, at least where there was no reason to believe that any distribution
would take place prior to adjudication of legal rights of all parties with claims against bank. Imperial Supply Co., Profit Sharing Trust v Northern Ohio Bank (1976, ND
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Ohio) 430 F Supp 339, CCH Fed Secur L Rep P 95908.
Federal securities laws, and particularly SEC Rule 10b-5, were not developed with intention of overlapping or reenforcing law of libel, nor to inhibit exercise of
freedom of press; complaint against proprietor of financial magazines alleging violation of Rule 10b-5 for publishing article defamatory of plaintiff is properly
dismissed where allegation was pleaded as method of circumventing higher evidentiary threshold developed to limit state actions for libel. Reliance Ins. Co. v
Barron's (1977, SD NY) 442 F Supp 1341, 3 Media L R 1033.
Antifraud provisions of federal securities laws are ancillary to 1934 Act's "fundamental purpose" of "full and fair disclosure", and once disclosure has been made, it is
state corporate law that governs fairness of transaction. Merrit v Libby, McNeill & Libby (1981, SD NY) 510 F Supp 366, CCH Fed Secur L Rep P 97848.
State gambling casino control commission's attempt to regulate qualifications of persons to maintain ownership of stock in gambling casino have only incidental
effects on interstate trade in securities and involve internal corporate regulation, and therefore are not pre-empted by federal securities laws. Doumani v Casino
Control Com. (1985, DC NJ) 614 F Supp 1465.
Securities fraud claim of holder of right to purchase shares in computer corporation must fail, where gist of claim is that holder attempted to exercise right 3 days
prior to expiration, but received fax 2 days after expiration date stating that right had been canceled in 1992, because holder has not identified any action it took, or
refrained from taking, and that resulted in legally cognizable harm to holder, as result of its acceptance of alleged misrepresentation by fax; holder has recast in tort
mold what is straightforward breach-of-contract claim. First Hanover Sec. v Sulcus Computer Corp. (1995, SD NY) 871 F Supp 700, CCH Fed Secur L Rep P 98712.
Partner cannot remove case to federal court, where case was brought under state partnership law, because 15 USCS § 78j(b) does not preempt state partnership law
and partner's assertion that claim arose under "forced seller doctrine" is counterclaim or defense. Reed v Cohen (1995, ED NY) 876 F Supp 25.
Absence of another regulatory scheme weighed in favor of finding, under Reves test, that promissory notes were securities under 15 USCS § 78j(b), where creditors
could seek state-law relief for breach of promissory notes, but no federal regulatory scheme afforded sufficient protection from risk. LeBrun v Kuswa (1998, ED La)
24 F Supp 2d 641.
Common stock purchasers' federal securities claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5 was dismissed as
untimely because claim was filed almost two months after one year statute of limitations expired, which had begun to run anew when purchasers opted out of prior
class action, and dismissal of previous nearly identical action without prejudice did not permit purchasers to file another complaint outside of limitations period;
further, purchasers provided no basis for equitable tolling. Bozeman v Lucent Techs., Inc. (2005, MD Ala) 378 F Supp 2d 1348.
21. Miscellaneous
15 USCS § 78j(b) does not provide independent jurisdictional basis for petition to vacate arbitration award filed under Federal Arbitration Act (9 USCS § 10). Garrett
v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1993, CA9 Cal) 7 F3d 882, 93 CDOS 7725, 93 Daily Journal DAR 13181, 8 BNA IER Cas 1645.
Preemptive provisions of Securities Litigation Uniform Standards Act of 1998 (SLUSA), unlike parallel provisions of § 10(b) of Securities Exchange Act of 1934, 15
USCS § 78j(b), do not create powers in Securities and Exchange Commission (SEC) or vest SEC with any rule-making, adjudicative, or other enforcement or
interpretive responsibility; therefore, court did not apply Chevron deference but applied lesser degree of deference to SEC's views concerning meaning of SLUSA.
Dabit v Merrill Lynch, Pierce, Fenner & Smith, Inc. (2005, CA2 NY) 395 F3d 25, CCH Fed Secur L Rep P 93068.
Section 10(b) Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, jurisprudence concerning "in connection with" language
applies to Securities Litigation Uniform Standards Act of 1998 (SLUSA); application of that jurisprudence to language as repeated in SLUSA comports with Congress's
stated goal in enacting SLUSA of closing "federal flight loophole" by stemming migration of claims from federal to state court. Dabit v Merrill Lynch, Pierce, Fenner &
Smith, Inc. (2005, CA2 NY) 395 F3d 25, CCH Fed Secur L Rep P 93068.
Employee's complaints about employer's inability to timely implement good manufacturing practices training program as required by Food and Drug Administration
was not protected under 18 USCS § 1514A because there was no objectively reasonable basis for employee to have believed that employer was violating § 10(b) of
Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5; there was no evidence indicating that employer intended to make
false or misleading statements in any report to shareholders or that deficiencies in training documentation procedures at one of more than 24 pharmaceutical
manufacturing facilities would have had material impact on employer's finances. Livingston v Wyeth, Inc. (2008, CA4 NC) 520 F3d 344, 27 BNA IER Cas 613, CCH
Dismissal of short seller's Sherman Act claim against financial institutions that served as "prime brokers" in short sales was properly dismissed because all four Billing
considerations weigh in favor of implied preclusion; liquidity and pricing benefits created by short sales placed transactions within heartland of federal securities
regulation, Securities Exchange Commission (SEC) had authority to regulate role of prime brokers in short selling, as well as borrowing fees charged by prime
brokers, pursuant to 15 USCS § 78j(a), and 15 USCS §§ 78o(c)(2)(D) and 78j(b) applied with equal force to role of prime brokers in short selling and borrowing fees
they charged, and antitrust liability would have created actual and potential conflicts with securities regime. Elec. Trading Group, LLC v Banc of Am. Sec. LLC (2009,
CA2 NY) 588 F3d 128, CCH Fed Secur L Rep P 95539, 2009-2 CCH Trade Cases P 76822.
Where minority shareholders alleged that defendants, directors and lawyers, defrauded them when they lost value of their investment in corporation due to
transaction, Private Securities Litigation Reform Act exception to Racketeer Influenced and Corrupt Organizations Act (RICO), 18 USCS §§ 1961-1968, barred
minority shareholders' civil RICO action because their allegations that defendants defrauded them from receiving purchasing company's stock as provided in
transaction, and subsequent allegedly fraudulent merger, described "purchase" and "sale" of securities. Bixler v Foster (2010, CA10 NM) 596 F3d 751.
Owner of company failed to allege that owner purchased or sold any securities, and defendants failed to identify any tangible relationship between alleged predicate
acts of fraud and any sale or purchase of securities by owner; therefore, defendants' Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737
(1995), argument failed. Gintowt v TL Ventures (2002, ED Pa) 226 F Supp 2d 672, RICO Bus Disp Guide (CCH) P 10372.
Dismissal of § 20(a) of Securities Exchange Act claim was warranted where plaintiff's § 10(b) had been dismissed. Funke v Life Fin. Corp. (2002, SD NY) 237 F Supp
2d 458.
Where indictment listed different classes of securities that likely involved different buyers who were defrauded by various misrepresentations, government could elect
to charge separate fraudulent transactions in separate counts by showing connection between prohibited activity pursuant to 15 USCS § 78j; thus, court concluded
that securities fraud charges were not multiplicitous. United States v Rigas (2003, SD NY) 281 F Supp 2d 660.
Court dismissed plaintiffs' complaint, brought on behalf of class of investors and alleging violations of 15 USCS §§ 78j(b) and 78t(a) of Securities Exchange Act of
1934 and 17 C.F.R. § 240.10b-5, where complaint did not comply with heightened pleading requirements of Private Securities Litigation Reform Act of 1995 (PSLRA),
15 USCS § 78a et seq., in that plaintiffs failed to plead with requisite particularity factual allegations of wrongdoing and factual allegations necessary to establish that
defendants acted with required state of mind. In re ICN Pharms., Inc. (2004, CD Cal) 299 F Supp 2d 1055.
If claim is not cognizable under § 10(b)(5) of Securities and Exchange Act of 1934, 10 USCS § 78j, because it is not "in connection with purchase or sale of covered
security," it similarly is not claim "in connection with purchase or sale of covered security" for purposes of Securities Litigation Uniform Standards Act, 15 USCS § 77
et seq. Bradfisch v Templeton Funds, Inc. (2004, SD Ill) 319 F Supp 2d 897.
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Private Securities Litigation Reform Act's exclusion of securities fraud as RICO Act predicate act applies regardless of whether particular plaintiff has standing to bring
civil action under § 10b of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5. Heller v Deutsche Bank AG (2005, ED Pa) 95
AFTR 2d 1372.
Shareholders' securities fraud action under § 10(b) of Securities Exchange Act of 1934 (1934 Act), 15 USCS § 78j(b), was dismissed because, although complaint
adequately pled falsity as to certifications of § 302 of Sarbanes-Oxley Act of 2002, 15 USCS § 7241, shareholders' scienter allegations did not meet Private Securities
Litigation Reform Act of 1995 requirements; however, shareholders were granted leave to file amended complaint under Fed. R. Civ. P. 15(a) because viable case
could be presented. Limantour v Cray Inc. (2006, WD Wash) 432 F Supp 2d 1129, CCH Fed Secur L Rep P 93875.
Taxpayers were not entitled to refund because incentive stock options (ISOs) were not subject to substantial risk of forfeiture under 26 USCS § 83 because employer
who issued ISOs could not assert successful securities action under either §§ 10b or 16(b) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), 78p(b), against
taxpayers due to their exercise of ISOs before expiration of lock-up period. Hernandez v United States (2006, CD Cal) 450 F Supp 2d 1112, 98 AFTR 2d 6098.
Where receiver was appointed as non-bankruptcy federal equity receiver and exclusive managing member for debtors prior to debtors' filing for bankruptcy,
receiver's corporate governance powers were not derived from his receivership, which terminated pursuant to 11 USCS § 543 when debtors filed for bankruptcy,
because corporate appointment was made pursuant to § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), § 22(a) of Securities Act of 1933, 15 USCS §
77v(a), § 27 of Securities Exchange Act of 1934, 15 USCS § 78aa, court's inherent authority, as well as receivership statutes 28 USCS §§ 754 and 959 and Fed. R.
Civ. P. 66; thus, receiver's corporate governor role did not end when debtors filed Chapter 11 petitions, and 11 USCS § 105(b) did not prohibit receiver from
continuing as manager; accordingly, U.S. Trustee's 11 USCS § 1104 motion to appoint Chapter 11 trustee was denied because receiver was authorized to act as
debtor-in-possession within meaning of 11 USCS § 1101(1), receiver was not custodian within meaning of 11 USCS §§ 101(11) and 543(b), and debtors' creditors
found loophole that permitted them to control appointment of person who would administer bankruptcy estate. Adams v Marwil (In re Bayou Group, L.L.C.) (2007,
SD NY) 363 BR 674.
In action by U.S. Commodity Futures Trading Commission (commission) against futures traders, heightened pleading requirements of § 10(b) of Securities Exchange
Act of 1934 did not apply because commission's complaint only alleged that traders violated Commodity Exchange Act of 1936. United States CFTC v Amaranth
Advisors, L.L.C. (2008, SD NY) 554 F Supp 2d 523.
Blockburger test established that wire fraud counts, in violation of 18 USCS § 1343, and securities fraud counts, in violation of 15 USCS §§ 78j(b), 78ff and 17 CFR §
240.10b-5, alleged against defendant were not multiplicitous because each contained element that was not contained in other because securities fraud required
showing of fraud in connection with purchase or sale of any security--element not required to prove wire fraud, and wire fraud required showing of use of interstate
wires--element not required to prove securities fraud. United States v Regensberg (2009, SD NY) 604 F Supp 2d 625.
II.INTERSTATE COMMERCE
22. Generally
Section 10 of Securities Exchange Act (15 USCS § 78j) covers transactions entirely outside any established securities-transfer business, when mail or any
instrumentality of interstate commerce has been used. Fratt v Robinson (1953, CA9 Wash) 203 F2d 627, 37 ALR2d 636.
Antifraud provisions of Securities Exchange Act prohibit fraud in sale of securities when significant conduct occurs in United States or conduct occurs anywhere and
has substantial effects on investors in United States. United Int'l Holdings, Inc. v Wharf (Holdings) Ltd. (2000, CA10 Colo) 210 F3d 1207, 2000 Colo J C A R 2427, 41
UCCRS2d 645, affd (2001) 532 US 588, 149 L Ed 2d 845, 121 S Ct 1776, 2001 CDOS 4046, 2001 Daily Journal DAR 4983, CCH Fed Secur L Rep P 91425, 2001 Colo
J C A R 2505, 44 UCCRS2d 569, 14 FLW Fed S 245.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is not limited to interstate transactions, and does not require that misrepresentations or omissions be
made through instrumentalities of commerce or through use of mails. Northern Trust Co. v Essaness Theatres Corp. (1952, DC Ill) 103 F Supp 954.
In action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, fraud itself need not be transmitted through interstate commerce, it
being sufficient if instrumentality of interstate commerce plays material role in transactions. Levin v Marder (1972, WD Pa) 343 F Supp 1050, CCH Fed Secur L Rep P
93563.
Private right of action arises under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) once facilities of mail or interstate communications are used in connection
with sale or purchase of securities, even though buyer and seller transact directly and not through securities exchange or organized over-the-counter market. Reube
v Pharmacodynamics, Inc. (1972, ED Pa) 348 F Supp 900, CCH Fed Secur L Rep P 93704.
Use of instrumentality of interstate commerce, for purpose of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, must have some
connection with transaction complained of and with defendant's role in transaction. Ford v Cannon (1976, MD Fla) 413 F Supp 1393, CCH Fed Secur L Rep P 95712,
19 UCCRS 653.
SEC Rule 10b-5, promulgated under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), specifically includes indirect use of instrumentality of interstate
commerce in connection with manipulative or deceptive device or contrivance; fraudulent misrepresentation need not be communicated over telephone or through
mails for there to be violation of statute or rule. Harrison v Equitable Life Assurance Soc. (1977, WD Mich) 435 F Supp 281.
Securities purchaser meets jurisdictional prerequisite of "interstate commerce," where incorporators selling business and stock of business admit to having used
telephone to change prescheduled meeting and, through their attorney, mailed information on filing of financing statement, document prepared in connection with
sale of securities. Leiter v Kuntz (1987, DC Utah) 655 F Supp 725, CCH Fed Secur L Rep P 93295.
Defendant's deposition claim that defendant only met with people in person and hand delivered promotional materials to brokerage customers was not credible
where defendant's claim was contradicted by every witness, as well as defendant. SEC v Gorsek (2002, CD Ill) 222 F Supp 2d 1112, CCH Fed Secur L Rep P 91977,
injunction den, judgment entered, motion den (2002, CD Ill) 222 F Supp 2d 1124.
23. Mail
Jurisdictional basis of criminal action based upon violation of antifraud provisions of 15 USCS § 78j(b) is use of mails or instrumentality of commerce but accused
need not carry out mailing or use of instrumentality of commerce, it being sufficient if he causes fraudulent scheme to be carried out by setting forces in motion
which foreseeably result in use of mails. United States v Mackay (1973, CA10 Utah) 491 F2d 616, CCH Fed Secur L Rep P 94326, cert den (1974) 416 US 972, 40 L
Ed 2d 560, 94 S Ct 1996 and cert den (1974) 419 US 1047, 42 L Ed 2d 640, 95 S Ct 619.
Where preparation of draft of contract was in furtherance of alleged fraudulent scheme violating SEC Rule 10b-5, mailing of draft by defendant's attorney to
defendant satisfied jurisdictional requirements of rule; requirement is satisfied even if use of mails is not itself fraudulent act. Hilton v Mumaw (1975, CA9 Wash) 522
F2d 588.
Entire scheme to defraud may include mailing of so-called "lulling" letters which conceal fraudulent device from person against whom it is utilized, and all that need
be shown is that mails have been used in furtherance of alleged fraud and there is no requirement that any fraudulent representation inducing sale or purchase of
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securities be by way of mails so long as requisite connection between scheme to defraud and use of mails is made out. United States v Pray (1978, MD Pa) 452 F
Supp 788, CCH Fed Secur L Rep P 96463.
Publisher of investment advisement newsletter does not fall within publisher exception of 15 USCS § 80b-2(a)(11) where he pursued practice of purchasing stocks,
recommending them in newsletter, then selling them off at huge profits, and failure to advise readers of his conflict of interest was violation of 15 USCS §§ 78j(b)
and 80b-6. SEC v Blavin (1983, ED Mich) 557 F Supp 1304, CCH Fed Secur L Rep P 99126, affd (1985, CA6 Mich) 760 F2d 706, CCH Fed Secur L Rep P 92021.
24. Telephone
Interstate commerce was involved where defendant, resident of Oregon, and owner of all stock of corporation, and plaintiff, also resident of Oregon, negotiated in
that state for sale of stock to plaintiff, which negotiations were broken off, and later defendant telephoned from Oregon to plaintiff in Washington, requesting that
latter return to Oregon and resume negotiations, which he did, and in purchase of stock was defrauded. Matheson v Armbrust (1960, CA9 Or) 284 F2d 670, cert den
(1961) 365 US 870, 5 L Ed 2d 860, 81 S Ct 904.
Use of interstate commerce facilities totally unrelated to defendant and transaction will not support jurisdiction, but subsequent use of interstate facilities in
furthering scheme is sufficient to establish federal jurisdiction, and where telephone call clearly furthers defendant's overall scheme, in that it is of material
importance to consummation of scheme, jurisdictional requirement is met. Gower v Cohn (1981, CA5 Ga) 643 F2d 1146, CCH Fed Secur L Rep P 97979.
Use of telephone in connection with sale of securities constitutes use of instrumentality of interstate commerce, whether or not actual fraudulent statements or
misrepresentations were communicated in call. Reube v Pharmacodynamics, Inc. (1972, ED Pa) 348 F Supp 900, CCH Fed Secur L Rep P 93704.
Use of telephones as sole interstate means of solicitation of purchase of stock is sufficient to give federal court jurisdiction over action for violation of 15 USCS § 78j.
Starck v Dewane (1973, ND Ill) 364 F Supp 466, CCH Fed Secur L Rep P 94340.
Secretary of corporation with office in one state who spoke on telephone with top management of corporation in second state in furtherance of offer to purchase
securities used instrumentality of interstate commerce so as to satisfy jurisdictional requirements for action alleging violation of SEC Rule 10b-5. REA Express, Inc. v
Interway Corp. (1976, SD NY) 410 F Supp 192, CCH Fed Secur L Rep P 95421, revd on other grounds (1976, CA2 NY) 538 F2d 953.
Numerous interstate telephone calls relating to fraudulent scheme to sell securities placed between plaintiff and each defendant constituted use of interstate
commerce in furtherance of scheme and action could be brought based on § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Weitzman v
Stein (1977, SD NY) 436 F Supp 895, CCH Fed Secur L Rep P 96159.
Investor's motion to confirm arbitration award was granted because arbitrator rationally held that defendants violated § 10(b) of Securities and Exchange Act of
1934, 15 USCS § 78j(b), based on defendants' untrue statements of material fact as to ownership, control, and shares of realty company; moreover, interstate
commerce element was satisfied because defendants used telephone to communicate many fraudulent representations and it was necessary for investor to open
credit card account on behalf of defendants by using channels of interstate commerce. Glazer v AA Premier Realty, Ltd. (2003, ED NY) 294 F Supp 2d 296.
Stock purchaser stated claim under 15 USCS § 78j(b) based on alleged statements by corporation and its chief executive officer (CEO); allegations that corporation
misrepresented adequacy of its loan loss reserves were stated with sufficient particularity, statements by CEO were more than mere puffery, and scienter was
sufficiently alleged; however, claim against corporation's chief financial officer (CFO) failed, as CFO's position, without more, was insufficient to support strong
inference of scienter. Jones v Corus Bankshares, Inc. (2010, ND Ill) 701 F Supp 2d 1014, CCH Fed Secur L Rep P 95709.
25.--To arrange meeting in furtherance of scheme
Use of telephone to arrange meeting at which scheme to defraud, in violation of 15 USCS § 78j(b), was carried out, satisfied jurisdictional requirements of statute; it
is not required that manipulative or deceptive device or contrivance be part of or actually transmitted in mails or instrumentality of interstate commerce, it being
sufficient that such device or contrivance be employed in connection with use of instruments of interstate commerce or mails. Kerbs v Fall River Indus. (1974, CA10
Utah) 502 F2d 731, CCH Fed Secur L Rep P 94788 (criticized in Wright v Ernst & Young LLP (1998, CA2 NY) 152 F3d 169, CCH Fed Secur L Rep P 90266).
Even though misrepresentation or words of fraud are not uttered over telephone, it is sufficient if telephone is used indirectly to cause meeting to be held for purpose
of effectuating fraud in order for provisions of 15 USCS § 78j(b) to come into play. Nemitz v Cunny (1963, ND Ill) 221 F Supp 571.
Even though misrepresentations or words of fraud are not uttered over telephone, provisions of 15 USCS § 78j prohibiting any person, directly or indirectly from
using any instrumentality of interstate commerce in connection with purchase of securities by manipulative or deceptive device is violated if telephone is used
"indirectly" to cause meeting to be held for purpose of effectuating fraud. Starck v Dewane (1973, ND Ill) 364 F Supp 466, CCH Fed Secur L Rep P 94340.
Interstate commerce was involved where meetings between management personnel of 2 corporations involved in securities transaction were arranged by intrastate
telephone calls. REA Express, Inc. v Interway Corp. (1976, SD NY) 410 F Supp 192, CCH Fed Secur L Rep P 95421, revd on other grounds (1976, CA2 NY) 538 F2d
953.
Fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 were applicable to fraudulent activities of investment advisor where
advisor used telephone to set up meetings with persons upon whom fraud was perpetrated. Nelson v Hench (1977, DC Minn) 428 F Supp 411, CCH Fed Secur L Rep
P 96085.
For jurisdictional purposes in action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), there must be some connection between interstate communication
and fraud; requirement was met where telephone communication was to set up meeting to complete transaction where alleged fraud took place. Harrison v Equitable
Life Assurance Soc. (1977, WD Mich) 435 F Supp 281.
26.--Intrastate calls
Complaint of transaction involving only 2 local telephone calls (prior to 1975 amendment to 15 USCS § 78c(a)(17)) failed to state cause of action under § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)) since neither mails nor instrumentality of interstate commerce was used. Burke v Triple A Machine Shop, Inc. (1971, CA9
Cal) 438 F2d 978, CCH Fed Secur L Rep P 92949.
Intrastate use of telephone might confer federal jurisdiction (even prior to 1975 amendment to 15 USCS § 78c(a)(17)) over private action alleging violation of § 10
of Securities Exchange Act (15 USCS § 78j) and SEC Rule 10b-5. Dupuy v Dupuy (1975, CA5 La) 511 F2d 641, CCH Fed Secur L Rep P 95079.
Intrastate use of telephone confers federal jurisdiction under § 10 of Securities Exchange Act (15 USCS § 78j) and SEC Rule 10b-5 where telephone call in question is
connected to transaction with respect to which there is complaint. Spilker v Shayne Laboratories, Inc. (1975, CA9 Cal) 520 F2d 523, CCH Fed Secur L Rep P 95244.
Phrase of § 10(b) of Securities Exchange Act referring to "instrumentalities of interstate commerce" does not require that misrepresentation occur in interstate
commerce, and jurisdiction thereunder may be predicated upon defendant's use of telephone, albeit for intrastate calls, as material part of sales transaction, since
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telephone is interstate communication facility. Ingraffia v Belle Meade Hospital, Inc. (1970, ED La) 319 F Supp 537, CCH Fed Secur L Rep P 92896.
In action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, it is sufficient for jurisdictional purposes if instrument of
interstate commerce, such as telephone, has been used, even if actual use by defendant was only intrastate. Childs v RIC Group, Inc. (1970, ND Ga) 331 F Supp
1078, CCH Fed Secur L Rep P 93333, affd (1971, CA5 Ga) 447 F2d 1407.
Use of telephone in connection with sale of security constitutes use of instrumentality of interstate commerce under SEC Rule 10b-5 whether call is intrastate or
interstate. Reube v Pharmacodynamics, Inc. (1972, ED Pa) 348 F Supp 900, CCH Fed Secur L Rep P 93704.
Since SEC Rule 10b-5 concerns use of any instrumentality of interstate commerce, even intrastate telephone call will satisfy jurisdictional requirement, as all
telephone lines are integral parts of interstate network. REA Express, Inc. v Interway Corp. (1976, SD NY) 410 F Supp 192, CCH Fed Secur L Rep P 95421, revd on
other grounds (1976, CA2 NY) 538 F2d 953.
Use of telephone constitutes interstate communication, for purposes of jurisdiction in action brought under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)),
even though call is intrastate, since nature of telephone remains as interstate instrumentality. Harrison v Equitable Life Assurance Soc. (1977, WD Mich) 435 F Supp
281.
27. Travel
Secretary of corporation who traveled in interstate commerce in order to work on draft of offer letter relating to securities transaction alleged to have been in
violation of SEC Rule 10b-5 satisfied jurisdictional requirement of use of instrumentality of interstate commerce. REA Express, Inc. v Interway Corp. (1976, SD NY)
410 F Supp 192, CCH Fed Secur L Rep P 95421, revd on other grounds (1976, CA2 NY) 538 F2d 953.
III.SHORT SALES OR STOP LOSS ORDERS [15 USCS § 78j(a)]

28. Applicability
Section 10(a) of Securities Exchange Act (15 USCS § 78j(a)), and SEC Rule 10a-1(a), apply to all persons and not just brokers and dealers; customer who explicitly
instructs broker to make short sale in contravention of rule is just as subject to liability as broker who carries out instruction. United States v Peltz (1970, CA2 NY)
433 F2d 48, CCH Fed Secur L Rep P 92836, 20 ALR Fed 216, cert den (1971) 401 US 955, 28 L Ed 2d 238, 91 S Ct 974.
Short sales provisions of § 10(a) of Securities Exchange Act (15 USCS § 78j(a)) and SEC Rule 10a-1 are applicable to all persons, not only to exchanges and brokers.
United States v Mandel (1969, SD NY) 296 F Supp 1038.
29. What is "short sale"
Recklessness, understood as mental state apart from negligence and akin to conscious disregard, may constitute scienter. Hoffman v Comshare, Inc. (In re Comshare
Inc. Sec. Litig.) (1999, CA6 Mich) 183 F3d 542, CCH Fed Secur L Rep P 90513, 1999 FED App 247P (criticized in Janas v McCracken (In re Silicon Graphics Sec.
Litig.) (1999, CA9) 183 F3d 970, 99 CDOS 5322, 99 Daily Journal DAR 6829, CCH Fed Secur L Rep P 90610, 44 FR Serv 3d 1311) and (criticized in Phillips v LCI
Int'l, Inc. (1999, CA4 Va) 190 F3d 609, CCH Fed Secur L Rep P 90645) and (criticized in Branca v Paymentech, Inc. (2000, ND Tex) 1920 CCH Fed Secur L Rep P
90911) and (criticized in Coates v Heartland Wireless Communs., Inc (2000, ND Tex) 100 F Supp 2d 417, CCH Fed Secur L Rep P 91015) and (criticized in In re
CDNOW, Inc. Sec. Litig. (2001, ED Pa) 138 F Supp 2d 624, CCH Fed Secur L Rep P 91463) and (criticized in In re Party City Secs. Litig. (2001, DC NJ) 147 F Supp 2d
282, CCH Fed Secur L Rep P 91487).
Complaint under 15 USCS § 78u-4(b)(2) alleging with particularity that defendant acted with severely reckless state of mind suffices to state claim for civil liability
under 15 USCS § 78j(b) and Rule 10b-5. Bryant v Avado Brands, Inc. (1999, CA11 Ga) 187 F3d 1271, CCH Blue Sky L Rep P 90636, 45 FR Serv 3d 420, 12 FLW Fed
C 1245 (criticized in Branca v Paymentech, Inc. (2000, ND Tex) 1920 CCH Fed Secur L Rep P 90911) and (criticized in In re Eng'g Animation Sec. Litig. (2000, SD
Iowa) 110 F Supp 2d 1183, CCH Fed Secur L Rep P 90945) and (criticized in Coates v Heartland Wireless Communs., Inc (2000, ND Tex) 100 F Supp 2d 417, CCH
Fed Secur L Rep P 91015) and on remand, complaint dismd, motion to strike den (2000, MD Ga) 100 F Supp 2d 1368, CCH Fed Secur L Rep P 91014, revd,
remanded (2001, CA11 Ga) 252 F3d 1161, CCH Fed Secur L Rep P 91440, 49 FR Serv 3d 1113, 14 FLW Fed C 707 and (criticized in In re CDNOW, Inc. Sec. Litig.
(2001, ED Pa) 138 F Supp 2d 624, CCH Fed Secur L Rep P 91463) and (criticized in In re Party City Secs. Litig. (2001, DC NJ) 147 F Supp 2d 282, CCH Fed Secur L
Rep P 91487) and (criticized in Helwig v Vencor, Inc. (2001, CA6 Ky) 251 F3d 540, CCH Fed Secur L Rep P 91445, 2001 FED App 179P) and (criticized in City of
Philadelphia v Fleming Cos. (2001, CA10 Okla) 264 F3d 1245, CCH Fed Secur L Rep P 91525, 2001 Colo J C A R 4635) and (criticized in Kundrat v Chicago Bd.
Options Exch., Inc. (2002, ND Ill) CCH Fed Secur L Rep P 92217, 2002-2 CCH Trade Cases P 73888) and (criticized in Ottmann v Hanger Orthopedic Group, Inc.
(2003, CA4 Md) 353 F3d 338, CCH Fed Secur L Rep P 92645).
Defendants, law firm and one of its attorneys, as secondary actors, were not liable for merely assisting in drafting and filing company's allegedly false statements,
because none of statements were attributed to them when disseminated; thus, plaintiff investors' claims under 15 USCS § 78j(b), 17 CFR § 240.10b-5, failed;
attribution was necessary to satisfy reliance element of private damages action, and since primary claims failed, 15 USCS § 78t(a) controlling person claims
necessarily also failed. Pac. Inv. Mgmt. Co. LLC v Mayer Brown LLP (2010, CA2) 603 F3d 144, CCH Fed Secur L Rep P 95722.
Short sale is accomplished by borrowing stock from owner and selling it, seller hoping to profit by buying equivalent number of shares later at lower price and
returning them to lender. Merrill Lynch, Pierce, Fenner & Smith, Inc. v Bocock (1965, SD Tex) 247 F Supp 373.
Short sale, as defined in SEC Rule 3b-3, is any sale of security which seller does not own or any sale which is consummated by delivery of security borrowed by or for
account of seller. United States v Mandel (1969, SD NY) 296 F Supp 1038.
30. Prohibited short sales
Import of SEC Rule 10a-1(a)(2) is that short sales may be made only at price higher than next preceding different price. United States v Mandel (1969, SD NY) 296 F
Supp 1038.
Class was certified in consolidated action that was brought by institutional investors against pharmaceutical company and various of its officers and directors where,
inter alia, investors asserted claims pursuant to 15 USCS § 78j(b), 15 USCS § 78t, and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, arising out of alleged public
misrepresentations that defendants made concerning efficacy of one of company's new drugs, defendants conceded that investors met Fed. R. Civ. P. 23(a)(1), (2),
(3), (b)(3), requirements, "lead plaintiff" restrictions imposed under 15 USCS § 78u-4(a)(3)(B)(vi) did not disqualify investors from seeking class certification under
Fed. R. Civ. P. 23, and mere fact that investors relied upon professional money managers to help them in making investment decisions did not render them
inadequate as class representatives under R. 23(a)(4). In re Vicuron Pharms. Inc. Sec. Litig. (2006, ED Pa) 233 FRD 421.
Broker-dealer who used facilities of national securities exchange to effect short sales at prices below prices at which last sales thereof, regular way, were made on
exchange violated § 10(a) of Securities Exchange Act (15 USCS § 78j(a)) and SEC Rule 10a-1. In re Duval Secur., Inc. Securities Exchange Act of 1934, Release No.
7655, July 23, 1965, 1965 SEC LEXIS 225.
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It was violation of § 10(a) of Securities Exchange Act (15 USCS § 78j(a)), and SEC Rule 10a-1, for broker to effect short sales of securities on national exchange for
accounts of customers below price at which last previous sale thereof, regular way, was effected on exchange, or at such previous price where that price was not
higher than next preceding different price at which sale of such stock was effected. In re Delafield & Delafield, Securities Exchange Act of 1934, Release No. 8480,
December 26, 1968, 1968 SEC LEXIS 270.
31. Requirement that orders be marked "long" or "short"
Although order tickets for 2 short sales were not properly marked as such, broker-dealer is not responsible, since he gave executing broker correct instructions to
execute short sales in accordance with his trading strategy and cannot be held responsible for that broker's errors in executing his orders. In re Larry A. Duban
(1981) 47 SEC 658.
Broker-dealer violated § 10(a) of Securities Exchange Act (15 USCS § 78j(a)) and SEC Rule 10a-1(b) by effecting short sales of national exchange without marking
orders "short". In re Guss & Stad Co., Securities Exchange Act of 1934, Release No. 7555, March 12, 1964, CCH Fed Secur L Rep P 77213.
Broker-dealer who used facilities of national securities exchange to execute sell orders without marking them either "long" or "short" violated § 10(a) of Securities
Exchange Act (15 USCS § 78j(a)), and SEC Rule 10a-1. In re Duval Secur., Inc., Securities Exchange Act of 1934, Release No. 7655, July 23, 1965, CCH Fed Secur L
Rep P 77264.
It was violation of § 10(a) of Securities Exchange Act (15 USCS § 78j(a)) and SEC Rule 10a-1 for broker-dealer to execute, on national securities exchange, orders
marked "long" when in fact such orders were "short". In re Delafield & Delafield, Securities Exchange Act of 1934, Release No. 8480, December 26, 1968, 1968 SEC
LEXIS 270.
IV.FRAUD PROVISIONS, GENERALLY [15 USCS § 78j(b)]
A.In General
32. Generally
Scope of antifraud provisions of SEC Rule 10b-5 cannot exceed power granted Commission by Congress under § 10(b) of Securities Exchange Act (15 USCS §
78j(b)). Ernst & Ernst v Hochfelder (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375, CCH Fed Secur L Rep P 95479, reh den (1976) 425 US 986, 48 L Ed 2d 811,
96 S Ct 2194.
Word "manipulative" is virtually term of art when used in connection with securities market; under SEC Rule 10b-5, term refers generally to practices, such as wash
sales, matched orders, or rigged prices, that were intended to mislead investors by artificially affecting market activity. Santa Fe Industries, Inc. v Green (1977) 430
US 462, 51 L Ed 2d 480, 97 S Ct 1292, CCH Fed Secur L Rep P 95914.
Silence in connection with purchase or sale of securities may operate as fraud actionable under 15 USCS § 78j(b); such liability is premised upon duty to disclose
arising from relationship of trust and confidence between parties to transaction; application of duty to disclose prior to trading guarantees that corporate insiders,
who have obligation to place welfare of shareholders before their own, will not benefit personally through fraudulent use of material, nonpublic information. Chiarella
v United States (1980) 445 US 222, 63 L Ed 2d 348, 100 S Ct 1108, CCH Fed Secur L Rep P 97309.
Supreme Court cannot amend § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) to create liability for acts that are not in themselves manipulative or
deceptive within meaning of statute. Central Bank, N.A. v First Interstate Bank, N.A. (1994) 511 US 164, 128 L Ed 2d 119, 114 S Ct 1439, 94 CDOS 2687, 94 Daily
Journal DAR 5160, CCH Fed Secur L Rep P 98178, 8 FLW Fed S 33, on remand, remanded sub nom First Interstate Bank v DBLKM, Inc. (1994, CA10 Colo) 1994 US
App LEXIS 16507 and (superseded by statute as stated in United States SEC v Fehn (1996, CA9 Nev) 97 F3d 1276, 96 CDOS 7516, 96 Daily Journal DAR 12375,
CCH Fed Secur L Rep P 99330) and (superseded by statute as stated in United States v Irwin (1998, CA7 Ill) 149 F3d 565) and (superseded by statute as stated in
Trustees of Boston Univ. v ASM Communs., Inc. (1998, DC Mass) 33 F Supp 2d 66, RICO Bus Disp Guide (CCH) P 9642) and (criticized in Grubaugh v DeCosta (1999,
Ariz App) 1999 Ariz App LEXIS 35) and (superseded by statute as stated in Scachitti v Prudential Sec., Inc. (1999, ND Ill) 1999 US Dist LEXIS 19391).
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) does not flatly prohibit use of manipulative device in purchase or sale of security, but prohibits such
devices or contrivances in contravention of rules and regulations of SEC. Marsh v Armada Corp. (1976, CA6 Mich) 533 F2d 978, CCH Fed Secur L Rep P 95496, cert
den (1977) 430 US 954, 51 L Ed 2d 803, 97 S Ct 1598.
Liability under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) does not depend on whether activity in question would support common-law fraud
action, but upon whether activity constitutes misleading or deceptive practice within meaning of SEC Rule 10b-5, and false promise to perform act in future can
constitute misleading and deceptive practice under Act, even though it will not serve as basis of fraud action under state law, if promise is part of consideration for
sale of securities. Messer v E.F. Hutton & Co. (1987, CA11 Fla) 833 F2d 909, CCH Fed Secur L Rep P 93545, amd, on reh (1988, CA11 Fla) 847 F2d 673, CCH Fed
15 USCS § 78j(b) was not designed to regulate corporate mismanagement. Acito v IMCERA Group (1995, CA2 NY) 47 F3d 47, CCH Fed Secur L Rep P 98667, 31 FR
Serv 3d 581 (criticized in In re Sirrom Capital Corp. Secs. Litig. (1999, MD Tenn) 84 F Supp 2d 933).
Investors' action against corporation and its officers, which alleged securities violations arising out of corporations' announcement of definitive merger that ensured
that shareholders would receive $ 25 per share, was properly dismissed because investors' action, which alleged violations of 15 USCS § 78j(b) and 78t(a), failed to
sufficiently plead, in great detail, facts that constituted strong circumstantial evidence that corporation and its officers actually knew or were deliberately reckless in
failing to know that alleged forward-looking misrepresentation was false or misleading as required under 15 USCS § 78u-4(b)(2). Lawrence v Zilog, Inc. (2000, CA9
Cal) CCH Fed Secur L Rep P 91242.
Antifraud provisions of Securities Exchange Act prohibit fraud in sale of securities when significant conduct occurs in United States or conduct occurs anywhere and
has substantial effects on investors in United States. United Int'l Holdings, Inc. v Wharf (Holdings) Ltd. (2000, CA10 Colo) 210 F3d 1207, 2000 Colo J C A R 2427, 41
UCCRS2d 645, affd (2001) 532 US 588, 149 L Ed 2d 845, 121 S Ct 1776, 2001 CDOS 4046, 2001 Daily Journal DAR 4983, CCH Fed Secur L Rep P 91425, 2001 Colo
J C A R 2505, 44 UCCRS2d 569, 14 FLW Fed S 245.
Trader sufficiently pleaded fraud in connection with purchase or sale of securities under Rule 10b-5 where, inter alia, trader's cash-settled over-the-counter and
"synthetic" options were "securities" under Securities Exchange Act of 1934 Act. Caiola v Citibank, N.A. (2002, CA2 NY) 295 F3d 312, CCH Fed Secur L Rep P 91942.
Decision of SEC that accountant had violated §§ 10(b), 13(a) and 13(b)(2) of Securities and Exchange Act of 1934, 15 USCS §§ 78j(b) and 78m, was affirmed
because substantial evidence showed that accountant had violated anti-fraud provisions by over-valuing license designs company had purchased and had improperly
characterized tooling and prototype expenses as inventory in company's financial statements and had aided and abetted company's violation of reporting and record
keeping requirements; furthermore, SEC had authority to order accountant to cease and desist his fraudulent activities, and to permanently bar him from practicing
before SEC. Ponce v SEC (2003, CA9 Cal) 345 F3d 722, 2003 CDOS 8727, CCH Fed Secur L Rep P 92508.
In civil enforcement action,the SEC produced sufficient evidence to establish as matter of law each defendant's liability; defendants never used investors' money to
finance or trade in any security instrument, but instead used money to pay purported profits to other investors or to make extravagant personal purchases. SEC v
George (2005, CA6 Ohio) 426 F3d 786, CCH Fed Secur L Rep P 93342, CCH Fed Secur L Rep P 93540, 2005 FED App 415P.
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Fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) prohibits all fraudulent schemes whether artifices employed involve garden-type variety of
fraud or present unique form of deception. Securities & Exchange Com. v Scott, Gorman Municipals, Inc. (1975, SD NY) 407 F Supp 1383, CCH Fed Secur L Rep P
95387.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 are not vehicles through which to litigate fairness of securities transactions, and
allegation of nondisclosure is central focus of claims thereunder. IIT v Vencap, Ltd. (1975, SD NY) 411 F Supp 1094, CCH Fed Secur L Rep P 95398.
Under § 10(b) of the Securities Exchange Act (15 USCS § 78j) elements of common law fraud need not be allege; plaintiffs need merely allege misstatement or
omission of material fact made with intent to defraud on which plaintiff relied to his injury. Arroyo v Wheat (1984, DC Nev) 591 F Supp 141, CCH Fed Secur L Rep P
91870.
Shareholders had adequately pled 15 USCS § 78j securities fraud claim against senior officers of foreign software company where complaint alleged that each senior
officer had signed company's financial statements and had information that conflicted with press releases and financial statements for which he was responsible. In
re Lernout & Hauspie Sec. Litig. (2002, DC Mass) 208 F Supp 2d 74, CCH Fed Secur L Rep P 91931, stay den, request gr (2002, DC Mass) 214 F Supp 2d 100, dismd,
in part (2002, DC Mass) 230 F Supp 2d 152, CCH Fed Secur L Rep P 92029, dismd, in part (2002, DC Mass) 286 BR 33, CCH Fed Secur L Rep P 92222, dismd, in part
sub nom Bamberg v SG Cowen (2002, DC Mass) 236 F Supp 2d 79.
Securities fraud claims brought by purchasers of company stock against law firm that represented company in acquisition were barred by recent U.S. Supreme Court
and Eleventh Circuit precedent restricting liability of law firms participating in securities transactions. In re Infocure Secs. Litig. v Infocure Corp. (2002, ND Ga) 210 F
Supp 2d 1331.
As stock purchasers' amended complaint indicated that accountants possessed mental state embracing intent to deceive, manipulate, or defraud that gave rise to
strong inference of recklessness, court could not conclude beyond doubt that purchasers could prove no set of facts in support of their securities fraud claim that
entitled them to relief and purchasers satisfied necessary pleading standard required by 15 USCS § 78j(b) and FRCP 9(b). Bovee v Coopers & Lybrand (2002, SD
Ohio) 211 F Supp 2d 985.
Motion to dismiss securities fraud action was granted because investors' complaint lacked requisite specificity and investors failed to plead sufficient, particular
factual allegations to support scienter pleading requirement. Alcina v pcOrder.com, Inc. (2002, WD Tex) 230 F Supp 2d 732, CCH Fed Secur L Rep P 92026.
In order to prevail on claim of securities fraud, plaintiff must establish following elements:(1) misrepresentation or omission, (2) of material fact, (3) made with
scienter, (4) justifiably relied on by plaintiffs, and (5) proximately causing them injury; where shareholders maintained that company's executive officers released
false and misleading information about company to public, and that alleged conduct created false, misleading, and unjustifiable positive impressions of financial
condition and performance of company, thereby artificially inflating market and issuance prices of company's securities, shareholders adequately stated claim for
relief. Bovee v Coopers & Lybrand (2003, SD Ohio) 216 FRD 596.
Class of investors alleged sufficient facts to show that that two participants, but not other, substantially participated in strategic-partner scheme that acted to
artificially inflate software firm's profits; both participants substantially participated by owning and funding multiple strategic partners, both were motivated by
money, and one's knowledge of how scheme worked permitted inference of scienter. Filler v Lernout (In re Lernout & Hauspie Sec. Litig) (2003, DC Mass) 236 F Supp
2d 161.
While it was true that neither party had found case in which trust was held liable for insider trading under circumstances similar to action, allegations in amended
complaint were sufficient to survive trust defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) Securities and Exchange Commission's action that alleged
violations of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b); Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; § 14(e), 15 USCS § 78m(e);
or Rule 14e-3 promulgated thereunder, 17 C.F.R. § 240.14e-3. SEC v Franco (2003, SD NY) 253 F Supp 2d 720.
Plaintiff's securities fraud allegations were explicitly based on information and belief, so complaint was subject to heightened pleadings requirements under Private
Securities Litigation Reform Act; however, complaint failed to state underlying facts with any degree of specificity, so conclusory allegations were insufficient to
support securities fraud claim and court granted summary judgment. In re Capstead Mortg. Corp. Secs. Litig. (2003, ND Tex) 258 F Supp 2d 533.
Shareholders claims under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC R. 10b-5 were dismissed as untimely because shareholders did
not file their claims within one year of discovery of facts that not all investors had signed lock-up agreements and that others may have been released from such
agreements before they expired. Flora v Firepond, Inc. (2003, DC Minn) 260 F Supp 2d 780, affd (2004, CA8 Minn) 383 F3d 745, reh den, reh, en banc, den (2004,
CA8) 2004 US App LEXIS 22035.
Where ERISA plan participants' RICO claims against ERISA fiduciaries were based on securities fraud Ponzi scheme that concealed defendant corporation's financial
condition and defrauded current and future shareholders, conduct that was actionable as securities fraud. Tittle v Enron Corp. (In re Enron Corp. Sec. Derivative &
ERISA Litig.) (2003, SD Tex) 284 F Supp 2d 511, 31 EBC 2281.
In their securities fraud action, investors alleged with sufficient particularity statements they claimed were false and misleading, reasons statements were false and
misleading, and factual basis for their belief, as required by PSLRA, but did not sufficiently plead that each defendant made allegedly false statements or that
defendants knew or recklessly disregarded possibility that statements were false or misleading; however, rather than dismiss claims, court granted leave to amend.
Friedman v Rayovac Corp. (2003, WD Wis) 295 F Supp 2d 957, motion gr, claim dismissed, dismd, in part (2003, WD Wis) 291 F Supp 2d 845 and (criticized in
Newby v Enron Corp. (In re Enron Corp. Sec., Derivative & "ERISA" Litig.) (2004, SD Tex) 2004 US Dist LEXIS 8158) and (criticized in L-3 Communs. Corp. v
Clevenger (2004, ED Pa) 2004 US Dist LEXIS 17845).
To establish violation of § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act and Rule 10b-5, SEC must prove (1) material misrepresentation, (2) in connection
with purchase or sale of security, (3) scienter, and (4) use of jurisdictional means. SEC v C. Jones & Co. (2004, DC Colo) 312 F Supp 2d 1375.
In Second Circuit, defendant may be held liable for fraudulent statements under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), where plaintiff
alleges sufficient facts that demonstrate that defendant was personally responsible for making those statements, even if he or she is not identified as speaker. In re
Global Crossing, Ltd. Sec. Litig. (2004, SD NY) 322 F Supp 2d 319, CCH Fed Secur L Rep P 92717.
Where stock purchasers failed to provide any particulars about allegedly false and misleading information insofar as they not only failed to identify such information,
but failed to identify reports that contained such allegedly false and misleading information, their claims under § 10-b, 15 USCS § 78j(b), were dismissed;
purchasers' claims also failed to meet particularity requirements in Fed. R. Civ. P. 9(b). Reding v Goldman Sachs & Co. (2005, ED Mo) 382 F Supp 2d 1112.
Sufficient evidence supported jury's finding of fraudulent and/or negligent misrepresentations and omissions regarding accounting for bargain sale transactions, in
violation of § 17(a) of Securities Act of 1933, 15 USCS § 77q(a), and § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), jury could have reasonably
concluded from magnitude of losses and pattern of transactions that offering circulars did not reflect honest judgments about values of properties, and that
cumulative effect was to inflate dishonestly financial condition of corporation so as to continue to induce purchasers to buy notes from entity that was insolvent.
United States SEC v Church Extension of Church of God (2005, SD Ind) 429 F Supp 2d 1045.
Because plaintiff former employees' claims against defendant, Employee Retirement Income Security Act of 1974, 29 USCS §§ 1000-1461, plan trustee surrounding
their severance plan fit within rubric of 15 USCS § 78j(b) claim, due to allegations that employer's president's stock sales to plan were "fraudulent" and accomplished
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through telephone calls and through U.S. Post Office in violation of 18 USCS §§ 1341, 1343, 1962, Racketeer Influenced and Corrupt Organizations Act, 18 USCS §
1961-1968, claims failed for lack of standing under 18 USCS § 1964(c). Cook v Campbell (2007, MD Ala) 482 F Supp 2d 1341, 40 EBC 2308.
Issue is not who made misstatement, but to whom misstatement is attributed at time of its dissemination; identity of speaker is not ipso facto dispositive of that
issue. Thomas H. Lee Equity Fund V, L.P. v Mayer Brown, Rowe & Maw LLP (2009, SD NY) 612 F Supp 2d 267, CCH Fed Secur L Rep P 95100.
Undisclosed purchases by insiders and other devices used by underwriters to make it appear that unsuccessful "all or none" or "part or none" offering has been
successfully completed are fraudulent. In re Gallagher & Co. (1991) 50 SEC 557.
Antifraud provisions of 15 USCS § 78j(b) are applicable, even though customers are experienced or sophisticated. In re Jay Houston Meadows (1996) 52 SEC 778.
Giving kickbacks in purchase or sale of securities is by definition fraudulent act, and comes within meaning of statute. Re Guy P. Riordan (2008) 93 CCH SEC Doc
2569.
B.Scienter
33. Generally
Function of what has been called scienter requirement in civil action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is to confine imposition of liability
to those whose conduct has been sufficiently culpable to justify penalty sought to be exacted, initial inquiry in each case being what duty of disclosure law should
impose upon person being sued; in making such determination, court should bear in mind that major congressional policy behind securities laws in general, and
antifraud provisions in particular, is protection of investors who rely on completeness and accuracy of information made available to them. Chris-Craft Indus. v Piper
Aircraft Corp. (1973, CA2 NY) 480 F2d 341, 25 ALR Fed 534, cert den (1973) 414 US 910, 38 L Ed 2d 148, 94 S Ct 231, 94 S Ct 232 and cert den (1973) 414 US
924, 38 L Ed 2d 158, 94 S Ct 234.
SEC Rule 10b-5, promulgated under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), incorporates scienter requirement. First Virginia Bankshares v Benson
(1977, CA5 Ala) 559 F2d 1307, CCH Fed Secur L Rep P 96189, reh den (1977, CA5 Ala) 564 F2d 416 and cert den (1978) 435 US 952, 55 L Ed 2d 802, 98 S Ct
1580.
To prove scienter in 15 USCS § 78j case, plaintiff must demonstrate knowing or intentional misconduct on part of defendant, or intent to deceive, manipulate, or
defraud investors. Wechsler v Steinberg (1984, CA2 NY) 733 F2d 1054, CCH Fed Secur L Rep P 91475.
Failure to follow generally accepted accounting principles, without more, does not establish scienter. Provenz v Miller (1996, CA9 Cal) 95 F3d 1376, 96 CDOS 6780,
96 Daily Journal DAR 11109, CCH Fed Secur L Rep P 99311, withdrawn by publisher and amd (1996, CA9 Cal) 102 F3d 1478, 96 CDOS 9137, 96 Daily Journal DAR
15131, cert den (1997) 522 US 808, 139 L Ed 2d 14, 118 S Ct 48.
Scienter element requires only that defendant have knowledge of what he is doing and consequences of those actions; defendant need not have knowledge that such
actions are illegal. SEC v Falstaff Brewing Corp. (1980, App DC) 203 US App DC 28, 629 F2d 62, CCH Fed Secur L Rep P 97505, cert den (1980) 449 US 1012, 66 L
Ed 2d 471, 101 S Ct 569.
In civil action alleging violation of SEC Rule 10b-5, relevant inquiry is as to existence of broad course of fraudulent conduct. Re U. S. Financial Secur. In re U. S.
Financial Sec. Litigation (1974, SD Cal) 64 FRD 443, CCH Fed Secur L Rep P 94844.
Violations of rules of securities exchanges do not take place of scienter requirements for recovery under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and
SEC Rule 10b-5. Drasner v Thomson McKinnon Secur., Inc. (1977, SD NY) 433 F Supp 485, CCH Fed Secur L Rep P 96080.
Summary judgment was denied to either party in purchasers' class action for defendants' misleading statements under § 10(b) of Securities Exchange Act of 1934,
codified at 15 USCS § 78j(b), as to results of their work on developing new drug for cancer treatment as there were fact issues as to defendants' scienter and
whether purchasers detrimentally relied on misrepresentations. In re Ribozyme Pharms. Secs. Litig. (2002, DC Colo) 209 F Supp 2d 1106, CCH Fed Secur L Rep P
91960.
Court applied more lenient standard of Court of Appeals for Second Circuit, whereby plaintiffs may establish "strong inference" of scienter by alleging specific facts
that either (a) showed that defendants had both motive and opportunity to commit fraud or (b) constituted strong circumstantial evidence of conscious or reckless
misbehavior. In re Trex Co., Inc. Sec. Litig. (2002, WD Va) 212 F Supp 2d 596, CCH Fed Secur L Rep P 91921.
Accounting firm's Fed. R. Civ. P. 12(b)(6) motion to dismiss federal securities claims under § 10(b) of Securities Exchange Act of 1934 Act, 15 USCS § 78j(b), was
granted where allegations of generally accepted accounting principles violations were insufficient, standing alone, to raise inference of scienter under Private
Securities Litigation Reform Act, 15 USCS § 78u-4(b)(2). Ferris, Baker Watts, Inc. v Ernst & Young, LLP (2003, DC Minn) 293 F Supp 2d 1003, affd (2005, CA8 Minn)
395 F3d 851, CCH Fed Secur L Rep P 93078.
In § 10(b) of Securities Exchange Act case, although shareholder had adequately pled generally accepted accounting principles violation, this allegation was
insufficient to raise requisite strong inference of scienter. In re Flag Telecom Holdings, LTD. (2004, SD NY) 308 F Supp 2d 249.
Term "scienter" is defined as mental state embracing intent to deceive, manipulate, or defraud. SEC v C. Jones & Co. (2004, DC Colo) 312 F Supp 2d 1375.
Addressing plaintiffs' claims that company's CEO and CFO were presumed to have had pertinent knowledge about certain fraudulent transactions, court rejected
plaintiffs' request that court infer scienter from individuals' positions as CEO and CFO, admissions of former company employees, suppliers, and customers in criminal
informations, including that criminal actions were known and authorized by management, as well as senior management defendants' signing of hundreds of
thousands of dollars in checks to entities that admitted that they did not provide goods or services to company. Special Situations Fund, III, L.P. v Cocciola (In re
Suprema Specialties, Inc. Sec. Litig.) (2004, DC NJ) 334 F Supp 2d 637, CCH Fed Secur L Rep P 93004.
With respect to scienter element, mental state of corporation is established through mental states of its officers. In re Albert Glenn Yesner, CPA (2001) 2001 SEC
LEXIS 978.
34.--Showing of scienter not necessary
Showing of scienter is not necessary to establish cause of action for damages for violation of antifraud provisions of Securities Exchange Act. Ellis v Carter (1961,
CA9 Cal) 291 F2d 270.
Proof of scienter, in sense of knowledge of falseness of impression produced by statements or omissions made, is not required under § 10(b) of Securities Exchange
Act (15 USCS § 78j(b)). Vanderboom v Sexton (1970, CA8 Ark) 422 F2d 1233, CCH Fed Secur L Rep P 92590, 13 FR Serv 2d 370, cert den (1970) 400 US 852, 27 L
Ed 2d 90, 91 S Ct 47.
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Showing of scienter or any other state of mind is not necessary as separate element of SEC Rule 10b-5 action; proper standard to be applied is extent of duty that
Rule imposes on defendant. White v Abrams (1974, CA9 Cal) 495 F2d 724, CCH Fed Secur L Rep P 94457, 18 FR Serv 2d 1408 (ovrld in part by Hollinger v Titan
Capital Corp. (1990, CA9 Wash) 914 F2d 1564, CCH Fed Secur L Rep P 95500) and (ovrld in part as stated in Drnek v Variable Annuity Life Ins. (2004, DC Ariz) 2004
US Dist LEXIS 9490).
Scienter or any other state of mind is not necessary and separate element of action alleging violation of SEC Rule 10b-5. Clark v Watchie (1975, CA9 Wash) 513 F2d
994, 19 FR Serv 2d 1496, cert den (1975) 423 US 841, 46 L Ed 2d 60, 96 S Ct 72.
While material misrepresentations must be proved to support claim in civil action alleging violation of SEC Rule 10b-5, scienter on part of defendant need not be
shown. In re Memorex Sec. Cases (1973, ND Cal) 61 FRD 88, CCH Fed Secur L Rep P 94029, 17 FR Serv 2d 975.
Scienter is not necessary element of violation of SEC Rule 10b-5. Kramer v Loewi & Co. (1973, ED Wis) 357 F Supp 83, CCH Fed Secur L Rep P 93970.
Scienter or any other state of mind is not necessary or separate element of civil action alleging violation of SEC Rule 10b-5; proper standard to be applied is extent
of duty Rule imposed upon particular defendant; among factors to be considered in application of duty standard are: (a) relationship of defendant to plaintiff; (b)
defendant's access to information as compared to plaintiff's access; (c) benefit defendant derived from relationship; (d) defendant's awareness of whether plaintiff
was relying upon their relationship in making his investment decision; and (e) defendant's activity in initiating securities transactions in question. Jackson v Bache &
Co. (1974, ND Cal) 381 F Supp 71.
When Canadian chartered accountant argued that Securities and Exchange Commission's allegation failed because it had not argued scienter, court denied chartered
accountant's summary judgment motion because scienter was not element of allegation brought under § 10A of Securities Exchange Act of 1934. SEC v Solucorp
Indus. (2002, SD NY) 197 F Supp 2d 4, CCH Fed Secur L Rep P 91788, findings of fact/conclusions of law, judgment entered, claim dismissed (2003, SD NY) 274 F
Supp 2d 379.
35.--Showing of scienter necessary
Some form of traditional scienter is required for finding of violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). SEC v Texas Gulf Sulphur Co. (1968,
CA2 NY) 401 F2d 833, CCH Fed Secur L Rep P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
When private plaintiff rather than SEC brings suit under 15 USCS § 78j and Rule 10b-5, he must prove scienter by showing either intent to defraud or recklessness.
Gert v Elgin Nat'l Industries, Inc. (1985, CA7 Ill) 773 F2d 154, CCH Fed Secur L Rep P 92308, 3 FR Serv 3d 881.
To establish 15 USCS § 78j(b) liability for insider trading, plaintiff must prove that inside traders acted with scienter. Miller v Pezzani (In re Worlds of Wonder Sec.
Litig.) (1994, CA9 Cal) 35 F3d 1407, 94 CDOS 7125, CCH Fed Secur L Rep P 98393, cert den (1995) 516 US 868, 133 L Ed 2d 123, 116 S Ct 185 and (criticized in
Grossman v Novell, Inc. (1997, CA10 Utah) 120 F3d 1112, CCH Fed Secur L Rep P 99507, 1997 Colo J C A R 1616) and (criticized in Copperstone v TCSI Corp.
(1999, ND Cal) 1999 US Dist LEXIS 20978).
Even absent duty to speak, party who voluntarily discloses material facts in connection with securities transactions assumes duty to speak fully and truthfully on
those subjects. Kushner v Beverly Enters. (2003, CA8 Ark) 317 F3d 820, CCH Fed Secur L Rep P 92259, reh den, reh, en banc, den (2003, CA8) 2003 US App LEXIS
3630.
Stockholders' motive allegations that corporate officers were failing to write-off uncollectible accounts in order to inflate stock prices were insufficient to satisfy strong
inference of scienter required by Private Securities Litigation Reform Act (PSLRA), 15 USCS § 78u-4, in their complaint alleging violations of 15 USCS §§ 78j(b) and
78t(a). Goldstein v MCI Worldcom (2003, CA5 Miss) 340 F3d 238, 56 FR Serv 3d 94.
In securities fraud suit brought pursuant to §§ 10(b) and 20(a) of Securities Exchange Act of 1934, 15 USCS § 78a et seq., by investors against financial institution,
various officers and directors, and related entities (defendants), district court properly dismissed investors' second amended complaint because defendants' allegedly
misleading statement in Securities and Exchange Commission filing was protected by actual knowledge prong of safe harbor because investors did not plead facts
demonstrating that statement was made with actual knowledge that statement was false or misleading; facts did not support inference that defendants were trying
to hide anything from its investors; rather, they suggest that defendants had disclosed its losses in 2000 and in first quarter of 2001, and that it was endeavoring in
good faith to ascertain and disclose future losses. Slayton v Am. Express Co. (2010, CA2 NY) 604 F3d 758, CCH Fed Secur L Rep P 95746.
In rescission action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and SEC Rule 10b-5 scienter is essential element. Parker v Baltimore Paint &
Chemical Corp. (1965, DC Colo) 244 F Supp 267; Vacca v Intra Management Corp. (1976, ED Pa) 415 F Supp 248.
Even if defaulting borrower had right of first refusal to redeem or obtain purchaser for pledged stock, defendants who, without knowing of right, assisted in arranging
for sale to third person, could not be liable under SEC Rule 10b-5 since, in such situation, there can be no wrong without scienter. Dopp v Franklin Nat'l Bank (1974,
SD NY) 374 F Supp 904, CCH Fed Secur L Rep P 94484, 14 UCCRS 866.
Scienter, in connection with misrepresentation or omission, must be shown in civil action alleging violation of antifraud provisions of § 10(b) of Securities Exchange
Act (15 USCS § 78j(b)). Hickman v Groesbeck (1974, DC Utah) 389 F Supp 769.
Elements to be proved in an action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 include scienter. Jackson v Oppenheim (1974,
SD NY) 411 F Supp 659, CCH Fed Secur L Rep P 94894, affd in part and revd in part on other grounds (1976, CA2) 533 F2d 826, CCH Fed Secur L Rep P 95497.
In civil action based on alleged violation of SEC Rule 10b-5, plaintiff must make showing of something resembling traditional scienter by defendant before he can
recover. Fox v Kane-Miller Corp. (1975, DC Md) 398 F Supp 609, affd (1976, CA4 Md) 542 F2d 915.
Pleading that lacked motive for deliberate misrepresentation alleged was fatal to § 10(b) of Securities Exchange Act claim; it was dismissed without prejudice. Funke
v Life Fin. Corp. (2002, SD NY) 237 F Supp 2d 458.
Safe-harbor provision of PSLRA applied and class-action complaint was consequently dismissed, where shareholders did not plead facts giving rise to strong inference
pharmaceutical company knew their forward-looking statements were false with sufficient particularity required; shareholders' allegations were conclusory and failed
to adequately indicate that company officials knew falsity of their statements at time they were made. In re Noven Pharms., Inc. Secs. Litig. (2002, SD Fla) 238 F
Supp 2d 1315, CCH Fed Secur L Rep P 92245.
Combination of facts included in complaint satisfied shareholders' burden to plead scienter with respect to alleged misrepresentations and omissions of material fact,
where plaintiffs alleged, inter alia, that knowledge was demonstrated by reported declines in demand and sales for competitors; reduction in purchases by large
customers; existence of internal sales and bookings reports and other performance reports reportedly reviewed by individual defendants; availability of internal
system that forecasted future demand; scaling back of production; fact that terminated employees were asked to sign confidentiality agreements and agreements
precluding assistance in future litigation; unusual stock sales by CEO and CFO; and individual defendants' approval of public filings. In re Sci. Atlanta, Inc. (2002, ND
Ga) 239 F Supp 2d 1351, affd (2004, CA11 Ga) 374 F3d 1015, CCH Fed Secur L Rep P 92846, 17 FLW Fed C 689.
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Shareholders' complaint for securities fraud satisfied neither Fed. R. Civ. P. 12(b)(6) and 9(b), nor heightened pleading requirements of Private Securities Litigation
Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified in various sections of 15 USCS §§ 77a et seq. and 78a et seq.); with respect to their claims
under § 10(b) of Exchange Act and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, shareholders did not allege facts with particularity that gave rise to strong inference of
scienter. In re Keithley Instruments, Inc. Secs. Litig. (2002, ND Ohio) 268 F Supp 2d 887.
In action by investors against, inter alia, investment fund manager, investment fund auditor, and foreign parent of investment fund auditor, alleging, inter alia,
violations of 15 USCS §§ 78j(b) and 78t(a), foreign parent was denied summary judgment where investors raised sufficient factual issues regarding foreign parent's
scienter by pointing to sufficient facts in record such that reasonable jury, assessing substance of foreign parent's agent's involvement in foreign parent's Global
Financial Services Industries (GFSI) practice, could find that it was within scope of his agency to acquire knowledge of existence and quality of investment fund's
audits, investors presented sufficient evidence to support finding that agent's work with GFSI, and knowledge he acquired about off-shore investment funds during
that agency, was on account of foreign parent, and investors showed that investment fund audits themselves bore name and logo of foreign parent, raising at least
issue of fact as to investors' reliance on foreign parent's involvement with audits. Cromer Fin. Ltd. v Berger (2003, SD NY) 245 F Supp 2d 552, CCH Fed Secur L Rep
P 92299.
Corporation and its officers were granted summary judgment on claims that they underfunded reserve accounts and made material optimistic misstatements with
scienter that reserves were understated, where evidence showed understated reserves were part of industry-wide trend in medical insurance industry. In re John
Alden Fin. Corp. Secs. Litig. (2003, SD Fla) 249 F Supp 2d 1273.
Motion to dismiss second consolidated amended class action complaint was granted as to claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS §§
78j(b), where, inter alia, statements regarding alleged overcapitalization of interest on debt were not false or misleading and plaintiff investors failed to sufficiently
plead scienter for any defendant. In re Calpine Corp. Secs. Litig. (2003, ND Cal) 288 F Supp 2d 1054.
Securities fraud complaint was dismissed for failure to present sufficient evidence of scienter or deliberate recklessness by corporate insiders or to identify fraudulent
acts with specificity. Wietschner v Monterey Pasta Co. (2003, ND Cal) 294 F Supp 2d 1102.
Shareholders' claim under 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5 against stock-issuing company and its former CEO was dismissed Pursuant to 15 USCS §
78u-4(b)(2) where fact that company and CEO had to restate earnings pursuant to Securities and Exchange Commission accounting rule, knew of pooling method of
accounting, did not respond to another company's inquiries regarding possible strategic partnership, denied any change at company, restated earlier financial
information, and disclosed restructuring costs immediately following consummation of restructuring were insufficient to give rise to inference of scienter. Semon v
Ledecky (In re United States Office Prods. Sec. Litig.) (2004, DC Dist Col) 326 F Supp 2d 68, CCH Fed Secur L Rep P 92878.
In action involving securities fraud of corporation and its chief executive officer (CEO), CEO was not entitled to summary judgment under Fed. R. Civ. 56(c) on issue
of whether he had sufficient scienter to be liable under § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), and 17 C.F.R. § 240.10b-5(b), where
evidence showed that CEO set financial goals of corporation, participated in questionable financial transactions that inflated corporation's earnings, signed inaccurate
statements that were sent to SEC without investigating them to determine their accuracy, issued public releases, and had motive to commit fraud because he was
co-founder of corporation and sold stock in corporation. In re Homestore.com, Inc. Sec. Litig. (2004, CD Cal) 347 F Supp 2d 769.
Stock purchasers' allegations of false and misleading statements, in violation of Securities Exchange Act of 1934, 15 USCS § 78j(b), were insufficient to establish
scienter required by Private Securities Litigation Reform Act of 1995, 15 USCS § 78u-4 et seq., because (1) allegations of violations of generally accepted accounting
principles alone were insufficient and they were minor, unrelated to corporation's core business activity, unaccompanied by insider trading claims, and did not violate
corporation's internal policies, (2) bald allegations of intended acquisition of another company and use of stock to pay off debt did not establish motive to inflate
stock price, (3) there was no connection between resignation of two key employees and accounting errors, (4) claimed knowledge of accounting errors by two
officers did not establish more than negligence, and (5) insider stock sales were done solely for tax withholding purposes. In re Sportsline.com Sec. Litig. (2004, SD
Fla) 366 F Supp 2d 1159.
Securities fraud class plaintiffs were allowed to proceed on claims under Securities Exchange Act of 1934 that sufficiently alleged scienter, failure to comply with
GAAP, and on claims under Securities Act of 1933, for involvement in public offering from which plaintiff acquired shares, and for controlling person liability. In re
Friedman's, Inc. Sec. Litig. (2005, ND Ga) 385 F Supp 2d 1345.
Shareholders' securities fraud action under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), was dismissed because they failed to adequately plead
falsity and scienter under Private Securities Litigation Reform Act of 1995 (PSLRA), 15 USCS § 78u-4, with regard to their allegations regarding company's earning
guidance, development and performance of product, and with regard to company's allegedly false Securities Exchange Commission filings; additionally, statements
made with regard to earnings guidance were forward looking statements which fell under safe harbor provision of PSLRA, 15 USCS § 78u-5(c)(1)(A)(i). Limantour v
Cray Inc. (2006, WD Wash) 432 F Supp 2d 1129, CCH Fed Secur L Rep P 93875.
Owners and operators of dairy farms in California had not plead scienter required for § 10(b)(5) of Securities Exchange Act of 1934, 15 USCS § 78j(b), with regard to
certain cheese distributions or to failure to disclose that milk would not be protected by milk producer's trust fund. Lopes v Vieira (2008, ED Cal) 543 F Supp 2d
1149.
Unpublished: Shareholders' allegations did not elaborate regarding when or how CEO learned about his successor's checkered past or that CEO intentionally withheld
successor's past from, or recklessly disregarded importance of successor's past to, shareholders in order to deceive, manipulate, or defraud them; thus, shareholders
failed to meet Private Securities Litigation Reform Act's requirement that his complaint under 15 USCS § 78j state with particularity facts giving rise to strong
inference that each separate defendant acts with scienter with respect to each act or omission alleged. In re Pegasus Wireless Corp. Secs. Litig. (2009, SD Fla) CCH
Fed Secur L Rep P 95352, motion gr, complaint dismd, request den (2009, SD Fla) 2009 US Dist LEXIS 86382.
Unpublished: SEC's scienter determinations with respect to § 10(b) of Securities and Exchange Act of 1934, SEC Rule 10b-5, 17 CFR § 240.10b-5, and NASD
Conduct Rule 2120, were reversed because SEC failed to find that securities professionals had to have known that their actions presented danger of misleading their
clients. Gebhart v SEC (2007, CA9 Cal) CCH Fed Secur L Rep P 94524.
36.--Pleading
In individual's securities class action lawsuit, district court did not err in dismissing action because individual's complaint failed to meet required heightened pleading
requirements when he relied upon violation of Generally Accepted Accounting Principles to establish required element of scienter; heightened pleading standards of
Fed. R. Civ. P. 9(b) were not met and therefore his claim that 15 USCS § 78t(a) was violated also failed. Colin v Onyx Acceptance Corp. (2002, CA9 Cal) 31 Fed Appx
Plaintiff shareholders' failure to plead scienter with particularity, where inference of legitimate conduct was as likely under facts and plaintiffs' allegation that
fraudulent false statements had been made, rendered complaint dismissible for failure to state claim for which relief could be granted under Private Securities
Litigation Reform Act of 1995. Gompper v VISX, Inc. (2002, CA9 Cal) 298 F3d 893, 2002 CDOS 7011, 2002 Daily Journal DAR 9216, CCH Fed Secur L Rep P 91952
(criticized in Pirraglia v Novell, Inc. (2003, CA10 Utah) 339 F3d 1182, CCH Fed Secur L Rep P 92478) and (criticized in In re Kindred Healthcare, Inc. (2004, WD Ky)
2004 US Dist LEXIS 775).
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Shareholders' securities fraud claim under 15 USCS § 78j(b) was dismissed for failure to allege accounting violations with requisite particularity under FRCP 9(b) and
for failure to plead facts giving rise to strong inference that company acted with required state of mind under 15 USCS § 78u-4(b)(2), where shareholders failed to
provide any basis for fraud allegations or sources for amounts. K-Tel Int'l Sec. Litig. v K-Tel Int'l, Inc. (In re K-Tel Int'l Sec. Litig.) (2002, CA8 Minn) 300 F3d 881, CCH
Fed Secur L Rep P 91955, reh den, reh, en banc, den (2002, CA8) 2002 US App LEXIS 21772 and (criticized in In re Kindred Healthcare, Inc. (2004, WD Ky) 2004 US
Dist LEXIS 775).
Stockholders' complaint alleging securities fraud was properly dismissed under 15 USCS § 78u-4(b)(3)(A) for failure to plead with particularity under Fed. R. Civ. P.
9(b), because mere allegations of motive and opportunity were insufficient and there were no allegations that officers and directors sold their shares, calling into
question alleged motive to artificially inflate stock price, and successive resignations of key officials was more likely probative only of fact that company was failing.
Rosenzweig v Azurix Corp. (2003, CA5 Tex) 332 F3d 854, CCH Fed Secur L Rep P 92434 (criticized in Faye L. Roth Revocable Trust v UBS Painewebber Inc. (2004, SD
Fla) 323 F Supp 2d 1279, CCH Fed Secur L Rep P 92848, 17 FLW Fed D 720).
Dismissal of investors' securities fraud action under § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), was reversed because loss causation did not
require pleading stock price drop after corrective disclosure, but merely required sufficient identification of cause and pleading that price at time of purchase was
overstated; furthermore, allegations of scienter had to be collectively considered. Broudo v Dura Pharms., Inc. (2003, CA9 Cal) 339 F3d 933, 2003 CDOS 6976, 2003
Daily Journal DAR 8748, CCH Fed Secur L Rep P 92474 (criticized in D.E. & J L.P. v Conaway (2003, ED Mich) 284 F Supp 2d 719) and (criticized in In re Alamosa
Holdings, Inc. (2005, ND Tex) CCH Fed Secur L Rep P 93215) and revd, remanded (2005, US) 161 L Ed 2d 577, 125 S Ct 1627, CCH Fed Secur L Rep P 93218, 18
FLW Fed S 233.
Private Securities Litigation Reform Act permits aggregation of facts to infer scienter, and scienter must be found with respect to each defendant and with respect to
each alleged violation of statute; under circumstances of case, complaint contained factual allegations amply linking each defendant to their alleged violations of
statute and attributing required scienter to each defendant with respect thereto, and investors did not need to rely upon group pleading doctrine. Phillips v Scientific-
Atlanta, Inc. (2004, CA11 Ga) 374 F3d 1015, CCH Fed Secur L Rep P 92846, 17 FLW Fed C 689.
Retirement fund (RF) adequately pleaded scienter with respect to corporation's representation that objective date reinforced its belief that its tires were safe; at least
five of nine non-exclusive Helwig factors were apparent in complaint's alleged facts, including clear divergence between internal reports and external statements on
same subject; and RF adequately pleaded scienter with respect to corporation's representations in its annual report that (1) no impairment of its corporate assets
was substantially certain to occur through problems arising from customers or regulators' actions and (2) there were no actual, material losses connected to lawsuits
and responses to regulatory scrutiny of corporation's tires; key factor was divergence between internal reports and external statements on same subject. City of
Monroe Emples. Ret. Sys. v Bridgestone Corp. (2004, CA6 Tenn) 387 F3d 468.
Retirement fund did not adequately plead scienter with respect to corporate officer, where fund did not allege by direct allegation or even upon information and belief
that officer played any role in drafting, reviewing, or approving "objective data" representation or annual reports and did not allege that he was, as matter of practice
or by job description, typically involved in creation of such documents. City of Monroe Emples. Ret. Sys. v Bridgestone Corp. (2004, CA6 Tenn) 387 F3d 468.
Court affirmed dismissal for failure to state claim of investor's securities fraud claim against auditing firm, which alleged violations of § 10(b) of Securities Act of
1934, which is found at 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5; conclusory allegations of fraudulent intent and allegations of violations of
generally accepted accounting principles were insufficient to plead scienter with particularity, as was required by Private Securities Litigation Reform Act and Fed. R.
Civ. P. 9(b). Ferris, Baker Watts, Inc. v Ernst & Young, LLP (2005, CA8 Minn) 395 F3d 851, CCH Fed Secur L Rep P 93078.
Investors pled sufficient facts to avoid dismissal of their 15 USCS § 78j(b) claims against two corporate officers for failing to satisfy heightened pleading
requirements of 15 USCS § 78u-4(b)(2) by alleging that each officer's insider sales of over 30 percent of his holdings was not normal or routine for these officers and
that profits from trades were substantial in comparison to officers' overall compensation. In re Suprema Specialties, Inc. Secs. Litig. (2006, CA3 NJ) 438 F3d 256.
Investors pled sufficient facts to avoid dismissal of their 15 USCS § 78j(b) claims against two corporate officers for failing to satisfy heightened pleading
requirements of 15 USCS § 78u-4(b)(2) by attributing to each officer specific knowledge and conduct, which gave rise to requisite strong inference that they knew
that statements they made in connection with two public offerings were materially false and misleading. In re Suprema Specialties, Inc. Secs. Litig. (2006, CA3 NJ)
438 F3d 256.
Dismissal of pension fund's complaint claiming violations of §§ 10(b) and 20(a) of Securities Exchange Act of 1934, 15 USCS § 78j(b) and 78t(a), was reversed
because, following district court's decision, U.S. Supreme Court in Tellabs, Inc., v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) reversed higher standard for
scienter imposed by prior First Circuit law; given pension fund's specific factual allegations, temporal proximity between chief operating officer's statements that
problem with coronary stent had been "fixed "and third recall week later, and alleged insider trading, fund had pled enough to give rise to inferences that were at
least as strong as any competing inferences regarding scienter. Miss. Pub. Emples. Ret. Sys. v Boston Sci. Corp. (2008, CA1 Mass) 523 F3d 75, CCH Fed Secur L Rep
P 94645.
In reviewing allegations of scienter for purposes of 15 USCS § 78j(b) claim, Ninth Circuit will conduct dual inquiry: first, it will determine whether any of plaintiff's
allegations, standing alone, are sufficient to create strong inference of scienter; second, if no individual allegations are sufficient, it will conduct "holistic" review of
same allegations to determine whether insufficient allegations combine to create strong inference of intentional conduct or deliberate recklessness. Zucco Partners,
LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH Fed Secur L Rep P 95038.
In action under, § 10(b) of Securities Exchange Act, 15 USCS § 78j(b), complaint did not satisfy heightened standard for pleading scienter, 15 USCS § 78u-4(b)(2);
complaint alleged that defendant chief executive officer who had granted backdated options in 2000 and 2001 later signed security filings and made other statements
that minimally overstated earnings between 2004 and 2006; complaint contained no allegation that CEO had any knowledge of accounting principles relating to stock
options, and impact on financial statements during class period consisted of increase in non-cash expenses that was only 0.5 percent of revenue in 2004 and 0.17
percent of revenue in 2005. Rosenberg v Gould (2009, CA11 Ga) 554 F3d 962, CCH Fed Secur L Rep P 95033, 21 FLW Fed C 1369.
For purposes of class certification, plaintiff must state claim common to all proposed class members, and in proposed class action under 15 USCS § 78j, plaintiff must
not only allege that misrepresentation or omission was accompanied by requisite scienter with regard to transaction involving him, but must also allege scienter with
regard to all members of proposed class. Shivangi v Dean Witter Reynolds, Inc. (1985, SD Miss) 107 FRD 313, CCH Fed Secur L Rep P 92426, dismd (1986, SD Miss)
637 F Supp 1001, CCH Fed Secur L Rep P 93142, affd (1987, CA5 Miss) 825 F2d 885, CCH Fed Secur L Rep P 93364, 8 FR Serv 3d 980.
Investors do not adequately plead scienter under 15 USCS § 78j(b), in action against brokers, where complaint's allegations of scienter deal with excessive trading
and commissions and supervising unsuitability of trades, rather than knowledge of alleged material misstatements and omissions. Newman v Rothschild (1986, SD
NY) 651 F Supp 160, CCH Fed Secur L Rep P 93035.
Federal securities fraud claim against officers and directors of acquiring corporation is dismissed, even though shareholders of target company have adequately
pleaded that 1996 financial statements contained false statements, where no insider trading occurred until August 1997 and majority of insiders did not sell off their
stock until 1998, because they have not adequately pleaded that these statements were made with scienter. In re SmarTalk Teleservices, Inc. Sec. Litig. (2000, SD
Ohio) 124 F Supp 2d 487, CCH Fed Secur L Rep P 91276.
Investors could not establish a securities fraud action under § 10b of the Securities and Exchange Act of 1934, by pointing to an isolated inquiry from a single
executive and insinuating there from an improbable and highly improper motive for the entire corporation. Faulkner v Verizon Communs., Inc. (2002, SD NY) 189 F
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Lead plaintiff's allegations, individually and together, that outside directors of corporation violated § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934
(Exchange Act), and contents of corporate minutes supporting complaint were insufficient to establish scienter with respect to any outside director; complaint also
failed to adequately plead insider trading as primary violation of Exchange Act; it therefore failed to state claim under § 10(b). Newby v Lay (In re Enron Corp. Secs.)
(2003, SD Tex) 258 F Supp 2d 576, CCH Fed Secur L Rep P 92296.
Even if group pleading doctrine survived 15 USCS § 78u-4(b), investors still had to allege facts supporting inference that statement was attributable to individual
defendant officers and directors of defendant company, and had to allege facts establishing that each individual defendant knew, or recklessly ignored, that
statements were materially false or misleading; merely stating which office individual defendant held was insufficient and thus complaint alleging securities fraud
under 15 USCS § 78j(b) was dismissed under Fed. R. Civ. P. 9(b), 12(b)(6). Johnson v Tellabs, Inc. (2003, ND Ill) 262 F Supp 2d 937, CCH Fed Secur L Rep P 92423
(criticized in Adams v Kinder-Morgan, Inc. (2003, CA10 Colo) 340 F3d 1083, CCH Fed Secur L Rep P 92479) and motion gr, reconsideration den, dismd (2004, ND Ill)
303 F Supp 2d 941.
Amendment of securities fraud claim was denied where motion to amend was filed three years after dismissal of prior complaint, where plaintiffs had not indicated
any information that was not available when they submitted previous complaint, and where plaintiffs consistently failed to plead their allegations with sufficient
particularity and therefore failed to establish strong inference of deliberate recklessness required under Private Securities Litigation Reform Act standard. In re Fritz
Cos. Secs. Litig. (2003, ND Cal) 282 F Supp 2d 1105.
Alternative reason to dismiss investors' complaints alleging securities fraud was complaints failed to allege scienter; no cognizable facts were pleaded to show that
defendant investment companies intended to cause loss to investors by intentionally deceiving them, and investors missed distinction between misrepresentations
punishable as breaches of conscience by public regulators and those punishable at law by courts. In re Merrill Lynch & Co. Research Reports Sec. Litig. (2003, SD NY)
289 F Supp 2d 416 (criticized in In re Cree, Inc. Sec. Litig. (2004, MD NC) 333 F Supp 2d 461, CCH Fed Secur L Rep P 92905) and (criticized in Swack v Credit
Suisse First Boston (2004, DC Mass) CCH Fed Secur L Rep P 92924).
Where investors alleged that corporate officers made various statements to its investors with respect to falling delinquencies and adequate reserves, investors had
adequately pled "who, what, when, where and how" with respect to specific statements to satisfy Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act, 15
USCS § 78u-4(b); thus, motions to dismiss investors' claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), Securities Exchange Commission
Rule 10-b, 17 C.F.R. § 240.10b-5, were denied. In re Sears, Roebuck & Co. Sec. Litig. (2003, ND Ill) 291 F Supp 2d 722, CCH Fed Secur L Rep P 92605.
Court dismissed plaintiffs' complaint, brought on behalf of class of investors and alleging violations of 15 USCS §§ 78j(b) and 78t(a) of Securities Exchange Act of
1934 and 17 C.F.R. § 240.10b-5, where complaint did not comply with heightened pleading requirements of Private Securities Litigation Reform Act of 1995 (PSLRA),
15 USCS §§ 78a et seq., in that plaintiffs failed to plead with requisite particularity factual allegations of wrongdoing and factual allegations necessary to establish
that defendants acted with required state of mind. In re ICN Pharms., Inc. (2004, CD Cal) 299 F Supp 2d 1055.
Although certain statements about availability of, demand for, and acceptance of corporation's product, together with channel stuffing claims, were actionable as
securities fraud, complaint did not sufficiently allege scienter under Private Securities Litigation Reform Act of 1995 (PSLRA); group pleading could not be used under
PSLRA for allegations of scienter, and allegations of insider trading, access to reports, and individual defendants' positions in corporation did not establish strong
inference of scienter. Johnson v Tellabs, Inc. (2004, ND Ill) 303 F Supp 2d 941.
Individuals' allegations of securities fraud under § 10(b) and Rule 10b-5 of Securities and Exchange Act of 1934, brought under Private Securities Litigation Reform
Act (PSLRA), were dismissed because individuals' complaint failed to create strong inference of scienter on part of defendants with regard to misstatement of
corporation's earning over six year period; individuals' complaint contained insufficient allegations of scienter because: (1) inference of scienter could not be based
solely on magnitude of accounting error; (2) individuals had not alleged any specific facts that defendants were aware of accounting error nor did they cite any red
flags that suggested deliberate ignorance on part of defendants; and (3) individuals' attempt to show scienter was insufficient because it was based merely upon
patching together of magnitude of accounting error, defendants' alleged motive and opportunity for misstating income, violations of generally accepted accounting
principles, and out-of-context alleged "admission" of corporation's chief financial officer. Merzin v Provident Fin. Group Inc. (2004, SD Ohio) 311 F Supp 2d 674.
Court denied accounting firm's motion to dismiss shareholders' amended securities fraud complaint as to its claim that shareholders failed to adequately plead
scienter because, when grave overstatements and understatements in income statement, balance sheet, and statement of cash flows were taken into consideration
with relatively small number of transactions during class period and fact that one fabricated transaction constituted 74 percent of corporation's business, it did not
appear that accounting firm conducted any type of audit whatsoever; such drastic overstatement, combined with alleged Generally Accepted Accounting Principles
and Standards violations and fact that numerous documents should have led accounting firm to investigate, established scienter. In re Eagle Bldg. Techs., Inc. Sec.
Litig. (2004, SD Fla) 319 F Supp 2d 1318.
Although outside auditor argued that plaintiffs had failed to allege, even in conclusory fashion, scienter on part of any individual employee named as defendant,
plaintiffs devoted over thirty paragraphs to pleading auditor's scienter and complaint specifically alleged that auditor acted with scienter and did so through specific
allegations as to individual defendants' roles in perpetrating fraud; whether those individuals actually acted with requisite scienter remained issue of fact to be
decided at later stage of litigation, but as matter of pleading, plaintiffs sufficiently alleged scienter on part of auditor's individual employees to sustain claim under §
10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b). In re Global Crossing, Ltd. Sec. Litig. (2004, SD NY) 322 F Supp 2d 319, CCH Fed Secur L Rep P
92717.
Plaintiff investors' allegations that management hid ownership in related company on date of license agreement and that management later disgorged shares and
then denied that management had ownership or financial interests in company suggested scienter under 15 USCS § 78u-4(b)(1), (2), part of Private Securities
Litigation Reform Act, by defendants, company, its chairman, and its chief executive and financial officers, in securities litigation case filed under §§ 10(b), 20(a), of
Securities Exchange Act of 1934, 15 USCS §§ 78j(b), 78t, and 17 C.F.R. § 240.10b-5; complaint suggested defendants had actual knowledge of skewed finances
sufficient to support claims based on misleading forward-looking statements under 15 USCS § 78u-5(c)(1). In re Stellent, Inc. Secs. Litig. (2004, DC Minn) 326 F
Complaint alleging violations of § 10b of Securities Exchange Act of 1934, 15 USCS § 78j(b), Securities and Exchange Commission Rule 10b-5, 17 C.F.R. §
240.10b-5(b), and § 20(a) of 1934 Act, 15 USCS § 78t(a), was dismissed under Fed. R. Civ. P. 12(b)(6) and under 15 USCS § 78u-4 where (1) with respect to most
of individual defendants, purchasers failed to allege scienter with particularity because there was no evidence that they had knowledge of illegal payments and there
was nothing unusual about their stock sales to support finding of insider trading; (2) although scienter was sufficiently alleged with respect to three individual
defendants, purchasers failed to sufficiently plead that any of statements were false or misleading; and (3) purchasers could not prevail under § 20(a) of 1934 Act
where court found no violation of § 10(b) of Act or Rule 10b-5. In re Syncor Int'l Corp. Secs. Litig. (2004, CD Cal) 327 F Supp 2d 1149, CCH Fed Secur L Rep P
92897.
Investors failed to adequately plead scienter under Private Securities Litigation Reform Act, 15 USCS § 78u-4, and to adequately plead their claims under 15 USCS §
78j(b), where investors made only very general allegations as to scope and content of defendant underwriter's due diligence and defendant accounting firm's audits,
but did not identify specific transactions that underwriter or accounting firm elected not to investigate or otherwise overlooked and did not provide requisite
specification of "each statement alleged to have been misleading, and reasons why statement is misleading" as required under 15 USCS § 78u-4(b)(1). In re
Interbank Funding Corp. Secs. Litig. (2004, DC Dist Col) 329 F Supp 2d 84, CCH Fed Secur L Rep P 92882.
Investor's failed to state securities fraud claim under 15 USCS §§ 78j(b) and 78u-4 where investors failed to establish loss causation because they failed to spell out
logical steps between subject corporation's insolvency and liability of defendant brokerage firm and accounting firm for investors' loss. In re Interbank Funding Corp.
Secs. Litig. (2004, DC Dist Col) 329 F Supp 2d 84, CCH Fed Secur L Rep P 92882.
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Where plaintiffs had adequately alleged defendants' motive and opportunity to commit fraud, and where there was no dispute that defendants had opportunity to
commit fraud through various representations and warranties they made in purchase agreement, opinion, and certificate, court found that plaintiffs had sufficiently
alleged violations of 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5, and therefore defeated defendants' claims that plaintiffs failed to sufficiently allege violations
under those provisions; therefore, court denied defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). Marcus v Frome (2004, SD NY) 329 F Supp 2d
464, CCH Fed Secur L Rep P 92890 (criticized in N.Y. City Emples. Ret. Sys. v Ebbers (In re WorldCom, Inc. Sec. Litig.) (2005, SD NY) 2005 US Dist LEXIS 4805).
Actions for securities fraud filed pursuant to § 10(b), 15 USCS § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10-b(5), are subject to pleading requirements of Fed. R. Civ.
P. 9(b) and Private Securities Litigation Reform Act of 1995, 15 USCS §§ 78u-4 et seq. Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v Dynegy, Inc. (In re
Dynegy, Inc.) (2004, SD Tex) 339 F Supp 2d 804.
Security holders' 15 USCS § 78j(b) claim against drug company and certain officers and directors was dismissed where allegations of financial motive and likely
timing of animal testing did not create strong inference of scienter as none of confidential witnesses had personal knowledge of most important facts and they failed
to provide sufficient detail and there was no evidence that level of toxicity present in drug violated clear-cut Food and Drug Administration policy. In re Vertex
Pharms., Inc., Sec. Litig. (2005, DC Mass) 357 F Supp 2d 343, CCH Fed Secur L Rep P 93123.
Court determined that purchaser of certain securities called GOALs, who alleged that corporation had practice of fraudulently recognizing revenue in violation of
generally accepted accounting principles, had to sufficiently allege that any misstatements were in connection with GOALS, that purchaser relied on any
misstatements, or that misstatements were accompanied by scienter; court had determined that purchaser had sufficiently alleged action for securities fraud. Zelman
v JDS Uniphase Corp. (2005, ND Cal) 376 F Supp 2d 956, CCH Fed Secur L Rep P 93324.
Investors failed to adequately plead scienter as required by 15 USCS § 78u-4(b)(2), part of Private Securities Litigation Reform Act (PSLRA), with respect to
allegations that corporation and three executives violated § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 by engaging in accounting fraud and
misrepresenting source of sales increase; as PSLRA abolished group pleading doctrine, knowledge of corporation's financial reporting could not be attributed to
defendants generally, and claims that officers reviewed or should have reviewed contents of sales reports did not adequately allege scienter. In re Bio-Technology
Gen. Corp. Secs. Litig. (2005, DC NJ) 380 F Supp 2d 574.
Complaint alleging violations of 15 USCS § 78j(b) was not dismissed for failing to meet requirements of Fed. R. Civ. P. 9 since it specified where and when individual
filed misleading information, individuals who advised him to do so, and steps he took to conceal action. SEC v Penthouse Int'l, Inc. (2005, SD NY) 390 F Supp 2d
In securities fraud action, securities purchasers sufficiently alleged scienter as to their claims concerning corporation's alleged claims handling misrepresentations
where they claimed that corporation's misstatements and/or omissions were taken for purpose of maintaining its standing with various rating agencies, enabling
corporation to access capital markets on favorable terms, fostering consumer confidence in corporation, and personally enriching its directors through both those
elements of their compensation packages that were tied to performance of corporation's stock and their own substantial personal holdings of corporation's securities;
purchasers clearly and specifically alleged knowing and deliberate scheme to deny legitimate disability claims for express purpose of enabling corporation to convert
claim reserves into income, and therefore it could be reasonably inferred that corporation's failure to disclose these activities or otherwise account for resulting
liability exposure was also knowing and intentional. In re Unumprovident Corp. Secs. Litig. (2005, ED Tenn) 396 F Supp 2d 858, motion gr, in part, motion den, in
part, dismd, in part, motion gr, in part, motion den, in part (2005, ED Tenn) 2005 US Dist LEXIS 31853.
In securities fraud action, securities purchasers did not sufficiently allege scienter because purchasers did not allege that they ever purchased or owned any
securities issued by or reflecting obligations of corporation; certificates they purchased were issued by unaffiliated entity; absence of any obvious pecuniary,
personal, or business motivation on part of corporation in attempting to defraud investors in certificates made any inference of scienter marginally weaker. In re
Unumprovident Corp. Secs. Litig. (2005, ED Tenn) 396 F Supp 2d 858, motion gr, in part, motion den, in part, dismd, in part, motion gr, in part, motion den, in part
(2005, ED Tenn) 2005 US Dist LEXIS 31853.
Shareholder's 15 USCS § 78j claim was dismissed because it failed to adequately plead scienter; under Private Securities Litigation Reform Act of 1995, 15 USCS §§
78u-4 et seq., absent allegations that defendants benefited from inflated stock price immediately in more direct and less common manner, allegations of incentive
compensation and stock ownership were insufficient basis for establishing motive. Johnson v NYFIX, Inc. (2005, DC Conn) 399 F Supp 2d 105.
In securities fraud case in which investors claimed that defendants, mortgage bank and certain of its senior officers, made materially false and misleading statements
representing that bank had successfully integrated certain mortgage origination and servicing acquisitions and was well positioned to withstand interest rate changes
but that bank had, in fact, not integrated its acquisitions, and had not integrated different information technology systems used by each, and that lack of integrated
information technology system made it impossible for company to be well positioned, plaintiffs attempted to impute requisite knowledge on basis of individual
defendants' job titles and responsibilities; while one defendant was alleged to have been president of bank's commercial group and its chief administrative officer,
responsible for overseeing various lending businesses and acquisition integration, his job titles and responsibilities would support inference of knowledge only if there
were other circumstantial evidence regarding his possession of knowledge. Job titles and responsibilities could not, without more, create strong inference of scienter.
S. Ferry LP # 2 v Killinger (2005, WD Wash) 399 F Supp 2d 1121.
information technology system made it impossible for company to be well positioned, plaintiffs failed to plead contextual facts that allowed court to draw strong
inference of scienter from several individual defendants' insider trading where one defendant appeared to have some sort of routine trading plan, plaintiffs failed to
provide trading history for second defendant and did not allege that his sale was somehow suspicious, and limited and sparse nature of third defendant's trading
history did not permit inference from amount traded. S. Ferry LP # 2 v Killinger (2005, WD Wash) 399 F Supp 2d 1121.
Stockholder failed to state securities fraud claim under 15 USCS § 78j(b) against corporation and executives based on allegations that paid circulation numbers for
newspapers owned by corporation had been overstated, resulting in artificial inflation of corporation's stock price, as scienter was not adequately alleged under 15
USCS § 78u-4(b) of Private Securities Litigation Reform Act of 1995; some of executives were allegedly involved in inflating circulation numbers but were not alleged
to have taken steps to mislead investing public, and allegations against other executives did not support inference that they knew that circulation was overstated. Hill
v Tribune Co. (2006, ND Ill) 39 EBC 1845.
Plaintiffs' securities claims failed for failing to allege requisite scienter because even assuming arguendo that alleged scheme to inflate five-day average closing price
of corporation's stock could have succeeded, plaintiffs had not sufficiently addressed independent grounds for rejecting their motive and opportunity allegations. In re
GeoPharma, Inc. (2006, SD NY) 411 F Supp 2d 434.
Allegations of accounting fraud, insider trading, motive, and opportunity were sufficient to state claim under 15 USCS § 78j(b) against corporation and various
individual defendants (directors and executives) except for one; defendants failed to show they were entitled to protection of statutory safe harbor for certain
allegedly fraudulent forward-looking statements. In re Cardinal Health, Inc. Sec. Litigs. (2006, SD Ohio) 426 F Supp 2d 688.
Investors' claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), were dismissed because investors failed to plead scienter under either theory
of motive and opportunity or theory of recklessness because (1) investors argued that former administrator's only possible motive to affect funds' net asset values
was illicit one--to inflate its own fees, (2) but complaint contained no allegations with respect to former administrator's fees, and thus investors failed to plead
scienter based on motive and opportunity, (3) even if investors had alleged former administrator's scienter based on motive and opportunity, group pleading doctrine
did not allow investors to automatically impute scienter of former administrator to directors, and (4) investors' allegations were too conclusory to support inference
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that directors should have discovered manager's scheme to manipulate stock prices. Pension Comm. of Univ. of Montreal Pension Plan v Banc of Am. Sec., LLC (2006,
SD NY) 446 F Supp 2d 163.
In securities class action under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), magnitude of restatement significantly contributed to finding of
scienter, as complaint alleged that restatement resulted in net loss for year 2000 of $ 2,500,000 instead of net income of $ 20,400,000, and restatement for 2001
resulted in net loss of $ 11,600,000 rather net income of $ 2,800,000; further, alleged nature of defendant accounting firm's Generally Accepted Accounting
Principles violations constituted evidence contributing to strong inference of scienter; one statement suggested firm recognized importance of Staff Accounting
Bulletin 101 to defendant company's revenue recognition policies and recognized significant possibility that company's revenue recognition policies would come under
close scrutiny, but firm continued to hide fact that company based its revenue recognition policies on accounting standards directly applicable to movie industry, not
on accounting literature specific to seismic data industry. In re Seitel, Inc. Secs. Litig. (2006, SD Tex) 447 F Supp 2d 693.
Section 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), complaint was dismissed because scienter was not adequately alleged where complaint did not
allege that defendant company officers generally knew that their statements were false or misleading and did not identify any instances in which officers evidenced
knowledge of alleged conduct or were present for specifically identified meetings or communications in which channel-stuffing was specifically alleged to have been
discussed. In re Spectrum Brands, Inc. Sec. Litig. (2006, ND Ga) 461 F Supp 2d 1297.
Investors adequately pleaded scienter under 15 USCS § 78u-4(b)(2) for violations of § 10(b) of Securities Exchange Act of 1934, and S.E.C. Rule 10-5 as to
corporation and its chief executive officer (CEO) because, besides accounting violations, CEO was directly confronted about defects with new product, all of which
amounted to extreme departure from ordinary care; however, there was no evidence that other top officers were severely reckless or that they were told of product
defects, and failure to write down inventory mere months prior to actual write down of inventory was at most claim of negligence or corporate mismanagement and
not evidence of scienter for fraud. Schultz v Applica, Inc. (2007, SD Fla) 488 F Supp 2d 1219.
Amended complaint failed to plead, with requisite particularity, that named defendants made knowingly false statements about any material matter either directly or
by violating GAAP (§ 10(b), 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5), that they controlled someone who violated these provisions (§ 20(a), 15 USCS
§ 78t(a)), or that shareholder defendants traded on material nonpublic information (§ 20A, 15 USCS § 78t-1(a)); therefore pleading requirements for Private
Securities Litigation Reform Act, 15 USCS § 78u-4(b), had not been met. In re Wet Seal, Inc. Secs. Litig. (2007, CD Cal) 518 F Supp 2d 1148, CCH Fed Secur L Rep P
94473.
Investors' class action complaint met requirements of Fed. R. Civ. P. 9(b) and 15 USCS § 78u-4(b) in alleging violations of 15 USCS § 78j(b) by corporation, its
former vice-president of finance, and its senior executive officers; action arose from decline in corporation's stock price following restatement of previously reported
earnings, and complaint adequately alleged scienter because it alleged that corporation filed Form 8-K disclosing accounting improprieties by vice-president, lack of
internal controls to prevent accounting malfeasance, and high level of recklessness by executive officers who knew or should have known of accounting irregularities
in exercise of reasonable care. In re ProQuest Secs. Litig. (2007, ED Mich) 527 F Supp 2d 728, CCH Fed Secur L Rep P 94510.
In putative class suit against pharmaceutical company and its officers and directors (defendants), based on statements regarding new drug to treat cardiovascular
disorders, investors failed to adequately allege scienter under 15 USCS § 78j(b) because neither alleged insider trading nor secondary placement of securities
established motive and opportunity showing requisite intent. In re AstraZeneca Sec. Litig. (2008, SD NY) 559 F Supp 2d 453, CCH Fed Secur L Rep P 94751.
Scienter was not adequately alleged (15 USCS § 78u-4(b)(2); Fed. R. Civ. P. 9(b)) in action under § 10(b) of Securities Exchange Act of 1934 and S.E.C. Rule 10b-5:
defendant company's restatement of financials covered four year period, and it brought to light numerous accounting irregularities, while these facts would have
tended to favor inferring scienter, net income was restated downward by less than one percent of total net income for period; information provided by confidential
sources was so general and ambiguous as to be useless and did not contribute to inference of scienter; Sarbanes-Oxley certifications did not add much to inference
of scienter; plaintiffs put forth no allegations of specific "glaring" accounting irregularities or other red flags; and, inter alia, fact executives based their compensation
on company performance (as measured partly by revenue-related numbers), did not lead to inference of fraudulent intent. In re Dell Inc., Securities Litig. (2008, WD
Tex) 591 F Supp 2d 877, CCH Fed Secur L Rep P 94891.
Where plaintiff investors alleged "suspiciously timed" option grants by defendant corporation to defendant officers and directors, but failed to allege that any specific
grant to any specific defendant was backdated, claims under 15 USCS §§ 78j(b), 78n(a), 78t, and 78t-1(a), failed; additionally, complaint failed to allege adequate
basis for claim that corporation was required to record compensation expense for options. Edward J. Goodman Life Income Trust v Jabil Circuit, Inc. (2009, MD Fla)
595 F Supp 2d 1253, CCH Fed Secur L Rep P 95049.
Investors failed to state securities fraud claim under 15 USCS § 78j(b) and 17 CFR § 240.10b-5 based on allegations of false statements and omissions regarding
manufacturer's medical device; allegations did not satisfy heightened pleading requirements of 15 USCS § 78u-4(b) as to scienter; court declined to adopt "collective
corporate scienter" doctrine, finding instead that it was necessary to allege that manufacturer's officers had scienter. In re Medtronic Inc., Sec. Litig. (2009, DC Minn)
In claim in which plaintiff lost money after investing in auction rate securities sold by broker in financial services company, plaintiff failed to adequately allege fraud
against company, related underwriting company, and their parent company for alleged violations of 15 USCS §§ 78j, 78g, and 17 CFR § 240.10b-5, because plaintiff
failed to provide particularized allegations of misrepresentations that could be attributable to one entity and whether or not other two entities even knew about
misrepresentations; further, plaintiff failed to set forth specific allegations of scienter, and assertions that entities were motivated by profit were insufficient, and
there was no evidence of conscious misbehavior or recklessness on part of entities. Defer LP v Raymond James Fin., Inc. (2009, SD NY) 654 F Supp 2d 204.
Shareholders' claims that corporation's chief executive officer and chief financial officer violated 15 USCS § 78j(b) and 17 CFR § 240.10b-5, when statements about
corporation's revenue later proved to be inaccurate, were dismissed because (1) shareholders' complaint made no reference to any documents that would support
strong inference that officers had any knowledge as to inadequacy of corporation's internal controls or flaws in corporation's revenue calculations that led to inflation
of price of corporation's stock, and (2) specific type of corporate accounting errors, officers' Sarbanes-Oxley certifications as to accuracy of earlier revenue
statements, and fact that officers' executive positions within corporation made officers privy to confidential proprietary information concerning corporation, on which
shareholders relied, were insufficient to support scienter element of claims. Stevens v InPhonic, Inc. (2009, DC Dist Col) 662 F Supp 2d 105, CCH Fed Secur L Rep P
95377.
Shareholders' claims that corporation's chief executive officer and chief financial officer violated 15 USCS § 78j(b) and 17 CFR § 240.10b-5, when statements about
corporation's revenue later proved to be inaccurate, based on officers' motive and opportunity to commit fraud and officers' sale of part of officers' shares in
corporation, were dismissed because shareholders' allegations regarding officers' profit motive and sale of stocks were not enough to cause reasonable person to find
them as compelling as officers' nonfraudulent explanations and thus did not support strong inference of scienter. Stevens v InPhonic, Inc. (2009, DC Dist Col) 662 F
Shareholders' claims that corporation's chief executive officer and chief financial officer violated 15 USCS § 78j(b) and 17 CFR § 240.10b-5, when restatement of
corporation's revenue and expenses later proved to be inaccurate, because shareholders alleged no facts from which strong inference of scienter could be inferred
with respect to restatement claims, as shareholders offered only vague allegation that chief executive officer knew restatement was misleading due to "access to
material non-public information." Stevens v InPhonic, Inc. (2009, DC Dist Col) 662 F Supp 2d 105, CCH Fed Secur L Rep P 95377.
Shareholders' claims that corporation's chief executive officer and chief financial officer violated 15 USCS § 78j(b) and 17 CFR § 240.10b-5, when officers issued
press release announcing corporation's definitive agreement with another company, which was later terminated, were dismissed because shareholders only identified
statements which declared that agreement between companies had been signed and that this agreement had subsequently been terminated, and revelation that
agreement was later terminated did not establish that there was never any agreement at all, much less that officers knowingly or with extreme recklessness
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misrepresented existence of agreement when in fact none existed, so shareholders failed to adequately plead scienter. Stevens v InPhonic, Inc. (2009, DC Dist Col)
Shareholders' claims that corporation's chief executive officer and chief financial officer violated 15 USCS § 78j(b) and 17 CFR § 240.10b-5, when chief executive
officer issued statement that another company had made investment in corporation which was not made, were not dismissed because statement clearly conveyed
impression that other company had already made investment, and chief executive officer did not clarify this erroneously conveyed impression in subsequent
conference call on same date, establishing strong inference of scienter, but claim was dismissed as to chief financial officer because chief financial officer had
resigned months before statement was made. Stevens v InPhonic, Inc. (2009, DC Dist Col) 662 F Supp 2d 105, CCH Fed Secur L Rep P 95377.
Investor sufficiently stated scienter under 15 USCS § 78u-4(b)(2) for SEC violation under 15 USCS § 78j(b) against three officers of lender because it alleged that
officers were members of executive management team, made public representations about state of lender's risk management, and had actual knowledge or acted
with deliberate recklessness in making soothing statements about risk. South Ferry LP # 2 v Killinger (2009, WD Wash) 687 F Supp 2d 1248.
In teachers' retirement system's securities fraud suit against corporation, its chairman, and its vice president (defendants), defendants' motion to dismiss was
denied, in part, as to allegations asserting that defendants made misstatements and omissions with regard to corporation's total exposure with regard to
collateralized debt obligations (CDOs) as system adequately alleged that CDOs were material, even if they represented small fraction of corporation's overall insured
portfolio; sufficient facts were pled to question whether defendants provided truth-on-the-market with degree of intensity and credibility sufficient to counter-balance
allegedly misleading statements; however, system failed to sufficiently allege that statements regarding control rights and payment obligations for CDOs were
materially misleading at time they were made; further, as to individual claims against chairman and vice president, court held that system failed to allege that they
acted with requisite scienter to sustain counts against them for control person liability. In re MBIA, Inc. Sec. Litig. (2010, SD NY) 700 F Supp 2d 566, CCH Fed Secur
L Rep P 95705.
Complaint sufficiently pleaded elements of securities fraud, including scienter and reliance, under 15 USCS §§ 78j(b), 78u-4(b)(1), 17 CFR § 240.10b-5, and Fed. R.
Civ. P. 9(b) by specifically alleging participation of individual directors and officers in backdated options scheme and repurchase of shares at artificially low prices,
thus suggesting motive and opportunity. In re Fossil, Inc. (2010, ND Tex) 713 F Supp 2d 644.
Unpublished: Appellant's complaint failed to satisfy heightened pleading requirements of Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act of 1995, 15
USCS § 78u-4; first, almost all statements identified by appellant were projections about defendant company's financial growth, or expressions of general optimism
about financial health; second, appellant alleged company falsified its earnings to maintain its credit line, but its complaint was bereft of facts or details supporting
that conclusion, so court was left to speculate about what particular information was hidden, what financial figures were manipulated, and when any of defendants
knew of or implemented such fraudulent devices. Key Equity Investors Inc. v Sel-Leb Mktg. Inc. (2007, CA3 NJ) 2007 US App LEXIS 21392.
Unpublished: Plaintiffs failed to state claim under § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), because plaintiffs' cursory allegations that
defendants failed to record accurately on company's balance sheet value of certain assets and other alleged departures from Generally Accepted Accounting
Principals established neither defendants' motive and opportunity nor strong circumstantial evidence of conscious behavior or recklessness. Caiafa v Sea Containers,
Ltd. (2009, CA2 NY) 2009 US App LEXIS 10569.
Unpublished: Securities fraud complaint under 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5(b) failed to adequately plead scienter as required under 15 USCS §
78u-4(b)(2) of Private Securities Litigation Reform Act of 1995; alleged motives for fraud, including acquisition of company, securing credit facilities, and completing
offerings, did not establish strong inference of scienter, nor were there sufficient allegations of recklessness based on alleged violations of generally accepted
accounting principles. In re Interpool, Inc. Sec. Litig. (2005, DC NJ) CCH Fed Secur L Rep P 93508.
37.--Jury Instructions
Although instruction that plaintiff in securities fraud case must prove by clear and convincing evidence that defendants acted with scienter was erroneous, no
prejudice is shown when action also included claim for common law fraud, elements of which are same as those for statutory fraud claim, and jury found against
plaintiffs on common law fraud claim, thus indicating that proof would have failed even if correct instruction had been given. Cavalier Carpets, Inc. v Caylor (1984,
CA11 Ga) 746 F2d 749, CCH Fed Secur L Rep P 91844.
District Court in action under § 78j(b) based on churning of client's account with brokerage firm did not abuse its discretion in instructing jury on essential element of
scienter where instructions, taken as whole, included statement that churning only occurs when broker willfully abuses his customer's confidence for personal gain.
Davis v Merrill Lynch, Pierce, Fenner & Smith (1990, CA8 SD) 906 F2d 1206, CCH Fed Secur L Rep P 95311.
Although court's instruction to jury that element of § 10(b) of Securities Act of 1934, 15 USCS § 78j(b), was that "defendant engaged in act, practice, or course of
business that operated, or, by ordinarily prudent person in his position at time he acted, would be expected to operate as fraud or deceit upon some person,"
standing alone, could be said to inject incorrect negligence standard, district court plainly instructed jury that it must find intentional or knowing conduct in order to
find requisite scienter; jury's special finding that defendant acted with intent and with knowledge further demonstrated that there was no prejudice. SEC v Happ
(2004, CA1 Mass) 392 F3d 12.
Where defendants were tried under 15 USCS §§ 78j(b) and 78ff(a) for committing securities fraud by failing to disclose commissions they received for selling
investment interests in limited liability companies that were formed to finance production and distribution of motion pictures, "no ultimate harm" jury charge was
warranted because defendants argued that even if they intended to deny investors information, they believed that there would be no ultimate harm to investors
because movies would be produced as promised. United States v Leonard (2008, CA2 NY) 529 F3d 83, CCH Fed Secur L Rep P 94746.
Unpublished: There was no error in jury instructions, as brokers and salesmen were under duty to investigate, and breach of that duty could constitute reckless
disregard; evidence at trial established that defendant knew, or was reckless in not knowing, that stock he was recommending was unsound investment. SEC v
Shainberg (2008, CA2) 2008 US App LEXIS 5935.
38.--Miscellaneous
Where no duty of disclosure on part of person charged with aiding and abetting violation of SEC Rule 10b-5 can be found, defendant can be found liable only if
scienter of high "conscious intent" variety can be proved; where some special duty of disclosure exists, liability is possible with lesser degree of scienter. Woodward v
Metro Bank of Dallas (1975, CA5 Tex) 522 F2d 84, CCH Fed Secur L Rep P 95351.
One who deliberately tips information which he knows to be material and non-public to outsider who may reasonably be expected to use it to his advantage has
requisite scienter to establish liability under 15 USCS § 78j(b). Elkind v Liggett & Myers, Inc. (1980, CA2 NY) 635 F2d 156, CCH Fed Secur L Rep P 97716.
General partner which sent limited partners letter concerning offer by corporation to exchange its shares for limited partners' interests could not be held liable under
§ 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 promulgated thereunder, or under § 12(2) of Securities Act of 1933 (15 USCS §
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77l(2)), for alleged misrepresentation in letter to effect that according to conventional wisdom price of corporation's shares would "zestily rebound" after initial
depressed opening, where there was no evidence of knowing or intentional misconduct by general partner. Mayer v Oil Field Systems Corp. (1986, CA2 NY) 803 F2d
Purchasers of securities who brought suit against sellers under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 on grounds that
sellers had failed to disclose that securities were not registered for sale in Illinois where purchasers were residents, with result that transaction was rescinded, could
not base their claim on alleged breach of representation of fair dealing implied in every broker-investor relationship where purchasers failed to sufficiently allege
fraud or deception in connection with purchase or sale of securities, since whatever representations may be implicated in broker-investor relationship, failure to live
up to those representations does not automatically give rise to action under antifraud provisions of securities laws. Forkin v Rooney Pace, Inc. (1986, CA8 Mo) 804
F2d 1047, CCH Fed Secur L Rep P 92982.
Purchasers of stock failed to sufficiently allege fraud, manipulation, or deceit necessary to state claim under § 10(b) of Securities Exchange Act of 1934 or SEC Rule
10b-5 where they alleged that they were defrauded by failure of sellers of stock to disclose that securities were not registered for sale in Illinois, where purchasers
were residents, resulting in rescission of transaction, but it was not alleged that sellers intended to defraud purchasers by representing that shares were registered
for sale in Illinois with intention of rescinding transaction if shares later increased in value, since unilateral rescission by itself does not violate § 10(b) or Rule 10b-5
where it does not involve any fraud or deception as those terms are used in antifraud provisions of federal securities laws. Forkin v Rooney Pace, Inc. (1986, CA8 Mo)
With respect to unsuitability claim under 15 USCS § 78j(b), scienter may be inferred by finding that defendant knew or reasonably believed that securities were
unsuited to investor's needs, misrepresented, or failed to disclose, unsuitability of securities, and proceeded to recommend or purchase securities anyway. Brown v
E.F. Hutton Group, Inc. (1993, CA2 NY) 991 F2d 1020, CCH Fed Secur L Rep P 97420 (superseded by statute as stated in Louros v Kreicas (2005, SD NY) CCH Fed
Secur L Rep P 93233).
Evidence of personal profit motive on part of officers and directors contemplating merger is insufficient to raise strong inference of scienter. Glazer Capital Mgmt., LP
v Magistri (2008, CA9 Cal) 549 F3d 736, CCH Fed Secur L Rep P 95008.
Because Congress expressed no intent to alter pleading requirements of Private Securities Litigation Reform Act of 1995, Sarbanes-Oxley Act of 2002, Pub. L. No.
107-204, certification is only probative of scienter if person signing certification was severely reckless in certifying accuracy of financial statements. Glazer Capital
Mgmt., LP v Magistri (2008, CA9 Cal) 549 F3d 736, CCH Fed Secur L Rep P 95008.
Element of deception is requirement in claim under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, with sole exception of actions
challenging "going private" merger. Goldberg v Meridor (1977, SD NY) 426 F Supp 1059, CCH Fed Secur L Rep P 95872, revd on other grounds (1977, CA2 NY) 567
F2d 209, CCH Fed Secur L Rep P 96162, cert den (1978) 434 US 1069, 55 L Ed 2d 771, 98 S Ct 1249 and (criticized in Isquith v Caremark Int'l (1998, CA7 Ill) 136
F3d 531, CCH Fed Secur L Rep P 90141) and (ovrld as stated in Krieger v Gast (1998, ND Ill) 1998 US Dist LEXIS 15422).
Corporate employees did not act with scienter where Securities and Exchange Commission brought 15 USCS § 78j action alleging that employees used material
information to purchase puts or option contracts for sale of common stock of corporation for which they worked prior to public corporate announcement of
forthcoming loss due to decreased home computer production, because employees did not have material inside information and, therefore, were under no duty to
disclose such before company announcement, where internal data of consumer group division for which employees worked estimated profit for year and division was
in process of increasing rather than decreasing production of home computer during months preceding announcement. SEC v Fox (1986, ND Tex) 654 F Supp 781,
CCH Fed Secur L Rep P 93033.
California insurance code provision does not per se bar insurance coverage for alleged violations of 15 USCS § 78j(b), where section bars insurer liability for loss
caused by willful, as opposed to negligent, acts of insured, because § 78j(b) requires only showing of recklessness to fulfill scienter element. Raychem Corp. v
Federal Ins. Co. (1994, ND Cal) 853 F Supp 1170, 94 Daily Journal DAR 8189, 94 Daily Journal DAR 8442, CCH Fed Secur L Rep P 98223.
Investors' scienter theory--that defendants conspired to pump price of company's stock--failed for several reasons, including: (1) defendants could not be held liable
under conspiracy theory absent individual liability by alleged conspirators; (2) alleged misrepresentations by company officials were either immaterial or supported
by fact at time they were made; (3) investors' allegations that insiders benefitted from alleged sales and transfers of stock were not pled with requisite specificity;
(4) private placement agreement, allegedly part of defendants' second "pump and dump" scheme, was irrelevant as to scienter because parties did not carry out
agreement and because insider sale, either publicly or privately, would have to be disclosed in accordance with 15 USCS § 78p. Glaser v Enzo Biochem, Inc. (2003,
ED Va) 303 F Supp 2d 724 (criticized in Argent Classic Convertible Arbitrage Fund L.P. v Rite Aid Corp. (2004, ED Pa) 315 F Supp 2d 666, CCH Fed Secur L Rep P
92818) and (criticized in Swack v Credit Suisse First Boston (2004, DC Mass) CCH Fed Secur L Rep P 92924) and affd in part and revd in part, remanded (2005, CA4
Va) CCH Fed Secur L Rep P 93134.
Motives that were common to all corporations and their executives were legally insufficient to demonstrate scienter; in addition, it was compelling evidence that was
relevant to motive that record established that none of individual defendants sold stock on open market during class period, and that, in fact, they and corporation
acquired stock during class period. In re Acceptance Ins. Cos., Sec. Litig. (2004, DC Neb) 352 F Supp 2d 940.
In determining whether alleged failure to disclose additional information is intentional, reckless, or negligent, when alleged misleading statement is literally true,
court must consider viability of alleged scheme to defraud, entire alleged misstatement (not just certain phrases), context in which statement was made, public's
access to additional information, defendant's response to any market confusion resulting from alleged misstatement, and any other indicia that defendant acted with
fraudulent intent. In re GeoPharma, Inc. (2006, SD NY) 411 F Supp 2d 434.
39. Intent to deceive, manipulate or defraud, generally
§ 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 incorporate scienter requirement: defendant must know of falsity of information, or must
act in reckless disregard of its falsity, or must intend to deceive. First Virginia Bankshares v Benson (1977, CA5 Ala) 559 F2d 1307, CCH Fed Secur L Rep P 96189,
reh den (1977, CA5 Ala) 564 F2d 416 and cert den (1978) 435 US 952, 55 L Ed 2d 802, 98 S Ct 1580.
In establishing scienter with respect to allegedly fraudulent financial projections and opinions, it is insufficient to show mere negligent conduct or that forecast has
turned out to be inaccurate; however, opinion must not be made with reckless disregard for its truth or falsity, or with lack of genuine belief that information
disclosed is accurate and complete in all material respects; therefore, opinion that has been issued without genuine belief or reasonable basis is untrue statement
which, if made knowingly or recklessly, is culpable conduct actionable under 15 USCS § 78j. Eisenberg v Gagnon (1985, CA3 Pa) 766 F2d 770, CCH Fed Secur L Rep
P 92202, 18 Fed Rules Evid Serv 783, 2 FR Serv 3d 980, cert den (1985) 474 US 946, 88 L Ed 2d 290, 106 S Ct 342, 106 S Ct 343 and (criticized in Rothwell v
Chubb Life Ins. Co. of Am. (1998, DC NH) 191 FRD 25).
Investment company's owners made material representations, either recklessly or with scienter, with regard to sale and offer of securities and made misleading and
false statements to investors; during two and half years that one of owners controlled trading account, he made only two purchases in investment company's balance
sheet enhancement program, and both purchases were for treasury bills; one of owners lost approximately $ 1.7 million in one of these treasury bill purchases, and
did not use investor funds to participate in third world projects, underlying premise of enhancement program. SEC v Fife (2002, CA1 RI) 311 F3d 1, cert den (2003)
538 US 1031, 155 L Ed 2d 1060, 123 S Ct 2073.
Given large number and percentages of stocks traded, timing of sales, and prior trading history of each defendant, stock sales that occurred were clearly calculated
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to maximize personal benefit from undisclosed inside information; accordingly, stock sales by individual defendants were unusual and suspicious and gave rise to
strong inference of scienter. No. 84 Employer-Teamster Joint Council Pension Trust Fund v Am. West Holding Corp. (2003, CA9 Ariz) 320 F3d 920, 2003 CDOS 1328,
2003 Daily Journal DAR 1721, CCH Fed Secur L Rep P 92278, reh den, reh, en banc, den, request den (2003, CA9 Ariz) 2003 US App LEXIS 10783 and (criticized in
In re Seebeyond Techs. Corp. Secs. Litig. (2003, CD Cal) 266 F Supp 2d 1150, CCH Fed Secur L Rep P 92425) and cert den (2003) 540 US 966, 157 L Ed 2d 311,
124 S Ct 433 and (criticized in In re Nextcard, Inc. Sec. Litig. (2005, ND Cal) 2005 US Dist LEXIS 9234).
There was enough evidence for jury to find that investors intended to deceive, manipulate or defraud in violation of § 10(b) of Securities and Exchange Act of 1934,
15 USCS § 78j(b), and that businessman had shown reasonable reliance on investors' misleading statements; furthermore, evidence was adequate for jury to award
damages, even if precise figure of $ 265,000 was not neatly traced to particular claim of liability. Wortley v Camplin (2003, CA1 Me) 333 F3d 284, 50 UCCRS2d 1178.
Activity can not take place outside market for relevant security and retain title of manipulation; conduct that affects marketplace indirectly can violate § 10(b) of
Securities Act of 1934, 15 USCS § 78j(b), only if it constitutes deception. Regents of Univ. of Cal. v Credit Suisse First Boston (2007, CA5 Tex) 482 F3d 372, CCH Fed
In context of § 10(b) of Securities Act of 1934, 15 USCS § 78j(b), device, such as scheme, is not "deceptive" unless it involves breach of some duty of candid
disclosure. Regents of Univ. of Cal. v Credit Suisse First Boston (2007, CA5 Tex) 482 F3d 372, CCH Fed Secur L Rep P 94173.
Desire to maximize corporation's profits does not strengthen inference of intent to defraud because earning "excessive" fees in competitive marketplace (for as long
as it lasts)--far from defrauding shareholders--actually benefits shareholders; earning profits for shareholders is essence of duty of loyalty, and therefore it would be
unusual case where accomplishment of this objective constitutes requisite motive to defraud shareholders. Eca & Local 134 IBEW Joint Pension Trust of Chi. v JP
Morgan Chase Co. (2009, CA2 NY) 549 F3d 187.
Alleged false statements regarding income and future outlook of company were opinions or general statements of optimism that could not be construed as anything
but mere puffery; such allegations did not reach threshold of actionable fraud. In re Cybershop.com Sec. Litig. (2002, DC NJ) 189 F Supp 2d 214, CCH Fed Secur L
Rep P 91726.
Corporate defendants were granted summary judgment on securities fraud claims pursuant to 15 USCS § 78j(b), where their forecasts and statements of puffery did
not establish evidence of scienter necessary to support claims of purchasers of securities. Mittman v Rally's Hamburgers, Inc. (2003, WD Ky) 278 F Supp 2d 831.
There was no reason to believe that defendants lacked scienter as to misrepresentations, as element of scienter, as used in connection with securities fraud statutes,
§ 17(a) (15 USCS § 77q(a)) of Securities Act of 1933 and § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 Act along with Rule 10b-5 (17 C.F.R. §
240.10b-5) promulgated thereunder, required plaintiff to show that defendant acted with intent to deceive, manipulate, or defraud, or at least knowing misconduct,
and Securities and Exchange Commission made prima facie case that defendants acted with intent to deceive, manipulate, and defraud and it seemed obvious that
individual at very least knew about his criminal record and knowingly did not include it on website or in other materials. SEC v Prater (2003, DC Conn) 289 F Supp 2d
Corporate president's motion to dismiss claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), was denied where allegations in complaint were
sufficient to create strong inference that he acted with requisite scienter; complaint described strong circumstantial evidence that president knew that corporation
was manipulating its books; complaint also pled with particularity information from wealth of sources that supported inference that president was fully familiar with
corporation's true financial state, was actively monitoring its financial condition, and was directly involved in decisions central to accounting fraud. In re WorldCom,
Inc. Sec. Litig. (2003, SD NY) 294 F Supp 2d 392.
Corporate auditing committee's motion to dismiss claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), was granted where one corporate
office's manipulative scheme was too far removed from fraud underlying false statements in SEC filings to put audit committee on notice of fraud. In re WorldCom,
Inc. Sec. Litig. (2003, SD NY) 294 F Supp 2d 392.
Defendant corporation's statements to its shareholders made no specific representations about corporation's earnings or debt, but asserted only general claims about
past and future successes of business and, thus, were mere puffery and would not have significantly altered mix of information deemed important to reasonable
investor in making its investment decision. Klebanow v NUI Corp. (In re NUI Sec. Litig.) (2004, DC NJ) 314 F Supp 2d 388.
District court granted summary judgment against two investors who had filed action and asserted § 10(b) of Securities Exchange Act of 1934 claim against, among
others, financial network and one of its agencies; in order to prevail, investors had to demonstrate that network and agency had engaged in fraud or deception, and
(1) investors had not alleged that network or agency had made any intentionally deceptive statements or had engaged in any deceptive actions, (2) investors did not
respond to assertions by network and agency in their summary judgment motion that investors had not shown fraudulent or deceptive conduct on their part, and (3)
investors' federal securities law claim against network and agency were dismissed due to absence of any evidence that they had committed fraudulent or deceptive
act. Munjak v Signator Investors, Inc. (2004, DC Kan) 316 F Supp 2d 1086.
What is required when endeavoring to plead facts supporting strong inference of scienter by showing motive and opportunity is not bare invocation of magic words
such as motive and opportunity but allegation of facts showing type of particular circumstances that case law has recognized will render motive and opportunity
probative of strong inference of scienter. In re PXRE Group, Ltd. Sec. Litig. (2009, SD NY) 600 F Supp 2d 510.
Alleged motivation of corporation to raise money to prevent negative ramifications of resultant drop of credit rating or stock price--even if such drop would allegedly
threaten survival of company--is far too generalized (and generalizable) to allege proper concrete and personal benefit required by Second Circuit. In re PXRE Group,
Ltd. Sec. Litig. (2009, SD NY) 600 F Supp 2d 510.
When evaluating motive and opportunity allegations, inquiry is authorized, even at motion to dismiss stage, as to whether plaintiff alleges scheme that has any
chance of achieving its putative ends. In re PXRE Group, Ltd. Sec. Litig. (2009, SD NY) 600 F Supp 2d 510.
Scienter is established by showing that defendant acted intentionally or with severe recklessness; recklessness is defined as highly unreasonable conduct involving
not merely simple or excusable negligence, but extreme departure from standards of ordinary care. In re Graystone Nash, Inc., et al. (1996) 1996 SEC LEXIS 3545.
40.--Intent required
Private cause of action for damages will not lie under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 in absence of intent to deceive or
manipulate on defendant's part. Sundstrand Corp. v Sun Chemical Corp. (1977, CA7 Ill) 553 F2d 1033, CCH Fed Secur L Rep P 95887, cert den (1977) 434 US 875,
54 L Ed 2d 155, 98 S Ct 224, 98 S Ct 225.
Scienter in form of intent to deceive, manipulate, or defraud, is necessary element of private cause of action for damages under § 10(b) of Securities Exchange Act
(15 USCS § 78j(b)) and SEC Rule 10b-5. Transcontinental Oil Corp. v Trenton Products Co. (1977, CA2 NY) 560 F2d 94, 23 UCCRS 156; Holmes v Bateson (1977, DC
RI) 434 F Supp 1365, CCH Fed Secur L Rep P 96228, affd in part and revd in part on other grounds (1978, CA1 RI) 583 F2d 542, CCH Fed Secur L Rep P 96532.
Plaintiff's theory of recovery based upon allegation that it suffered losses as result of defendant stockbroker's selling securities in its margin account in excess of
minimum requirements of New York Stock Exchange, when stockbroker entered into oral agreement that it would not require margin in excess of minimum
requirements, notwithstanding carte blanche provisions of standard margin agreement entered into between parties, is rejected since there is no indication that
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defendant was motivated by fraudulent intent or scienter in not enforcing margin maintenance requirements. Golob v Nauman Vandervoort, Inc. (1972, ND Ohio)
Facts amounting to scienter, intent to defraud, reckless disregard for truth, or knowing use of device, scheme or artifice to defraud are essential to imposition of civil
liability under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Rich v Touche Ross & Co. (1976, SD NY) 415 F Supp 95.
Facts amounting to scienter--intent to defraud, reckless disregard for truth, or knowing use of device, scheme or artifice to defraud--are essential to finding of
liability under § 10(b) of Securities Exchange Act and SEC Rule 10b-5. Gross v Diversified Mortg. Investors (1977, SD NY) 431 F Supp 1080, CCH Fed Secur L Rep P
96137, affd without op (1980, CA2 NY) 636 F2d 1201 and affd without op (1980, CA2 NY) 636 F2d 1201 and affd without op (1980, CA2 NY) 636 F2d 1203 and affd
without op (1980, CA2 NY) 636 F2d 1206; Osadchy v Gans (1977, DC NJ) 436 F Supp 677, CCH Fed Secur L Rep P 96250; Weitzman v Stein (1977, SD NY) 436 F
Even in absence of insider trading or prior inaccurate disclosures, violation of SEC Rule 10b-5(c) may arise from failure to disclose where rumors are rampant, price
of stock is shooting upward and defendants are in possession of all material facts but refrain from disclosing them, but liability may be imposed only upon showing
that failure to disclose was motivated by defendants' intent to deceive investors for their own gain, since wrongful purpose is required to establish liability in private
action under SEC Rule 10b-5. State Teachers Retirement Bd. v Fluor Corp. (1980, SD NY) 500 F Supp 278, CCH Fed Secur L Rep P 97340, affd in part and revd in
part on other grounds, remanded (1981, CA2 NY) 654 F2d 843, CCH Fed Secur L Rep P 98005.
In action by investors against corporation and its officers, alleging securities fraud in violation of, inter alia, 15 USCS §§ 78j(b), motion to dismiss filed by corporation
and officers was granted where (1) investors' complaint failed to show how information allegedly omitted from corporation's Securities and Exchange Commission
(SEC) filings would have significantly altered total mix of information available to analysts as they formulated their projections, and investors' complaint failed to
allege that corporation or its officers acted with culpable scienter in omitting any material information from SEC filings; (2) corporation's press release and
conference call involving officers contained meaningful cautionary statements that were forward-looking and were sufficient to invoke safe harbor protection; (3)
statements by one officer at technology conference, three separate announcements of significant sales by corporation, and statement by corporate manager in
newspaper article were not actionable as matter of law; and (4) investors failed to support inference that it was highly probable that one officer's interview
statements were made with required intent to deceive, manipulate, or defraud. In re Parametric Tech. Corp. Sec. Litig. (2001, DC Mass) 300 F Supp 2d 206.
Individual's claim under § 10(b) of Securities Exchange Act, 15 USCS § 78j(b), alleging companies misled him into believing he would be made head of division of
one company failed where individual alleged no facts probative of companies' intent at time alleged promises were made; however, fact that one company appointed
someone else to position allegedly promised to individual as part of consideration for sale of his business within only two months of consummation of that sale could
be found to support strong inference of fraudulent intent not to perform at time alleged promise was made, so individual was given opportunity to amend this
element of his complaint, which did not currently include any allegations regarding timing of hire. Dujardin v Liberty Media Corp. (2005, SD NY) 359 F Supp 2d 337,
Court dismissed stock buyers' claim that investment advisors violated § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17
CFR 240.10b-5, by making misrepresentations and material omissions in association with securities that were to be transferred to buyers pursuant to consulting
agreement because buyers failed to plead facts supporting cogent and compelling inference of scienter under 15 USCS § 78u-4(b)(2). Greer v Advanced Equities,
Inc. (2010, ND Ill) 683 F Supp 2d 761, CCH Fed Secur L Rep P 95578.
Court dismissed stock buyers' claim that defendants, investment advisors and investment corporation, violated § 10(b) of Securities and Exchange Act of 1934, 15
USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR 240.10b-5, by making fraudulent statements and omissions of material fact in connection with sale of company's
stock to buyers because buyers failed to establish strong inference that defendants acted recklessly or intentionally defrauded buyers; specifically, court found that
(1) although defendants might have had some financial motive to sell company's stock, second amended complaint did not sufficiently support that motive with
factual allegations that gave rise to inference of scienter; (2) buyers' allegations regarding timing of misrepresentations and their purportedly extreme nature fell
short of supporting inference that was cogent and at least as compelling as any of defendants' non-culpable inferences; and (3) second amended complaint also
failed to create strong inference of scienter for each individual defendant. Greer v Advanced Equities, Inc. (2010, ND Ill) 683 F Supp 2d 761, CCH Fed Secur L Rep P
95578.
41.--Not an indispensable element
Antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) was meant to cover more than deliberately and dishonestly misrepresenting or
omitting material facts which ordinarily are badges of fraud and deceit; bad faith intent to mislead or misrepresent are not required to prove violation upon which
civil remedy for damages will lie. Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486.
So long as statement or omission made in connection with purchase or sale of any security has effect or tendency to mislead or deceive investing public, it violates
antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) notwithstanding that purpose is not to so defraud or deceive. SEC v Texas Gulf Sulphur
Co. (1968, CA2 NY) 401 F2d 833, CCH Fed Secur L Rep P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
Under antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), in making misleading statement of material fact, or omitting to state material
fact necessary to understanding of attractiveness of securities being offered for sale, it does not matter whether purpose of such statement or omission is to deceive
prospective securities buyers. Heit v Weitzen (1968, CA2 NY) 402 F2d 909, CCH Fed Secur L Rep P 92279, 3 ALR Fed 803, cert den (1969) 395 US 903, 23 L Ed 2d
217, 89 S Ct 1740.
In determining whether securities broker has violated SEC Rule 10b-6, prohibiting purchases of securities by broker while broker is in process of distributing those
securities to public, it is unimportant that it is not shown that broker intended to defraud market place or his purchasers; where rule applies, its prohibition is
absolute. Jaffee & Co. v SEC (1971, CA2) 446 F2d 387, CCH Fed Secur L Rep P 93092.
Intent to defraud is not indispensable element in private action for damages under antifraud provisions of federal securities laws. Chris-Craft Indus. v Piper Aircraft
Corp. (1973, CA2 NY) 480 F2d 341, 25 ALR Fed 534, cert den (1973) 414 US 910, 38 L Ed 2d 148, 94 S Ct 231, 94 S Ct 232 and cert den (1973) 414 US 924, 38 L
Ed 2d 158, 94 S Ct 234.
Corporate insider, who purchased corporation shares shortly after obtaining information indicating that corporation had made significant mineral discoveries, violated
§ 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5; it is immaterial whether insider intended to deceive or defraud anyone or whether he
knew at time that his purchase would violate Act or Rule. Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, SD NY) 258 F Supp 262, affd in part and revd
in part on other grounds (1968, CA2 NY) 401 F2d 833, CCH Fed Secur L Rep P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
Intent to defraud is not necessary element of civil action brought on basis of alleged violation of SEC Rule 10b-5. Kramer v Loewi & Co. (1973, ED Wis) 357 F Supp
Defendants are not liable under § 78j(b) for obtaining financing in smaller amount and at higher interest rate than that specified in partnership agreement, where
plaintiff limited partners make no showing that defendants harbored intent contrary to stated objectives when statement was made. Zaro v Mason (1987, SD NY)
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42.--Requirements in particular circumstances
Defendant rebuts allegation of scienter where plaintiff relies solely on legal arguments without submitting probative evidence and where defendant states that there
was no misrepresentation, that allegation of scienter was result of confusion, and that all statements in prospectus were made in good faith. Bryson v Royal Business
Group (1985, CA1 Mass) 763 F2d 491, CCH Fed Secur L Rep P 92410.
Although § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)), and SEC Rule 10b-5 establish liability for aiders, abettors, and conspirators, without any
requirement that these individuals be "control persons" within meaning of 15 USCS §§ 78t or 770, such persons may be liable only if they have same mental state
required for primary liability, including scienter, and law firm and accounting firm which gave advice to foundation selling bonds in order to raise money to finance
construction of retirement village could not be held liable under § 10(b) or Rule 10b-5 where there was no direct evidence that either firm acted with intent to
deceive any purchaser of the foundation's securities or even that they saw the foundation's selling documents during the period in question until after the documents
had been placed in use. Barker v Henderson, Franklin, Starnes & Holt (1986, CA7 Ill) 797 F2d 490, CCH Fed Secur L Rep P 92864.
Action for securities fraud pursuant to 15 USCS § 78j(b)against company, its officers, and its auditors was properly dismissed for failure to allege adequate scienter
under 15 USCS § 78u-4(b); there was nothing to support inference that officers knew that certain transactions were bogus or that challenged statements were false
when made; key motivation alleged was officers' desperation to save company from bankruptcy, but facts did not support inference of imminent bankruptcy; claims
against company failed as solely derivative of officers' actions; further, with regard to claims against auditors, shareholders presumed that it was obvious that
challenged accounting entries were bogus, but facts did not support presumption; also, fact accounting, which was ultimately restated, conclusory "laundry list" of
alleged violations that lacked specific ties to alleged fraud, and alleged financial motivation to continue business relationship did not support inference of scienter.
Ezra Charitable Trust v Tyco Int'l, LTD (2006, CA1 NH) 466 F3d 1, CCH Fed Secur L Rep P 93964.
Individual defendants in securities actions, who were controlling persons of corporate defendant which offered investors opportunity to invest in pool of United States
Treasury Bills and to purchase short term commercial paper issued in small denominations by company providing it administrative services, were in full possession of
material information regarding previous injunction against company's investment program and directed preparation of communications which failed to fully disclose
said information and thus they possess the requisite scienter in failing to disclose material information and thus violated the antifog provisions of both § 17(a) of
Securities Act and § 10(b) of Exchange Act. SEC v American Bd. of Trade, Inc. (1984, SD NY) 593 F Supp 335, CCH Fed Secur L Rep P 91651, revd on other grounds
(1984, CA2 NY) 751 F2d 529, CCH Fed Secur L Rep P 91894.
Plaintiff is not entitled to recover damages against general partners on individual causes of action predicated on common law fraud and violation of securities laws,
where general partner, although misguided concerning his authority to consummate exchange of property without knowledge and consent of limited partners, did not
have intent to defraud plaintiff under 15 USCS § 78j(b). Shlomchik v Richmond 103 Equities Co. (1986, SD NY) 662 F Supp 365, amd, in part, adhered to, in part
News wire service and worldwide republisher of business and financial news are entitled to summary dismissal of securities fraud claim, where they picked up and
published purported news release that was work of fraudster seeking to drive down price of stock he had bought "short" positions on, because complaint is devoid of
any suggestion that defendants were aware of fraudulent nature of release and there is no allegation that defendants issued their releases with intent to defraud.
Hart v Internet Wire, Inc. (2001, SD NY) 145 F Supp 2d 360, CCH Fed Secur L Rep P 91473.
As plaintiffs alleged facts sufficient to establish scienter, even under heightened standards of Reform Act, plaintiffs' market manipulation claims survived defendant's
motions to dismiss; allegations of detailed, complicated scheme gave rise to strong inference that defendants acted with intent to deceive, manipulate, or defraud,
and that defendants engaged in deliberately illegal behavior that did not happen accidentally, negligently, or even recklessly; further, plaintiffs identified with
precision opportunities defendants had to engage in scheme, their pecuniary motive, and how scheme was carried out. Stephenson v Deutsche Bank AG (2003, DC
Minn) 282 F Supp 2d 1032, 51 UCCRS2d 613.
Even assuming that corporate officer knowingly failed to disclose financial losses related to potential bankruptcy, resulting in artificial inflation of stock price, there
was no showing that officer acted with requisite scienter to support shareholder's claim of securities fraud; there was no evidence of any transaction involving stock
that provided motive for officer to omit information or benefited officer in any way, and there was no showing that officer recklessly disregarded danger of misleading
shareholder. Keeney v Larkin (2003, DC Md) 306 F Supp 2d 522, affd (2004, CA4 Md) 102 Fed Appx 787, CCH Fed Secur L Rep P 92868.
In § 10(b) of Securities Exchange Act, shareholder failed to allege that any of individual defendants, who were officers and directors of defendant bankrupt company,
sold single share during class period; instead, shareholder claimed that that company and individual defendants possessed requisite motive and opportunity because:
(1) company needed cash badly; (2) company had to inflate revenues to remain eligible for extensions of credit by bank; and (3) individual defendants received
performance-based bonuses; however, those allegations were insufficient to establish strong inference of scienter based solely on showing of motive and opportunity.
In re Flag Telecom Holdings, LTD. (2004, SD NY) 308 F Supp 2d 249.
In suit under 78 USCS § 78j(b) where shareholders alleged that corporation used improper method of accounting for its investment in another company, which led it
to report inflated financial results in numerous SEC filings and press releases, shareholders' claims were subject to dismissal because shareholders' allegations of
incentive compensation and stock ownership were insufficient to establish inference of fraudulent intent through motive and opportunity. Johnson v NYFIX, Inc.
(2005, DC Conn) CCH Fed Secur L Rep 93531, amd, complaint dismd (2005, DC Conn) 399 F Supp 2d 105.
Corporation's motion to dismiss was granted as to securities purchasers' claims concerning alleged investment misrepresentations because purchasers failed to
sufficiently allege scienter as required under 15 USCS § 78u-4(b)(2) and Fed. R. Civ. P. 9(b), as they did not make any specific or detailed allegations of underlying
scheme designed to misrepresent quality of corporation's investment portfolio or conceal its methods of accounting for investments; rather, purchasers alleged only
that certain investment disclosures were not made and certain investments were not properly accounted for, such actions violated generally accepted accounting
principles, and they had material impact on financial picture of corporation provided to investing public; nowhere did purchasers allege exactly how it was defendants
were or should have been aware of accounting errors or insufficiency of investment disclosures. In re Unumprovident Corp. Secs. Litig. (2005, ED Tenn) 396 F Supp
2d 858, motion gr, in part, motion den, in part, dismd, in part, motion gr, in part, motion den, in part (2005, ED Tenn) 2005 US Dist LEXIS 31853.
Plaintiff investors' complaint for violations of §§ 10(b), 20(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a), and S.E.C. Rule 10b-5, 17 CFR §
240.10b-5, that arose when defendants, company and its officers, reported company's financial results in S.E.C. filings and press releases did not meet heightened
pleading requirements of Private Securities Litigation Reform Act of 1995, 15 USCS § 78u-4(b)(1), (2) because investors' claims that defendants had overstated
revenues by failing to write off or properly reserve for uncollectible receivables were deficient and suggested mismanagement rather than fraud and investors'
scienter allegations were merely based on their theory that company's problems were well known and discussed and reflected in various internal reports that
investors did not describe in detail; additionally, only one purported insider traded stock during relevant time period, and investors had failed to provide any
information indicating that any of confidential witnesses would have been in position to know what defendants knew during relevant time period. Alaska Elec. Pension
Fund v Adecco S.A. (2006, SD Cal) 434 F Supp 2d 815.
Where investors' suit against company and others (defendants) under §§ 10(b) of Exchange Act, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, based on
disclosures in company's registration statement for secondary offering with respect to "swap" of company's brokerage unit for another entity's asset management
division, failed to plead alleged fraud with required particularity, investors also failed to allege required scienter in that there were no facts supporting claim that
defendants had motive and opportunity to commit fraud or that they acted with self-interest. Garber v Legg Mason, Inc. (2008, SD NY) 537 F Supp 2d 597.
Plaintiff failed to allege concrete and personal benefit resulting from fraud, as required by Second Circuit to plead requisite strong inference of scienter; plaintiff also
did not allege motive that was at least as compelling as any opposing inference one could draw from facts alleged; merely alleging facts suggesting that defendants
knew that river flooding was causing extensive damage in New Orleans did not raise inference that defendants knew, or were reckless in not knowing, that
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defendants' internal methods and proprietary software all failed to adequately account for river flooding. In re PXRE Group, Ltd. Sec. Litig. (2009, SD NY) 600 F Supp
2d 510.
Chapter 11 trustee sufficiently alleged facts under Fed. R. Bankr. P. 7009(b), 7012(b), to survive dismissal of action against securities broker to avoid, under 11
USCS §§ 546(e), 548(a)(1)(A), transfers of margin payments made by debtor who was operating Ponzi scheme, by averring that debtor's principal had pled guilty to
securities fraud under 15 USCS §§ 78j(b) and 78f(F) and that margin payments were made in connection with massive Ponzi scheme. Manhattan Inv. Fund, Ltd. v
Bear (In re Manhattan Inv. Fund Ltd.) (2002, BC SD NY) 310 BR 500.
Unpublished: Defendant's attempt to use pleading standard laid out by Private Securities Litigation Reform Act, 15 USCS § 78u-4(b)(2), to argue that individual
pieces of evidence were insufficient to show scienter was unconvincing in civil enforcement action in which district court found that he violated § 17(a) of Securities
Act of 1933, 15 USCS § 77q(a), and §§ 10(b), 13(a), and 13(b)(2)(A) of Securities and Exchange Act of 1934, 15 USCS §§ 78j(b), 78m(a), and 78m(b)(2)(A);
weight of evidence was well beyond amount needed to support district court's findings and conclusions that defendant intended to manipulate entity's accounting and
thereby defraud market. SEC v Yuen (2008, CA9 Cal) 2008 US App LEXIS 7606.
Unpublished: General counsel's motion to dismiss shareholders' claims for violation of § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 and Rule
10b-5, 17 CFR § 240.10b-5(b) was denied because shareholders alleged that general counsel exhibited deceptive conduct, and shareholders alleged sufficiently that
general counsel acted with scienter since amended complaint alleged that general counsel assisted in backdating scheme by directing widespread and intentional
backdating of stock option grants, colluding with other defendants to carry out policy of backdating options, and receiving backdated options; moreover, amended
complaint also alleged that in order to conceal this misconduct, general counsel caused corporation to disseminate false financial statements and false proxy
statements. In re Atmel Corp. Derivative Litig. (2008, ND Cal) 2008 US Dist LEXIS 91909.
43.--What constitutes "intent to deceive"
As to criminal charge that law firm partner used, for partner's trading purposes, material nonpublic information regarding tender offer by client of firm for
corporation's common stock, partner's failure to disclose partner's personal trading to client and firm, in breach of duty to do so, makes partner's conduct deceptive,
within meaning of § 78j(b). United States v O'Hagan (1997) 521 US 642, 138 L Ed 2d 724, 117 S Ct 2199, 97 CDOS 4931, 97 Daily Journal DAR 7991, CCH Fed
Secur L Rep P 99482, 1997 Colo J C A R 1354, 11 FLW Fed S 154, on remand, remanded (1998, CA8 Minn) 139 F3d 641, CCH Fed Secur L Rep P 90178.
Intent to deceive, within scienter requirement of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) means intent to say something that is
expected to be relied upon, that is not believed to be true, or, if strictly true, is hoped will be understood in untruthful sense. SEC v World Radio Mission, Inc. (1976,
CA1 NH) 544 F2d 535, CCH Fed Secur L Rep P 95751.
Complaint under SEC Rule 10b-5 for brokerage firm's failure to reveal that account executives receive higher compensation for principal trades of over-the-counter
stocks in which firm is market maker than for other sales was subject to summary judgment on grounds that plaintiff purchasers had failed to prove scienter since
there was no evidence that defendants actually intended to deceive, they did not know nor should they have known of danger of misleading customers since
materiality of compensation information remains open question, and there was no proof of intent to manipulate stock since fact that compensation system gave
account executive incentive to sell particular stock did not by itself define manipulative device. Shivangi v Dean Witter Reynolds, Inc. (1987, CA5 Miss) 825 F2d 885,
CCH Fed Secur L Rep P 93364, 8 FR Serv 3d 980.
Purchasers' allegations of resignation of several members of company's financial department were insufficient to allege scienter with particularity required by Fed. R.
Civ. P. 9(b) and Private Securities Litigation Reform Act where resignation of independent accounting firm month after restatement of earning was issued was not
surprising given its partial responsibility for company's failure to adequately control its accounting procedures, and complaint did not include enough facts about
other retirements and resignations during relevant time period to create compelling inference of scienter. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552
Securities and Exchange Commission (SEC) prevailed on its 15 USCS § 78j(b) claim; SEC's chief evidence of plaintiff's intent to deceive was his use of numerous
account and registration numbers that actually represented his work for certain customer, and SEC's characterization of use of multiple registration and account
numbers was ample evidence of intent to mislead. SEC v Gann (2009, CA5 Tex) 565 F3d 932, CCH Fed Secur L Rep P 95210.
Employer's knowing withholding of material information when discussing departure with employee who must sell stock to company did not constitute intent to
deceive where employer's focus was on employee's moonlighting activities, and employer had secrecy obligation to company involved in merger negotiations until
company could go public on agreement in principle. Guy v Duff & Phelps, Inc. (1985, ND Ill) 628 F Supp 252, CCH Fed Secur L Rep P 92828.
Securities fraud claim of transportation services company founder, his wife, and 3 other shareholders is denied, where shareholders agreed to sell shares sufficient to
give company's chief financier majority control of company in return for financier's agreement to grant founder renewed support and employment contract and to
extend funding to assure continued growth of company, because court is persuaded by financier's testimony that he intended at time of stock transaction to continue
to support founder's dream and management, but 4 months later was forced by continued unprofitability to enforce performance standards in employment contract
and terminate founder. Taylor v Door to Door Transp. Services, Inc. (1988, SD Ohio) 691 F Supp 27, CCH Fed Secur L Rep P 94002.
Summary judgment is precluded in securities fraud action under 15 USCS § 78j(b), where (1) government claims investor intentionally failed to reveal source of
funds used to purchase controlling interest in company's stock, (2) government's evidence on intent is limited to depositions of investor's former attorney, and (3)
investor refutes intent allegation, because material issue of fact exists as to scienter. SEC v Levy (1989, DC Dist Col) 706 F Supp 61, CCH Fed Secur L Rep P 94773.
Federal securities claim is not alleged under 15 USCS § 78j(b), where complaint alleges only that fiduciaries failed to act in shareholders' interest and failed to
disclose this breach of duty, because neither manipulative or deceptive conduct nor misrepresentation or nondisclosure are alleged. In re United States Shoe Corp.
Litigation (1989, SD Ohio) 718 F Supp 643, CCH Fed Secur L Rep P 95844.
44. Specific intent to defraud
Specific intent to defraud is irrelevant with respect to insider violations of SEC Rule 10b-5. Hanly v Securities & Exchange Com. (1969, CA2) 415 F2d 589, CCH Fed
In private suit for damages under 15 USCS § 78j(b) and SEC rule 10b-5, it is unnecessary to prove specific fraudulent intent essential to claim of common-law fraud.
Stier v Smith (1973, CA5 Tex) 473 F2d 1205, CCH Fed Secur L Rep P 93768; Cohen v Franchard Corp. (1973, CA2 NY) 478 F2d 115, CCH Fed Secur L Rep P 93937,
17 FR Serv 2d 912, cert den (1973) 414 US 857, 38 L Ed 2d 106, 94 S Ct 161; Mooney v Tallant (1975, ND Ga) 397 F Supp 680, 20 FR Serv 2d 1161.
In action based upon antifraud provisions of federal securities acts, with regard to requirement of scienter, something short of specific intent to defraud is required;
knowledge of fact that figures created false picture is enough. Republic Technology Fund, Inc. v Lionel Corp. (1973, CA2 NY) 483 F2d 540, CCH Fed Secur L Rep P
In civil action alleging violation of SEC Rule 10b-5 proof of scienter is sufficient where requisite knowledge of falsity is adequately evidenced, intent in odious or
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malicious sense not being required. Andrews v Blue (1973, CA10 Colo) 489 F2d 367, CCH Fed Secur L Rep P 94316.
In private suit for damages under Rule 10b-5, it is unnecessary to prove specific fraudulent intent. Vohs v Dickson (1974, CA5 Ga) 495 F2d 607, CCH Fed Secur L
Rep P 94589.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 have eliminated need to prove common law intent to defraud. Carras v Burns
(1975, CA4 NC) 516 F2d 251.
Specific intent to defraud satisfies scienter requirement for civil action based upon violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule
15b-5. Straub v Vaisman & Co. (1976, CA3 NJ) 540 F2d 591, CCH Fed Secur L Rep P 95623.
Defendant corporate directors possessed scienter required by 15 USCS § 78j(b) where they fixed certain date as both date of declaration of, and record date for
participation in, dividend of stock in spin-off corporation to holders of common stock in defendant company, knowing that such action would be material to holders of
convertible bonds of defendant company, would deprive them of right to exercise conversion privilege, and would inure to benefit of controlling stockholder, since
decision to withhold information to bondholders was knowing and intentional as to consequences, notwithstanding lack of specific intent to violate law. Pittsburgh
Terminal Corp. v Baltimore & O. R. Co. (1982, CA3 Pa) 680 F2d 933, CCH Fed Secur L Rep P 98706, cert den (1982) 459 US 1056, 74 L Ed 2d 621, 103 S Ct 475,
103 S Ct 476 and (criticized in Page Mill Asset Mgmt. v Credit Suisse First Boston Corp. (2000, SD NY) 2000 US Dist LEXIS 3941).
Investors in real estate partnership state claim under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) where they allege that general partners'
offering memorandum represented that general partners would make initial capital contribution of $ 385,000 and guarantee $ 4.5 million construction loan, that at
least one of general partners had maintained and would continue to maintain its net worth at levels sufficient to ensure partnership's profitability, that general
partners would collect management fees from partnership for only 1 year, and that no assignment or transfer of general partners' interest in partnership could occur
without notice to and consent of limited partners, but that these promises were not kept and that promises were known by defendants to be false when made. Luce v
Edelstein (1986, CA2 NY) 802 F2d 49, CCH Fed Secur L Rep P 92932, 6 FR Serv 3d 117.
In criminal, unlike tortious, fraud, only issue is whether there is plan, scheme or artifice intended to defraud; thus, jury is not required to be instructed that it must
find that defendant's scheme would have to defraud person of ordinary prudence and comprehension. United States v Faulhaber (1991, CA1 Mass) 929 F2d 16, CCH
Fed Secur L Rep P 95907, post-conviction relief dismd (1995, CA1 Mass) 66 F3d 306, reported in full (1995, CA1 Mass) 1995 US App LEXIS 27270 and cert den
(1996) 516 US 1133, 133 L Ed 2d 879, 116 S Ct 956 and (criticized in United States v Lopez (1995, CA1 Puerto Rico) 71 F3d 954).
Although complaint did not link factual allegations against defendant company for securities fraud and defendant chief executive officer for controlling persons
liability, with scienter in particularly cogent manner, it was not so inadequate in this aspect as to merit dismissal; however, complaint did not contain allegations
sufficient to state PSLRA claim because many of accused statements were forward-looking and accompanied by meaningful cautionary language, and were therefore
not actionable, while other accused statements held no strong inference of recklessness or of highly unreasonable conduct which was extreme departure from
standards of ordinary care. Miller v Champion Enters., Inc. (2003, CA6 Mich) 346 F3d 660, 56 FR Serv 3d 1177, 2003 FED App 359P, reh den, reh, en banc, den
(2003, CA6) 2003 US App LEXIS 26622.
Securities fraud convictions under 15 USCS §§ 78j(b), 78ff(a), and 17 CFR § 240.10b-5, were supported by sufficient evidence that defendant used inside
information that was material when he exercised employee stock options to purchase stock in his own company after negotiations with rival had begun and when he
purchased call options for his company's stock as soon as he returned home from due diligence meetings; jury properly inferred that defendant sought to capitalize
on his nonpublic information and anticipated he could profit by purchasing call options that could later be sold at higher price; nonpublic information would have been
of interest to reasonable investor, and jury could have found substantial likelihood that it would have been considered important in making investment decisions.
United States v Mooney (2005, CA8 Minn) 401 F3d 940, CCH Fed Secur L Rep P 93143, reh, en banc, gr, vacated, in part (2005, CA8) 2005 US App LEXIS 7404.
Shareholder's securities fraud claims under §§ 10(b) and 20(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b) and 78t(a), and 17 C.F.R. § 240.10b-5 were
properly dismissed on summary judgment because shareholders were unable to meet scienter requirements under those sections or to satisfy pleading requirements
of Private Securities Litigation Reform Act, 15 USCS § 78u-4(b)(2). Kinder v Acceptance Ins. Cos. (In re Acceptance Ins. Cos. Sec. Litig.) (2005, CA8 Neb) 423 F3d
Government presented sufficient evidence to convince reasonable jury beyond reasonable doubt that defendant had necessary intent to defraud; record showed that
at same time he had been advising his newsletter readers to buy certain stock, defendant himself was selling his shares. United States v Wenger (2005, CA10 Utah)
Civil liability under SEC Rule 10b-5 can be found even in absence of one or more elements of common law fraud. Fox v Kane-Miller Corp. (1975, DC Md) 398 F Supp
609, affd (1976, CA4 Md) 542 F2d 915.
Scienter requirement of SEC Rule 10b-5 is something short of specific intent to defraud, and something more than mere negligence. Oleck v Fischer (1975, SD NY)
401 F Supp 651, CCH Fed Secur L Rep P 95332, 21 FR Serv 2d 1247.
Proof of churning, as being violative of SEC Rule 10b-5, does not require proof of specific or invidious intent to defraud. Marshak v Blyth Eastman Dillon & Co. (1975,
ND Okla) 413 F Supp 377, CCH Fed Secur L Rep P 95698.
"Intentional or reckless" test, as opposed to strict common law test, may be used to determine whether scienter requirement of § 10(b) of Securities Exchange Act
(15 USCS § 78j(b)) is met; under "intentional" or "knowing" aspect of this test, actual knowledge of misstatement, irrespective of intent, fulfills scienter
requirement; intentional or knowing approach does not impose absolute liability on defendants; intentional or knowing test was met where defendants failed to
disclose fully to plaintiff material facts in tender offer and these failures were made knowingly. In re Transocean Tender Offer Sec. Litigation (1978, ND Ill) 455 F
Supp 999.
Discharges that occur during course of clearing or excavation activities are subject to Army Corps of Engineers permit jurisdiction, notwithstanding their connection
with otherwise unregulated removal activities. Salt Pond Assocs. v United States Army Corps of Eng'rs (1993, DC Del) 38 Envt Rep Cas 2098 .
Where plaintiff shareholder pointed to bonus compensation for individual defendants as evidence of § 10(b) of Security Exchange Act violation, this attempt to plead
scienter failed because: (1) no mention of individual bonuses was made in complaint; and (2) allegations were not sufficiently particular to allow determination
whether alleged misstatements resulted in bonuses. In re Flag Telecom Holdings, LTD. (2004, SD NY) 308 F Supp 2d 249.
Necessary fraudulent intent for violation of 15 USCS § 78j(b) was present where salesman for broker-dealer enthusiastically recommended investment in stock of
corporation which he knew was object of tender offer under investigation for antitrust violations by FTC without disclosing existence of investigation, and in falsifying
his order tickets in violation of 15 USCS § 78q to indicate that orders were unsolicited. In re Novak (1983) 47 SEC 892.
In order for criminal fraud to have occurred in violation of SEC Rule 10b-5, promulgated pursuant to § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), specific
intent to defraud is unnecessary, but it is necessary that there be more than showing of mere negligence. State v Cox (1977) 17 Wash App 896, 566 P2d 935, cert
den (1978) 439 US 823, 58 L Ed 2d 115, 99 S Ct 90.
45. Actual knowledge or reckless disregard, generally
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Standard for determining liability under SEC Rule 10b-5 essentially is whether one seeking relief has established that person who allegedly violated such rule either
knew material facts that were misstated or omitted and should have realized their significance, or failed or refused to ascertain and disclose such facts when they
were reasonably available to him and he had reasonable grounds to believe they existed; it is not enough for one seeking relief to show that person charged failed to
detect material facts when he had no reason to suspect their existence. Cohen v Franchard Corp. (1973, CA2 NY) 478 F2d 115, CCH Fed Secur L Rep P 93937, 17 FR
Serv 2d 912, cert den (1973) 414 US 857, 38 L Ed 2d 106, 94 S Ct 161.
In private damage action alleging violation of SEC Rule 10b-5, satisfaction of scienter requirement requires only showing of knowledge of falsity or reckless disregard
for truth. Chris-Craft Indus. v Piper Aircraft Corp. (1973, CA2 NY) 480 F2d 341, 25 ALR Fed 534, cert den (1973) 414 US 910, 38 L Ed 2d 148, 94 S Ct 231, 94 S Ct
232 and cert den (1973) 414 US 924, 38 L Ed 2d 158, 94 S Ct 234.
Offense of securities fraud calls for proof of scheme or design to defraud incident to purchase or sale of security, but with respect to alleged misrepresentations
constituting such fraudulent activity, statement made which is either patently false or made with reckless indifference to its truth or falsity can be equivalent to intent
to defraud. United States v Mackay (1973, CA10 Utah) 491 F2d 616, CCH Fed Secur L Rep P 94326, cert den (1974) 416 US 972, 40 L Ed 2d 560, 94 S Ct 1996 and
cert den (1974) 419 US 1047, 42 L Ed 2d 640, 95 S Ct 619.
In non-disclosure situation, any required element of scienter is satisfied where defendant has actual knowledge of material information. Fenstermacher v Philadelphia
Nat'l Bank (1974, CA3 Pa) 493 F2d 333, CCH Fed Secur L Rep P 94404, 18 FR Serv 2d 372.
It is sufficient to prove violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 if it is shown that defendant knew statement was
misleading or knew of existence of facts which, if disclosed, would have shown it to be misleading. Carras v Burns (1975, CA4 NC) 516 F2d 251; Globus v Law
Research Service, Inc. (1968, SD NY) 287 F Supp 188, CCH Fed Secur L Rep P 92226, 1 ALR Fed 988, affd in part and revd in part on other grounds (1969, CA2 NY)
418 F2d 1276, CCH Fed Secur L Rep P 92474, cert den (1970) 397 US 913, 25 L Ed 2d 93, 90 S Ct 913.
Knowledge of material facts and failure of disclosure provide adequate basis for culpability sufficient to establish liability for violation of § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Thomas v Duralite Co. (1975, CA3 NJ) 524 F2d 577, CCH Fed Secur L Rep P 95322.
Reckless behavior can be sufficient to constitute requisite scienter in civil action alleging violations of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC
Rule 10b-5. Sanders v John Nuveen & Co. (1977, CA7 Ill) 554 F2d 790, CCH Fed Secur L Rep P 96030; Wright v Heizer Corp. (1977, CA7 Ill) 560 F2d 236, CCH Fed
Secur L Rep P 96101, cert den (1978) 434 US 1066, 55 L Ed 2d 767, 98 S Ct 1243 and (ovrld as stated in Krieger v Gast (1998, ND Ill) 1998 US Dist LEXIS 15422).
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 incorporate scienter requirement: defendant must know of falsity of information, or
must act in reckless disregard of its falsity, or must intend to deceive. First Virginia Bankshares v Benson (1977, CA5 Ala) 559 F2d 1307, CCH Fed Secur L Rep P
96189, reh den (1977, CA5 Ala) 564 F2d 416 and cert den (1978) 435 US 952, 55 L Ed 2d 802, 98 S Ct 1580.
Plaintiff may recover under SEC Rule 10b-5 for misrepresentations that are recklessly made as well as those made with conscious fraudulent intent. Coleco
Industries, Inc. v Berman (1977, CA3 Pa) 567 F2d 569, CCH Fed Secur L Rep P 96253, 24 FR Serv 2d 516, cert den (1978) 439 US 830, 58 L Ed 2d 124, 99 S Ct
106, reh den (1978) 439 US 998, 58 L Ed 2d 671, 99 S Ct 601.
Congress intended ambit of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) to reach broad category of behavior, including knowing or reckless conduct.
Nelson v Serwold (1978, CA9 Wash) 576 F2d 1332, CCH Fed Secur L Rep P 96399, cert den (1978) 439 US 970, 58 L Ed 2d 431, 99 S Ct 464.
Recklessness is sufficiently culpable state of mind for liability under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and Rule 10b-5. Mansbach v Prescott, Ball
& Turben (1979, CA6 Ky) 598 F2d 1017, CCH Fed Secur L Rep P 96861 (superseded by statute as stated in Burns v Prudential Sec. (2000, ND Ohio) 116 F Supp 2d
917).
Severe recklessness is sufficient for scienter in SEC Rule 10b-5 action. G. A. Thompson & Co. v Partridge (1981, CA5 Ga) 636 F2d 945, CCH Fed Secur L Rep P
97862, 30 FR Serv 2d 1605.
In order to establish requisite element of scienter in action under SEC Rule 10b-5 based on alleged failure to disclose material information, question is not merely
whether defendant had knowledge of undisclosed acts, but rather, it is danger of misleading buyers that must be actually known to defendant or so obvious that any
reasonable man would be legally bound as knowing. Schlifke v Seafirst Corp. (1989, CA7 Ill) 866 F2d 935, CCH Fed Secur L Rep P 94174, 106 OGR 446.
Recklessness satisfies scienter requirement for primary violation of 15 USCS § 78j(b). Anixter v Home-Stake Prod. Co. (1996, CA10 Okla) 77 F3d 1215, CCH Fed
Secur L Rep P 99056, 33 FR Serv 3d 1389 (criticized in In re Enron Corp. Secs., Derivative & ERISA Litig. (2002, SD Tex) 235 F Supp 2d 549, CCH Fed Secur L Rep P
92239).
Investment company's owners made material representations, either recklessly or with scienter, with regard to sale and offer of securities and made misleading and
false statements to investors; during two and half years that one of owners controlled trading account, he made only two purchases in investment company's balance
sheet enhancement program, and both purchases were for treasury bills; one of owners lost approximately $ 1.7 million in one of these treasury bill purchases, and
did not use investor funds to participate in third world projects, underlying premise of enhancement program. SEC v Fife (2002, CA1 RI) 311 F3d 1, cert den (2003)
538 US 1031, 155 L Ed 2d 1060, 123 S Ct 2073.
When non-employee consultant causes misstatements or omissions within periodic financial reports submitted to Securities and Exchange Commission, knowing that
those misstatements or omissions will reach investors, he can be held primarily liable under antifraud provisions of federal securities laws. SEC v Wolfson (2008,
CA10 Utah) 539 F3d 1249, CCH Fed Secur L Rep P 94825.
It was plain error to issue conscious avoidance instruction that contained neither "high probability" nor "actual belief" language, so defendant's securities fraud
conviction under 15 USCS §§ 78j(b) & 78ff was reversed and remanded. United States v Kaiser (2010, CA2 NY) 609 F3d 556, CCH Fed Secur L Rep P 95789.
In order to show criminal intent necessary for conviction of violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, it must be shown
that defendant misrepresented or failed to disclose material facts (a) knowing that facts represented were false, or (b) not knowing that facts represented were false
but acting with wilful or reckless disregard for truth. United States v Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
If defendant knew statement was misleading or knew of existence of facts which, if disclosed, would have shown it to be misleading, sufficient scienter was present
to permit recovery under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Wassel v Eglowsky (1975, DC Md) 399 F Supp 1330, affd
(1976, CA4 Md) 542 F2d 1235 (ovrld in part by Baker, Watts & Co. v Miles & Stockbridge (1989, CA4 Md) 876 F2d 1101, CCH Fed Secur L Rep P 94454, 110 ALR Fed
83).
There is little reason to distinguish between knowing misbehavior and reckless misbehavior under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC
Rule 10b-5; in practice, one who recklessly makes statement inherently possesses some knowledge of its falsity. McLean v Alexander (1976, DC Del) 420 F Supp
Plaintiff in action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) must prove that defendant was guilty of conscious fraud, which would require that
defendant have actual knowledge of matters complained of. Franke v Midwestern Oklahoma Dev. Authority (1976, WD Okla) 428 F Supp 719, CCH Fed Secur L Rep P
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95786, vacated on other grounds (1980, CA10 Okla) 619 F2d 856, CCH Fed Secur L Rep P 97347.
Scienter, essential element in civil action alleging violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, requires
proof of either actual knowledge of misrepresentations or wilful or reckless disregard for truth. Peltz v Northern Ohio Bank (1976, ND Ohio) 430 F Supp 382, CCH Fed
Magnitude of two transactions, both of which represented very substantial portion of company's revenues, were so important that knowledge of them could be
attributed to company and its key officers; thus, allowing investors to amend their complaint to show that these transactions violated generally accepted accounting
principles would support strong inference of deliberate recklessness on part of company and its officers when considered in light of other facts investors asserted they
would be able to allege or that they had already alleged in their complaint. In re Ramp Networks, Inc. Secs. Litig. (2002, ND Cal) 201 F Supp 2d 1051, CCH Fed
Stock purchaser's claims under § 10(b) of Securities and Exchange Act of 1934 claims were dismissed, where purchasers failed to make single allegation regarding
relevant defendant's particularized knowledge regarding forward-looking statements, and instead alleged generally that defendants--without specifying among 21
named defendants in case--knew various alleged facts, and therefore, knew that forward-looking statements were actually false. In re Infonet Servs. Corp. Secs.
Litig. (2003, CD Cal) 310 F Supp 2d 1080.
Corporate officers should never be presumed to know plans of another company. In re Copper Mt. Secs. Litig. (2004, ND Cal) 311 F Supp 2d 857.
Where court found that backdated stock options and concurrent practices of option-granting employees were highly suspicious and concluded that both leaned
heavily toward finding of scienter, court denied corporation's motion to dismiss claim of securities fraud in violation of 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5.
Middlesex Ret. Sys. v Quest Software Inc. (2007, CD Cal) 527 F Supp 2d 1164.
Where study that involved off-label use of drug manufactured by corporation during curative radiotherapy to test whether outcomes of patients suffering from head
and neck cancer improved had been halted, but that information had not been disclosed, court held that class member's complaint sufficiently plead violation of 15
USCS § 78j(b). Mendell v Amgen, Inc. (In re Amgen Inc. Secs. Litig.) (2008, CD Cal) 544 F Supp 2d 1009.
Finding of recklessness satisfies scienter requirement of 15 USCS § 78j(b). In re Martin Herer Engelman, et al. (1995) 52 SEC 271.
Recklessness satisfies scienter requirements of antifraud provisions of 15 USCS § 78j(b). In re Jay Houston Meadows (1996) 52 SEC 778.
Recklessness can satisfy scienter requirement under 15 USCS § 78j(b) and Rule 10b-5. Re Orlando Joseph Jett (1998) 1998 SEC LEXIS 1501.
46.--Pleading
District court did not err when it held that scienter was inadequately pled under 15 USCS § 78u-4(b)(1)(B), part of Private Securities Litigation Reform Act, and
granted judgment on pleadings where declarations attached to complaint failed to set forth facts implying that officer made statement in deliberate or conscious
disregard of information that transaction would not immediately add earnings per share to company's results and where no facts were alleged that supported
inference that officer or anyone at company knew extent of trade promotions work-out problem when acquisition was announced. Emplrs. Teamsters Local Nos. 175
& 505 Pension Trust Fund v Clorox Co. (2004, CA9 Cal) 353 F3d 1125.
Private Securities Litigation Reform Act (PSLRA) applies heightened pleading standard to private suits alleging violations of federal security law; with regard to suits
alleging violations of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), PSLRA requires that complaint state with particularity facts giving rise to strong
inference that defendant acted with scienter--that is with deliberate recklessness with regard to truth of manipulative or deceptive device or contrivance that was
used; in assessing whether scienter has been sufficiently pleaded, court must consider all reasonable inferences and determine whether, when considered together,
plaintiff's allegations are sufficient to create strong inference that defendant acted with deliberate or conscious recklessness. Nursing Home Pension Fund, Local 144
v Oracle Corp. (2004, CA9 Cal) 380 F3d 1226, CCH Fed Secur L Rep P 92909.
Because investors alleged accounting violations by corporation's auditor which surpassed inference of ordinary negligence, violations reasonably suggested that
auditor either knew of or willfully turned blind eye to fraud at corporation; accordingly, allegations were sufficient to withstand dismissal of investors' claim against
auditor under 15 USCS § 78j(b). In re Suprema Specialties, Inc. Secs. Litig. (2006, CA3 NJ) 438 F3d 256.
Investors blanket allegations of recklessness on part of corporation's outside directors based on their position, without any attempt to link specific individuals to
specific instances of reckless conduct did not satisfy particularity requirements of Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act, and therefore were
disregarded on review of motion to dismiss investors' 15 USCS § 78j(b) claims against outside directors. In re Suprema Specialties, Inc. Secs. Litig. (2006, CA3 NJ)
438 F3d 256.
Allegation that accountant should have know of or recklessly disregarded evidence of managerial and accounting difficulties of issuer fails to satisfy particularity
requirements of alleging scienter. Deane v Thomson McKinnon Secur., Inc. (1984, DC Dist Col) 586 F Supp 44, CCH Fed Secur L Rep P 91480, affd without op (1985,
App DC) 246 US App DC 43, 762 F2d 137, cert den (1985) 474 US 903, 88 L Ed 2d 231, 106 S Ct 232.
Investors in lease and service agreements regarding energy devices adequately allege scienter for securities fraud under 15 USCS § 78j(b) where detailed complaints
allege experts, either knowingly or in reckless disregard of truth, made actionable misstatements and omissions and either knew or recklessly disregarded fact that
their actions, analyses, and opinions would be used by promoters and reasonably relied upon by investors. In re Energy Systems Equipment Leasing Sec. Litigation
(1986, ED NY) 642 F Supp 718, CCH Fed Secur L Rep P 92920.
Complaint of investors in device for converting natural gas into liquid natural gas adequately alleges brokers' scienter under 15 USCS § 78j(b), where complaint
details numerous alleged misrepresentations and omissions that give rise to inference that brokers had knowledge of facts or recklessly disregarded their existence,
because complaint offers enough information for brokers to frame response. In re Gas Reclamation, Inc. Sec. Litigation (1987, SD NY) 659 F Supp 493, CCH Fed
Secur L Rep P 93217 (criticized in Silverman v Ernst & Young, LLP (1999, DC NJ) 1999 US Dist LEXIS 17703).
Purchaser's 15 USCS § 78j(b) claim against auditor of company it acquired under stock purchase agreement must fail under Rule 9(b), where purchaser alleges in
conclusory terms that auditor "knew or should have known and was reckless in not ascertaining" that company's inventory was materially overvalued, because Rule
9(b) requires that general averments of scienter be accompanied by detailed factual allegations capable of supporting inference of fraud. Limited, Inc. v McCrory
Federal securities claims under 15 USCS § 78j(b) adequately alleged scienter by identifying circumstances indicating conscious or reckless behavior by defendants,
where each individual defendant occupied position with or had relationship with his or her company, and it could thus be inferred that each was privy to confidential,
proprietary information concerning company, as well as that individual defendants were aware of market manipulation by controlling person and financial position of
controlling person. Degulis v LXR Biotechnology (1996, SD NY) 928 F Supp 1301, CCH Fed Secur L Rep P 99260.
Securities fraud plaintiffs have not satisfied scienter pleading requirement, where, in order to allege that independent accountant or auditor acted with scienter,
complaint must identify specific, highly suspicious facts and circumstances available to auditor at time of audit and allege that these facts were ignored either
deliberately or recklessly, because plaintiffs have alleged nothing more than failure to follow generally accepted accounting principles and auditing standards which is,
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by itself, insufficient to state securities fraud claim. In re SmarTalk Teleservices, Inc. Sec. Litig. (2000, SD Ohio) 124 F Supp 2d 505, CCH Fed Secur L Rep P 91274.
Shareholders' claims under § 10b of Securities Exchange Act of 1934, 15 USCS § 78j(b), failed to state claim pursuant to Fed. R. Civ. P. 12(b)(6) and failed to
adequately plead scienter under Private Securities Litigation Reform Act, 15 USCS § 78u-4, where it was not enough for shareholders to allege that computer
manufacturer and its chief executive officer (CEO) who spoke publicly at computer conference could have known about manufacturing difficulties with company's new
"Cube" computer, or even that they should have known about them; shareholders were required to allege "something approaching actual knowledge" on part of CEO
or other officers of company who actually made challenged statements. In re Apple Computer, Inc. (2002, ND Cal) 243 F Supp 2d 1012, CCH Fed Secur L Rep P
92407, affd (2005, CA9 Cal) CCH Fed Secur L Rep P 93203.
Plaintiff's Securities Exchange Act claim was dismissed because their complaint did not allege with particularity that defendants made any statements that
proximately caused plaintiffs' injuries or were made in connection with complained of transaction. Filler v Hanvit Bank (2003, SD NY) 247 F Supp 2d 425, CCH Fed
Secur L Rep P 92286, vacated (2003, SD NY) 2003 US Dist LEXIS 12836, subsequent app (2003, SD NY) 2003 US Dist LEXIS 12837, affd (2004, CA2 NY) 378 F3d
213, cert den (2004, US) 160 L Ed 2d 499, 125 S Ct 677.
Pursuant to claims under 15 USCS § 78j, shareholders failed to satisfy particularity standard set forth in 15 USCS § 78u-4(b)(1) and Fed. R. Civ. P. 9(b) where their
complaint identified alleged false statements contained in drug company's Securities Exchange Commission filings and press releases, but did not set forth sufficient
particular facts supporting reasons why shareholders believed statements to be false. In re Empyrean Bioscience, Inc. Secs. Litig. (2003, ND Ohio) 255 F Supp 2d
751, motion to strike den, motion den, motion gr (2003, ND Ohio) 219 FRD 408, CCH Fed Secur L Rep P 92629.
Pursuant to claims under § 10(b) of Securities Exchange Act, 15 USCS § 78j, shareholder plaintiffs failed to adequately plead scienter under 15 USCS § 78u-4(b)(2)
in claims against drug company where shareholders failed to properly allege that company knew (or were reckless in not knowing) that National Institute of Health
rejected its application to conduct clinical trials for company's contraceptive gel. In re Empyrean Bioscience, Inc. Secs. Litig. (2003, ND Ohio) 255 F Supp 2d 751,
motion to strike den, motion den, motion gr (2003, ND Ohio) 219 FRD 408, CCH Fed Secur L Rep P 92629.
Pursuant to claims under 15 USCS § 78j, shareholders' claims concerning allegedly false press releases and Securities Exchange Commission (SEC) filings related to
drug company's contraceptive gel failed to qualify for safe harbor protection under 15 USCS § 78u-5(i)(1) where each of statements indicated future objective or
plan with respect to gel, truth of which could not be tested as of time statement was made, and thus qualified as forward looking. In re Empyrean Bioscience, Inc.
Secs. Litig. (2003, ND Ohio) 255 F Supp 2d 751, motion to strike den, motion den, motion gr (2003, ND Ohio) 219 FRD 408, CCH Fed Secur L Rep P 92629.
In Private Securities Litigation Reform Act securities fraud claim against officers and directors of corporation that had announced certain accounting errors and filed
restated annual financials that dramatically reduced reported net income, defendants conceded all of elements of securities fraud claim except scienter; as these
management defendants were responsible for day-to-day operations at company and complaint alleged that, at least, they were reckless not to know "financial
shenanigans" leading to $ 259 million restatements, when company stated that its Board of Directors had always expected and required proper financial reporting,
but admitted that view was not "properly reflected in attitudes and actions of certain former managers," this statement was tantamount to admission that
management knew or should have known that proper accounting was not taking place; thus, plaintiffs had pleaded with as much specificity as possible in absence of
discovery as to these defendants, so officers and directors' motions to dismiss for failure to state claim was denied. Pacholder High Yield Fund, Inc. v Cucuz (In re
Hayes Lemmerz Int'l, Inc. Equity Secs. Litig.) (2003, ED Mich) 271 F Supp 2d 1007, CCH Fed Secur L Rep P 92460.
Complaint alleged only that auditor's professional standards group (PSG) was aware of misleading accounting schemes auditor espoused and that it stifled dissent of
junior auditor working on another account who questioned their propriety, and such allegations were insufficient to state claim for primary violation against PSG
members. In re Global Crossing, Ltd. Sec. Litig. (2004, SD NY) 322 F Supp 2d 319, CCH Fed Secur L Rep P 92717.
Plaintiff shareholders' allegations did not support strong inference that accountant defendants knew or recklessly disregarded that defendant company's financial
statements were materially misstated due to overstated promotional allowances and improper consolidation of joint venture revenue. In re Royal Ahold N.V. Sec. &
ERISA Litig. (2004, DC Md) 351 F Supp 2d 334, CCH Fed Secur L Rep P 93061.
Where complaint alleged various accounting and financial reporting problems within company, but did not allege facts showing that company and officers had
knowledge of or recklessly disregarded information about alleged problems and intentionally concealed those problems, shareholders claims under 15 USCS § 78j(b)
failed to allege requisite scienter and meet heightened pleading requirements of Fed. R. Civ. P. 9(b) and § 101(b) of Private Securities Litigation Reform Act of 1995,
15 USCS § 78u-4. In re Stonepath Group, Inc. Securities Litigation (2005, ED Pa) 397 F Supp 2d 575, CCH Fed Secur L Rep P 93555.
Shareholder's 15 USCS § 78j claim was dismissed because it failed to adequately plead scienter; complaint did not comply with pleading standards of Private
Securities Litigation Reform Act of 1995, 15 USCS § 78u-4 et seq., because it did not state facts suggesting that defendants knew or should have known corporation
was using inappropriate accounting method. Johnson v NYFIX, Inc. (2005, DC Conn) 399 F Supp 2d 105.
In securities fraud action against current and former officer, plaintiff failed adequately to plead scienter, as required by 15 USCS § 78u-4(b)(2) and Fed. R. Civ. P.
9(b); earnings restatement alone did not establish scienter, i.e., that officers knew accounts and statements were false and, despite that knowledge, intentionally
deceived public into believing company's numbers were accurate; officers' high-level position with company alone was not sufficient to establish scienter; anonymous
sources were not sufficient to establish scienter; magnitude of financial fraud was not factor in determining officers' scienter. Frank v Dana Corp. (2007, ND Ohio)
525 F Supp 2d 922.
Investors sufficiently pleaded scienter under 15 USCS § 78j(b) and S.E.C. Rule 10b-5 by showing that officer of Internet marketing company was directly confronted
several times with traffic quality problems and directly lied to analysts during conference call; these allegations satisfied Fed. R. Civ. P. 9(b) and 15 USCS §
78u-4(b)(1). In re Miva, Inc. (2008, MD Fla) 544 F Supp 2d 1310, CCH Fed Secur L Rep P 94584.
Inference of scienter was sufficiently supported by complaint's allegations regarding frequency with which defendants caused certain underwriters' decisions that
rejected risky loans and degree to which company's reserves were decreased compared to historic levels, at time when according to generally accepted accounting
principles such reserves should have been increased. Atlas v Accredited Home Lenders Holding Co. (2008, SD Cal) 556 F Supp 2d 1142.
Securities fraud claims under 15 USCS § 78j(b) and 17 CFR § 240.10b-5 were sufficiently pleaded with particularity under Fed. R. Civ. P. 9(b) and gave rise to strong
inference of scienter under 15 USCS § 78u-4(b) as to all but two allegedly false statements made by officers about risk management, appraisals, underwriting,
financial statements, and internal controls. In re Wash. Mut., Inc. Sec. (2009, WD Wash) 694 F Supp 2d 1192, CCH Fed Secur L Rep P 95503.
In securities fraud class action suit brought by group of investors, against company, its officers and directors, underwriters, and auditors (defendants), defendants'
motion to dismiss was denied as to most counts of complaint because investors sufficiently pled following allegations that satisfied heightened pleading requirements
for fraud case, namely: that false statements were made by defendants by continuing to portray their underwriting procedures as cautious and conservative, while
failing to disclose that company had lowered its standards; that defendants made false statements that company was outperforming market when it was not; and
that defendants creating false financial statements; investors sufficiently pled scienter on part of officers and directors and, thus, company, by alleging their approval
of lower standards and still representing that company was maintaining same conservative standards; and, investors sufficiently alleged that defendants had made
misleading statements and omissions by failing to disclose lowering of company's underwriting standards, by misrepresenting its performance, and misstating its
financial information. In re Ambac Fin. Group, Inc. (2010, SD NY) 693 F Supp 2d 241, Certificate of appealability denied (2010, SD NY) 693 F Supp 2d 241.
In securities fraud case, motion to dismiss filed by bank and four of its officers was granted as suing pension fund's allegations imputing dishonest motives based on
press releases forecasting and speculating about looming subprime mortgage crisis were insufficient to establish liability under § 10(b) of Securities Exchange Act of
1934, 15 USCS § 78j(b), and because court determined that no primary violation occurred under § 10(b), motion to dismiss was granted as to pension fund's §
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20(a), 15 USCS § 78t(a), claim as well; additionally, allegations regarding bank's write-downs on mortgage-backed holdings amounted to fundamental
disagreements with business judgments of banks and its officers, which were not actionable claims. Plumbers & Steamfitters Local 773 Pension Fund v Canadian
Imperial Bank of Commerce (2010, SD NY) 694 F Supp 2d 287.
Unpublished: Security fraud plaintiffs failed to plead scienter as to one investment broker where they did not sufficiently allege facts indicating that broker had access
to model for misleading revenue guidances, or other information indicating that guidances were false or misleading; although they allege that one brokerage partner
sat on defendant company's board of directors, they failed to allege facts indicating that outside directors had access to allegedly arbitrary financial model; mover,
have specifically disclaimed brokerage partner's knowledge in order to proceed with § 11 of Securities Act of 1933, 15 USCS § 77k, negligence claim, which was only
alleged basis for brokerage's knowledge; as such, allegation that brokerage partner sat on company's board of directors was insufficient to establish "strong
inference" of scienter as to brokerage under Private Securities Litigation Reform Act, 15 USCS § 78u-4 et seq. on their § 10(b) of Securities Exchange Act of 1934, 15
USCS § 78j(b), and SEC Rule 10b-5, 17 CFR § 240.10b-5, claims. In re Tellium , Inc. Sec. Litig. (2005, DC NJ) 2005 US Dist LEXIS 19467.
Unpublished: On plaintiff investors' § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and SEC Rule 10b-5, 17 CFR § 240.10b-5, claims, kickback
allegations underlying defendants' alleged misstatements did not meet level of particularity required by Private Securities Litigation Reform Act, 15 USCS § 78u-4 et
seq., where confidential sources cited by plaintiff investors in support of kickback allegations did not provide enough detail with respect to, among other things, what
former employees' positions entailed and how those positions provided basis for statements made, or approximate dates that events that they allege transpired
occurred; although information gleaned from Securities and Exchange Commission proceedings could potentially be used to support first hand accounts, in absence
of independent, particularized facts demonstrating contemporaneous knowledge, such allegations amounted solely to "fraud by hindsight," which had been "long
rejected" by Third Circuit. In re Tellium , Inc. Sec. Litig. (2005, DC NJ) 2005 US Dist LEXIS 19467.
Unpublished: Pharmaceutical service provider's motion to dismiss securities fraud claims based on safe harbor grounds was denied where company was not entitled
to safe harbor protection under 15 USCS § 78u-5(c)(1)(A) for certain forward looking statements; although company used broad terms such as "expected," "would
likely earn," and "anticipated" pertaining to earning and revenue prospects, which were forward-looking within meaning of 15 USCS § 78u-5(i)(1)(A), it was not clear
that cited cautionary language rendered these statements immaterial as matter of law. In re PDI Sec. Litig. (2005, DC NJ) CCH Fed Secur L Rep P 93504.
Required element of scienter in civil enforcement action to enjoin violations of 15 USCS §§ 77q and 78j and SEC Rule 10b-5 was present where defendant had actual
knowledge of fraudulent misrepresentations being made by his subordinate sales representatives but intentionally did nothing to stop them. SEC v Aaron (1981, CA2
NY) 666 F2d 5, CCH Fed Secur L Rep P 97851.
Trial court did not have to make specific finding of scienter on part of defendant, where court found that he violated SEC Rule 10b-5 by knowingly misrepresenting
(1) facts concerning debentures he sold to plaintiffs and use of proceeds from sales, and (2) that corporation whose debentures he sold was formally incorporated at
time of sale, since implicit in court's finding is that defendant had knowledge of falsity of statements he made or acted in reckless disregard of their truth or falsity
and intended to deceive or mislead plaintiffs so they would purchase debentures. Loveridge v Dreagoux (1982, CA10 Utah) 678 F2d 870, CCH Fed Secur L Rep P
98680.
Reckless conduct falls within ambit of 15 USCS § 78j, and District Court properly instructed jury that scienter was present if manner in which account was handled
reflected disregard for client's investment concerns. Kehr v Smith Barney, Harris Upham & Co. (1984, CA9 Cal) 736 F2d 1283, CCH Fed Secur L Rep P 91547, 39 FR
Serv 2d 924.
Mere publication of inaccurate accounting figures or failure to follow generally accepted accounting principles (GAAP), without more, does not establish scienter;
party must know that it is publishing materially false information, or party must be severely reckless in publishing such information. Fine v American Solar King Corp.
(1990, CA5 Tex) 919 F2d 290, cert dismd (1991) 502 US 976, 116 L Ed 2d 601, 112 S Ct 576.
District court's factual finding that individual lacked scienter necessary to establish securities fraud in violation of 15 USCS § 77q(a) & 78j(b) was affirmed under Fed.
R. Civ. P. 52(a) where Securities and Exchange Commission failed to challenge admissibility of evidence showing that individual was inept businessman who did not
know of his business's dire financial situation and was not responsible for statements contained in sales brochure for pay telephone investment program and, from
that evidence, district court could have reasonably found that individual had not acted intentionally or recklessly with regard to false representations made to
investors and did not know that program's buyback options were uninsured. SEC v Rubera (2003, CA9 Or) 350 F3d 1084, 2003 CDOS 10450, 2003 Daily Journal DAR
District court erred in dismissing 15 USCS § 78j(b) and 17 CFR § 240.10b-5 claims brought by purchaser of stock in corporation where purchaser alleged that
offering memorandum misleadingly implied corporation had received proceeds of private stock offering; purchaser sufficiently alleged scienter, as it claimed
defendants knew that most obvious interpretation of statement in memorandum was false when made and that they had motive to misrepresent status of stock sale.
Livid Holdings Ltd. v Salomon Smith Barney, Inc. (2005, CA9 Wash) 416 F3d 940.
Given that Securities and Exchange Commission need not establish attribution in enforcement action under either § 10(b) (15 USCS § 78j(b)) of Securities Exchange
Act of 1934 or § 17(a) (15 USCS § 77q(a)) of Securities Act of 1933, mere fact that misstatements and omissions were not publicly attributable to member did not
mean that member and limited liability company (LLC) could not have been held primarily liable; because member caused misstatements and omissions to be made,
and knew that statements were calculated to reach investors, member and LLC could have properly been held liable under §§ 10(b) and 17(a) for those
misstatements and omissions. SEC v Wolfson (2008, CA10 Utah) 539 F3d 1249, CCH Fed Secur L Rep P 94825.
Appellate court held that allegations contained in complaint did not create inference of scienter that was at least as probable as non-fraudulent explanation, namely
that none of officers or directors knew of accounting errors until investigation began in 2006; therefore, claims under § 10(b) (15 USCS § 78j(b)) of Securities
Exchange Act of 1934 and Rule 10b-5 claims based on financial restatements failed because of they lacked sufficient allegations of scienter. Edward J. Goodman Life
Income Trust v Jabil Circuit, Inc. (2010, CA11 Fla) 594 F3d 783, CCH Fed Secur L Rep P 95576, 22 FLW Fed C 463.
District court did not err when it dismissed shareholders claims under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 and Rule 10b-5 claims against
officers and directors for insider trading because although complaint contained numerous allegations of trades made by officers and directors during class period, it
failed to make any particularized allegation as required under 15 USCS § 78u-4(b)(2) that any individual officer or director knew about accounting errors at time of
trading. Edward J. Goodman Life Income Trust v Jabil Circuit, Inc. (2010, CA11 Fla) 594 F3d 783, CCH Fed Secur L Rep P 95576, 22 FLW Fed C 463.
Securities and Exchange Commission's (SEC) findings of violations of § 10(b) of Securities and Exchange Act of 1934 and S.E.C. Rule 10b-5 for improper securities
disclosures were supported by substantial evidence, as SEC's opinion had ample support of reckless indifference and extreme recklessness as to misclassification of
stock of certain company; company represented between 10 and 40 percent of fund's holdings, and attentive director would have rectified error absent extreme
abdication of ordinary care. Rockies Fund, Inc. v SEC (2005, App DC) 428 F3d 1088, CCH Fed Secur L Rep P 93573.
Substantial evidence supported finding that municipal bond underwriter violated § 17(a) of Securities Act of 1933, 15 USCS § 77q(a), and § 10(b) of Securities
Exchange Act of 1934, 15 USCS § 78j(b), where bonds were issued to finance purchase of office building; substantial evidence supported conclusion that
underwriter's cautionary statements were so deficient petitioner must have known investors would be misled by offering documents; cautionary language only
disclosed risk that tenants might leave--not underwriter's knowledge that Pennsylvania Department of Transportation's actually planned to do so in near future.
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Dolphin & Bradbury, Inc. v SEC (2008, App DC) 512 F3d 634, CCH Fed Secur L Rep P 94552.
Actual knowledge of misstatement of fact is sufficient alone for civil action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); where shareholder sold
stock to insiders of corporation without being advised of impending merger wherein corporation was acquired by second corporation, second corporation did not
violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where it was unaware of shareholder's sale of stock. Gibson v Cannon (1971, ED Pa) 325 F Supp 706.
Directors of corporation who caused its assets to be sold for inadequate consideration were in violation of SEC Rule 10b-5 because they failed to disclose unfairness
of transaction to minority shareholders; actual knowledge of unfairness of transaction was not necessary where they knew of factors bearing upon limited worth of
consideration received by corporation and were grossly negligent in failing to determine unfairness. Bailey v Meister Brau, Inc. (1973, ND Ill) 378 F Supp 869, CCH
Fed Secur L Rep P 94837, affd (1976, CA7 Ill) 535 F2d 982, CCH Fed Secur L Rep P 95543.
In civil action under SEC Rule 10b-5 against public accounting firm based upon alleged misrepresentations and omissions in financial statement, plaintiffs were
required to prove that firm had actual knowledge of misrepresentations and omissions or that its failure to discover misrepresentations and omissions amounted to
wilful, deliberate, or reckless disregard for truth that was equivalent of knowledge; firms knowledge of fact that figures created false picture was enough to constitute
scienter. Herzfeld v Laventhol, Krekstein, Horwath & Horwath (1974, SD NY) 378 F Supp 112, CCH Fed Secur L Rep P 94574, affd in part and revd in part on other
grounds (1976, CA2 NY) 540 F2d 27, CCH Fed Secur L Rep P 95660.
Defendants' motion for summary judgment on issue of scienter is denied, where 15 USCS § 78j(b) plaintiff investors argue that computer corporation officials made
2 positive statements to public about new computer system even while knowing certain negative facts about new computer and its prospects for success, because
plaintiffs also demonstrate sufficient facts contradicting defendants' public statements that defendants either knew, were aware of, or were recklessly indifferent to,
and summary judgment will not be granted on issue of scienter unless no reasonable inference supports plaintiffs' claim. In re Apple Computer Sec. Litigation (1987,
ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
Claim for securities fraud secondary liability is not stated by stockholders under 15 USCS § 78j(b), where complaint alleges that defendant was director and outside
attorney for corporation sold stock during relevant period, and had knowledge of allegedly fraudulent practices, because allegations do not amount to knowing or
reckless participation in fraud. Cammer v Bloom (1989, DC NJ) 711 F Supp 1264, CCH Fed Secur L Rep P 95211, app dismd (1993, CA3 Pa) 993 F2d 875.
In suit by investors in fraudulent real estate venture, motion to dismiss was granted to accounting firm, where evidence did not show firm had knowledge of or was
reckless regarding falsity of information that went into reports, since scienter is required by 15 USCS § 78j(b). Abrams & Wofsy v Renaissance Inv. Corp. (1993, ND
Ga) 820 F Supp 1519.
Uncertified securities fraud class action arising out of machinations surrounding merger of media company is dismissed, even though amended complaint adequately
alleges theory that defendants' failure to disclose large shareholder's authorization to seek superior merger proposals artificially depressed market for company's
shares, causing plaintiff and other class members to sell their shares at deflated price, because plaintiff has again failed to plead either (1) motive and opportunity or
(2) circumstantial evidence of recklessness, and has not sufficiently alleged scienter. Kalnit v Eichler (2000, SD NY) 99 F Supp 2d 327, 1921 CCH Fed Secur L Rep P
90933, affd (2001, CA2 NY) 264 F3d 131.
Purchasers of stock in defendant corporation stated sufficient claim for relief under 15 USCS § 78j, where they alleged that defendant executives failed to disclose
negative consequences from specific risks that had either already come to pass or were known to be imminent, including serious accounting irregularities, and that
their public statements were made with actual knowledge or with reckless disregard that they were false or misleading. In re Nortel Networks Corp. Sec. Litig. (2003,
SD NY) 238 F Supp 2d 613, CCH Fed Secur L Rep P 92283.
In action by stockholders against corporation and corporate officers alleging securities fraud in violation of 15 USCS § 78j(b), 17 C.F.R. § 240.10b-5, and 15 USCS §
78t(a), motion to dismiss filed by corporation and corporate officers for failure to state claim under Fed. R. Civ. P. 12(b)(6) and for failure to plead securities fraud
with particularity under Fed. R. Civ. P. 9(b) and 15 USCS § 78u-4(b), was granted where alleged fraudulent statements made by corporation and corporate officers
were accompanied by sufficient meaningful cautionary language such that application of safe harbor under 15 USCS § 78u-5(c)(1)(A) was appropriate, stockholders
failed to plead facts showing strong inference that corporation and corporate officers actually knew that their forward-looking statements reaffirming earnings
projections were false or misleading such that application of safe harbor under 15 USCS § 78u-5(c)(1)(B) was appropriate, stockholders' Generally Acceptable
Accounting Principles allegations lacked particularity and did not give rise to strong inference of scienter, and, because stockholders failed to plead primary cause of
action under 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5, their 15 USCS § 78t(a) claims against corporate officers as controlling persons also failed. Stavros v
Exelon Corp. (2003, ND Ill) 266 F Supp 2d 833.
In action by plaintiff sellers under purchase agreement alleging fraud under § 10b (15 USCS § 78j(b)) and § 20 (15 USCS § 78t) of Securities Exchange Act of 1934,
against defendants, buyer's president and law firm, claims were insufficient under Fed. R. Civ. P. 9(b) and 15 USCS 78u-4(b)(2), part of Private Securities Litigation
Reform Act, because allegations that defendants had access to facts and documents that allowed them to know that representations were false were insufficient to
plead conscious misbehavior or recklessness. Marcus v Frome (2003, SD NY) 275 F Supp 2d 496, CCH Fed Secur L Rep P 92482.
Stockholders' claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), was dismissed for failure adequately to plead scienter, as 1) stockholders'
argument that restructuring bonuses offered to corporate officers were sufficient basis from which to infer motive to defraud was without merit because, as matter of
law, allegations that officers were motivated by desire to maintain or increase executive compensation was insufficient when such desire can be imputed to all
corporate officers; and 2) stockholders' allegations that announcement of restructuring and sale of business unit meant that officers must have known that
corporation would have to be sold was wholly insufficient to plead conscious misbehavior or recklessness, especially with particularity required by Fed. R. Civ. P. 9(b),
as statement did nothing more than announce end of publicly disclosed restructuring process. Abbad v Amman (2003, SD NY) 285 F Supp 2d 411, affd (2004, CA2
NY) 112 Fed Appx 97, CCH Fed Secur L Rep P 93011.
Court denied advisor and corporation's motion to dismiss Securities and Exchange Commission's (SEC) claims that they violated sections of Securities Exchange Act
of 1934, 15 USCS §§ 78a et seq., prohibiting fraudulent or deceptive conduct in offer and sale of securities, as SEC's assertions that advisor and corporation made
promises of exorbitant returns on investment that they either knew or were reckless in not knowing were impossible legitimately to fulfill were more than sufficient to
satisfy requirements for scienter, and because securities laws applied differently to SEC than they did to private plaintiff, SEC was not required to allege or prove that
investors relied on advisor and corporation's misrepresentations or that specific investors suffered actual harm as result of advisor and corporation's
misrepresentations. SEC v Prater (2003, DC Conn) 296 F Supp 2d 210.
Where stock purchasers alleged that defendants made material misrepresentations regarding product's quality, product's demand, recognition of revenues, and
accounting for inventory, stock purchasers failed to adequately plead bases of most of confidential witnesses' personal knowledge and individual defendants'
knowledge of falsity of statements. In re Metawave Communs. Corp. Secs. Litig. (2003, WD Wash) 298 F Supp 2d 1056.
Investors alleged in essence that defendant corporation fraudulently recognized revenue it knew it could not collect, under-reserved for doubtful accounts, and
engaged in fictitious transactions with related-parties while its officers and directors realized substantial profits; problem was that there was significant lack of indicia
of fraud, which, in turn, refuted any inference that each defendant acted with requisite intent to deceive. Druskin v Answerthink, Inc. (2004, SD Fla) 299 F Supp 2d
1307, CCH Fed Secur L Rep P 92663, 17 FLW Fed D 224.
Complaint satisfied pleading requirements of Private Securities Litigation Reform Act of 1995 regarding scienter because complaint raised strong inference that, at
minimum, corporate officers were consciously reckless in making representations to public that grossly inflated corporation's subscriber line count, rate of growth,
and revenues. In re Rhythms Secs. Litig. (2004, DC Colo) 300 F Supp 2d 1081, CCH Fed Secur L Rep P 92674.
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While accused statements indicated that some telecom companies were involved in fraudulent swaps and that defendant company was on other side of allegedly
improper swap, these allegations may have given rise to inference that many telecom companies, including defendant company, were involved in questionable swap
transactions, but plaintiff shareholder failed to allege (1) that company or individual defendants acted with conscious intent to defraud or even that company entered
into any specific transaction merely to boost revenues and earnings before interest, taxes, depreciation and amortization and (2) facts demonstrating recklessness or
showing that company or individual defendants knew facts or had access to information suggesting that swap transactions at issue were improper; therefore, court
granted defendants' motions to dismiss. In re Flag Telecom Holdings, LTD. (2004, SD NY) 308 F Supp 2d 249.
Conscious misbehavior or recklessness could not be inferred where it was alleged that 1) management set aggressive targets, 2) incentives were given to
wholesalers to buy product before they actually needed it, 3) in order to meet earnings estimates, 4) it was known that wholesaler inventories were higher than
usual, and 5) real products were shipped to real customers who paid real money. In re Bristol-Myers Squibb Sec. Litig. (2004, SD NY) 312 F Supp 2d 549, CCH Fed
Securities and Exchange Commission (SEC) failed to prove that entrepreneur had knowledge of security fraud committed by chief executive officer (CEO) of
corporation because entrepreneur did not know that cards ordered from corporation were dummies or that cards shipped were incompatible with his product and,
while he may have been negligent in not checking dummy shipment, he did not have scienter necessary to aid and abet corporation's CEO in committing securities
fraud; therefore, entrepreneur was entitled to judgment in his favor on SEC's claims that he aided and abetted securities fraud in violation of § 10(b) (15 USCS §
78j(b)) and § 13(b)(2)(A) (15 USCS § 78m(b)(2)(A)) of Securities Exchange Act of 1934. SEC v Peretz (2004, DC Mass) 317 F Supp 2d 58.
Scienter was established in Securities and Exchange Commission's action against company president under § 17(a) of Securities Act of 1933, 15 USCS § 77q(a), §
10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), where president admitted he knew company's alleged medical device was not approved by Food and
Drug Administration, but distributed brochures touting approval, and admitted he did not know who owned patent despite representations to investors that company
had patent rights. SEC v Global Telecom Servs. L.L.C. (2004, DC Conn) 325 F Supp 2d 94, CCH Fed Secur L Rep P 92875.
Plaintiff established genuine issues of fact as to scienter as to claims against his broker where jury could find that broker's use of strategy staking virtually all
available assets in one taxable account on his belief that market would not dip precipitously, constituted conscious misbehavior or at least recklessness, especially
after significant losses were realized from options spread just one month earlier. Louros v Kreicas (2005, SD NY) 367 F Supp 2d 572, CCH Fed Secur L Rep P 93233.
Stock purchaser's securities fraud complaint (alleging that corporate officers knew or were reckless in not knowing value of goodwill that was acquired from two
entities that corporation purchased was severely impaired, and corporation would need to take charge against earnings) was dismissed, as purchaser's allegations did
not meet scienter pleading requirement as to officers; inter alia, purchasers' confidential witness did not provide information about how officers were involved in
alleged schemes to misrepresent value of goodwill or how each officer knew of alleged fraud. In re Acterna Corp. Sec. Litig. (2005, DC Md) 378 F Supp 2d 561.
Stock purchaser's securities fraud complaint was dismissed as to corporation's outside auditor, as purchaser's allegations did not meet scienter pleading requirement
as to individual corporate officers; allegations did not support strong inference that auditor knew or recklessly disregarded that corporation's financial statements
were materially false or misleading due to purported overvaluation of goodwill; inter alia, they also did not support conclusory allegation that had auditor conducted
its audit in accordance with Generally Accepted Auditing Standards, it would have discovered, inter alia, massive goodwill overvaluation. In re Acterna Corp. Sec.
Litig. (2005, DC Md) 378 F Supp 2d 561.
Section 10(b) of Securities Exchange Act of 1934 claim was dismissed as to defendant compensation committee members where plaintiff actuarial pension funds
alleged that committee members approved improper loan to chief executive officer and sought to conceal loan from board and public; disclosure of loan was delayed
for period of weeks; committee members' conduct did not tend to show that danger of fraud was known to either man or obvious to him. N.Y. City Emples. Ret. Sys.
v Ebbers (In re WorldCom, Inc. Sec. Litig.) (2005, SD NY) 382 F Supp 2d 549, motion den, injunction gr (2005, SD NY) 2005 US Dist LEXIS 7958.
Where shareholder alleged that several corporate officers were aware of certain accounting manipulations, that officers made statements or were sufficiently
connected to group statements that they knew to be false, and knowingly participated in scheme to defraud that supported allegedly false statements, and that
alleged manipulations and statements were part of pervasive and long-standing series of accounting machinations and resulting misstatements, alleged facts
supported strong inference of scienter as to officers. In re Qwest Communs. Int'l, Inc. Sec. Litig. (2005, DC Colo) 387 F Supp 2d 1130, CCH Fed Secur L Rep P
93514.
Securities purchasers clearly pled scienter as to defendant accounting firm; factual allegations in complaint portrayed firm as "virtual pushover" in its dealings with
company whose securities plaintiffs purchased, which at minimum went along with accounting practices it knew to be clear violations of Generally Accepted
Accounting Principles, and which, even after it was clear early in 2001 that there were very serious concerns about company's accounting practices and it was
apparent that it was questionable--at best--whether company took seriously its obligation to comply with applicable accounting rules, was intimidated into signing off
on minimal restatement of company's financial statements that accounted for only small portion of company's overstatements of revenues and pre-tax earnings.
Carlson v Xerox Corp. (2005, DC Conn) 392 F Supp 2d 267, CCH Fed Secur L Rep P 93303.
Securities purchasers clearly pled scienter, based on defendant company's and defendant officers' knowledge of facts and access to information contradicting their
public statements; factual allegations made clear that this was not case of client's innocent reliance on advice from accountants; already strong inference of
fraudulent intent was made stronger by two sets of allegations concerning SEC investigation, that is, first, purchasers alleged that these defendants failed to
cooperate with SEC investigation, and in support of that allegation, they made note of statement from SEC concerning $ 10,000,000 fine; second, purchasers alleged
that on numerous occasions these defendants represented that they were fully cooperating with SEC, when, in fact, they were not. Carlson v Xerox Corp. (2005, DC
Conn) 392 F Supp 2d 267, CCH Fed Secur L Rep P 93303.
Securities and Exchange Commission failed to present prima facie case that defendants, limited liability company and its principals, had committed violations of §
17(a)(1) of Securities Act, 15 USCS § 77q(a), and § 10(b) of Securities Exchange Act, 15 USCS § 78j(b), in connection with sale of general partnership interests in
registered limited liability partnerships (RLLPs); defendants did not act with scienter; they relied in good faith upon information they had received, including number
of legal opinion letters that opined that RLLPs were not securities, and they knew that at least two of leading companies in relevant industry used RLLP structure.
SEC v Merchant Capital, LLC (2005, ND Ga) 400 F Supp 2d 1336.
Where investor alleged that defendants engaged in price manipulation and made misrepresentations regarding mutual fund pricing, investor sufficiently stated claim
based on allegation that certain defendants used investor's secret trading techniques to manipulate method by which values were calculated with knowledge that
there was protective order regarding secrets; however, certain defendants lacked any knowledge of trade secrets. DH2, Inc. v Athanassiades (2005, ND Ill) 404 F
Where investors alleged that subsidiary intentionally underbid contract which resulted in overstatement of income in parent's accounting statements, investors
sufficiently pled scienter as to subsidiary but not as to parent, because: (1) complaint failed to allege that parent had sufficient motive to orchestrate accounting
improprieties at subsidiary; and (2) there were insufficient facts to demonstrate that parent knew, or was reckless in not knowing, that subsidiary's financial results
were false. In re Alstom SA Secs. Litig. (2005, SD NY) 406 F Supp 2d 433.
Where investors alleged that company failed to disclose that it had extended loan guarantees to customers to purchase ships, investors alleged facts giving rise to
strong inference of fraudulent intent based upon company's access to information about vendor financing arrangements, and two officers' signing filings containing
misrepresentations. In re Alstom SA Secs. Litig. (2005, SD NY) 406 F Supp 2d 433.
Promoter aced with scienter when he made misrepresentations and omission that caused clients to invest in Ponzi scheme where he knew that investor funds were
not being used as represented, despite that knowledge, he continued to tell clients that their money would be invested according to master financial plan, and he
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knew that company operated at loss. SEC v Merrill Scott & Assocs., Ltd. (2007, DC Utah) 505 F Supp 2d 1193, CCH Fed Secur L Rep P 94336.
In case in which Securities and Exchange Commission (SEC) alleged that company's Chief Technology Officer (CTO) violated 15 USCS § 78j(b) and 17 C.F.R. §
240.10b-5, CTO motion for summary judgment was denied because each of CTO's four arguments owed that genuine issue of material fact existed in case; CTO
argued unsuccessfully that (1) SEC could not prove that Statement of Work (SOW) was not completed in first quarter, (2) he could not be held liable because he
signed earlier version of SOW before it was later fraudulently altered, (3) company's president did not rely on SOW when he decided to recognize earnings, and (4)
there was no evidence that he was involved in, or otherwise had responsibility for, determining if revenue would be recognized. SEC v Johnson (2008, DC Dist Col)
530 F Supp 2d 307.
Stock purchasers' claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, which alleged that corporation's
financial results reflected revenues that were artificially enhanced through booking of fictitious sales, satisfied pleading requirements of Fed. R. Civ. P. 9(b) and
Private Securities Litigation Reform Act of 1995, 109 Stat. 737, because director and two former directors were alleged to have signed allegedly fraudulent financial
statements, claims against director and former directors alleged misstatements that were disseminated to public as part of corporation's SEC filings, and complaint
sufficiently alleged scienter as to director, former directors, and partnership because (1) fact that director was not trained as accountant was not sufficient to negate
scienter as to alleged booking of nonexistent sales and subsequent execution of SEC filings; (2) as to former directors, there was sufficient pleading of scienter based
on strong circumstantial evidence of at least recklessness; and (3) there were more than sufficient allegations that partnership either knew or was reckless in not
knowing that most of sales allegedly made by corporation in 2004 were fictitious. Katz v Image Innovations Holdings, Inc. (2008, SD NY) 542 F Supp 2d 269.
Securities and Exchange Commission Act's claims that CEO and president violated 15 USCS §§ 77q(a) and 78j(b) were dismissed where even though complaint
alleged material misrepresentations with sufficient particularity under group pleading doctrine as to one transaction, allegations that they knew or were reckless in
not knowing that base book transactions were to be accounted for as barter transactions or that income from those transactions was improperly recorded as revenue
were conclusory and did not support strong inference of fraudulent intent, and complaint contained no specific reference to any accounting principle or standard that
was violated by Internet portal's recognition of revenue from base book or incremental revenue transactions. SEC v Espuelas (2008, SD NY) 579 F Supp 2d 461, CCH
Securities and Exchange Commission Act's claims that senior vice president had violated 15 USCS §§ 77q(a) and 78j(b) with respect to accounting for contingent
transactions survived where accounting for contingent transactions was not complex, allegations that she was aware of sales department's policy on insertion orders
suggested importance of disclosing side agreements, and act of concealing information or failing to document agreements gave rise to strong inference of fraudulent
scienter. SEC v Espuelas (2008, SD NY) 579 F Supp 2d 461, CCH Fed Secur L Rep P 94864.
Securities and Exchange Commission Act's claims that CEO and president violated 15 USCS §§ 77q(a) and 78j(b) were dismissed where even though complaint
alleged material misrepresentations with sufficient particularity under group pleading doctrine as to one transaction, allegations that they knew or were reckless in
not knowing that base book transactions were to be accounted for as barter transactions or that income from those transactions was improperly recorded as revenue
were conclusory and did not support strong inference of fraudulent intent, and complaint contained no specific reference to any accounting principle or standard that
was violated by Internet portal's recognition of revenue from base book or incremental revenue transactions. SEC v Espuelas (2008, SD NY) 579 F Supp 2d 461, CCH
Defendant could be found liable to Securities and Exchange Commission for violations of 15 USCS §§ 77q, 78j, and 17 CFR § 240.10b-5 based on admitted findings
that defendant acted recklessly in disclosing confidential insider trading information to others. SEC v Aragon Capital Mgmt. (2009, SD NY) 672 F Supp 2d 421,
request gr (2010, SD NY) 2010 US Dist LEXIS 5203.
In proposed second amended complaint, lead plaintiffs had adequately alleged violations of 15 USCS § 78j and 17 CFR § 240.10b-5, against bank for securities sold
over American stock exchange because plaintiffs had stated that officials of bank misstated impact of mortgage crisis on bank's financial health and on securities sold
by bank. Cornwell v Credit Suisse Group (2010, SD NY) 689 F Supp 2d 629.
Shareholders' 15 USCS § 78j(b) claim against residential mortgage lender's chief operating officers survived where, considering allegations as whole and public
filings, inference of scienter was at least as likely as any other inference with respect to officer's statements concerning lender and subprime mortgages. In re
Thornburg Mortg. Secs. Litig. (2010, DC NM) 695 F Supp 2d 1165, CCH Fed Secur L Rep P 95593.
Shareholders' 15 USCS § 78j(b) claim against former officers and directors of residential mortgage lender did not survive where shareholders had not attributed any
wrongful conduct or statements to them, and documents that they had signed contained no statements or omissions that established strong inference of scienter. In
re Thornburg Mortg. Secs. Litig. (2010, DC NM) 695 F Supp 2d 1165, CCH Fed Secur L Rep P 95593.
Unpublished: Where stock purchasers alleged that auditor made material misstatements in connection with its audit reports on corporation's financial statements,
complaint was properly dismissed because (1) stock purchasers lacked standing with respect to 1999 audit report, and (2) as to 1998 audit report, allegations that
auditor should have been aware of Generally Accepted Accounting Principles violations and should have perceived red flags indicating errors in financial statements
did not satisfy Private Securities Litigation Reform Act of 1995 pleading requirement for scienter; stock purchasers' complaint alleging that corporate officers were
deliberately reckless or had actual knowledge that financial statements were materially misleading was properly dismissed because it failed to meet pleading
requirement for scienter based upon allegations that officers, inter alia, signed for unreported loans and unreported interest payment checks; however, denial of
leave to amend was abuse of discretion because district court did not provide any reasoned explanation as to why leave to amend would be futile. In re Saxton Sec.
Litig. v Deloitte & Touche LLP (2005, CA9 Nev) 156 Fed Appx 917, CCH Fed Secur L Rep P 93585.
Unpublished: Court affirmed SEC's finding that officer for securities and technology company willfully violated § 10(b) of Securities Exchange Act of 1934, 15 USCS §
78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5 because substantial evidence supported SEC's finding that officer designed and operated his automatic trading
program for sole purpose of capturing rebate revenue, he knowingly engaged in thousands of wash sales, that he matched orders at end of financial quarter to meet
eligibility threshold, that he contacted National Association of Securities Dealers to request payment despite having been told that his trades were "wrong," and that
Consolidated Tape Association was deceived into paying money to NASA that it would not have paid had it known true nature of officer's trades; further, sanctions
imposed, while harsh, were proper exercise of SEC's discretion given fact that officer's violation was serious and capable of repetition. Amanat v SEC (2008, CA3)
2008 US App LEXIS 5716.
Unpublished: Misstatements and omissions created false impression that company was profitable, impression that would have assumed significance in deliberations
of any reasonable investor; district court's conclusion was proper that one defendant was personally responsible for making misleading statements by conveying
information to potential investors and SEC. SEC v Global Express Capital Real Estate Inv. Fund (2008, CA9 Nev) 2008 US App LEXIS 16992.
Unpublished: In action in which plaintiff, founder and CEO of biopharmaceutical company, filed suit against defendants, lender and others, alleging common law
fraud, violation of state Consumer Fraud Act (NJCFA), violation of state Loan Broker Statute (NJLBS), violation of § 10(b) of Securities Exchange Act of 1934, and
S.E.C. Rule 10b-5, common law breach of fiduciary duty, breach of contract, and promissory fraud, defendants were denied summary judgment on Securities
Exchange Act of 1934 and S.E.C. Rule 10b-5 claims; relationship between plaintiff and certain defendants was subject of conflicting testimony that could not be
resolved on motion for summary judgment; if factfinder accepted defendants' version of facts, that they reasonably believed that plaintiff was in contact with
competent SEC counsel to assist her in this transaction, then their conduct could not have been reckless. Shogen v Global Aggressive Growth Fund, Ltd. (2007, DC
NJ) 2007 US Dist LEXIS 31093.
Unpublished: Shareholders based their claim that director participated in alleged backdating scheme on allegation that, as vice-president of corporation, with broad
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knowledge of company, as well as and recipient of backdated stock options, he must have known of scheme and permitted it to occur; those allegations were
insufficient to establish that director knowingly received backdated options or that he played active role in alleged scheme, and thus, shareholders' claim under §
10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 against director was dismissed with leave to amend. In re Atmel Corp. Derivative Litig. (2008, ND Cal)
2008 US Dist LEXIS 91909.
Unpublished: Corporation was not entitled to summary judgment on representative's claims that corporation violated § 10(b) of Securities Exchange Act of 1934, 15
USCS § 78j(b), based on its paid consultants' statements at medical conference, which discussed results of clinical trials of corporation's drug without mentioning
corporation's serious concerns about side effect; jury could reasonably have found that corporation adopted statements of consultants with whom it had two-way
communications and that it knew or should have known that statements contained material and misleading omissions. In re Bristol-Myers Squibb Sec. Litig. (2005,
DC NJ) CCH Fed Secur L Rep P 93507.
Unpublished: District court did not clearly err in finding that promoter acted with requisite scienter for purposes of 15 USCS §§ 78j(b) and 77q(a)(1) in failing to
disclose in anonymous Internet postings about company that promoter was compensated for promoting company; it was logical to conclude that promoter knew that
failing to disclose compensation would mislead readers by making promoter's opinions appear objective. SEC v Curshen (2010, CA10 Colo) CCH Fed Secur L Rep P
95718.
48.--What constitutes recklessness, generally
Recklessness is sometimes considered form of intentional conduct for purposes of imposing liability, and use of reckless alternative in assessing liability under 15
USCS § 78j(b) is proper; reckless omission of material facts upon which plaintiff put justifiable reliance in connection with sale or purchase of securities is actionable
under § 10(b) and Rule 10b-5, but danger of misleading buyers must be actually known or so obvious that any reasonable man would be legally bound as knowing;
objective obviousness of danger is sufficient for liability even absent actual appreciation of significance of omitted material; omission caused because defendant
genuinely forgot about facts would not be actionable, even if such omission was derived from inexcusable neglect. Sundstrand Corp. v Sun Chemical Corp. (1977,
CA7 Ill) 553 F2d 1033, CCH Fed Secur L Rep P 95887, cert den (1977) 434 US 875, 54 L Ed 2d 155, 98 S Ct 224, 98 S Ct 225.
Recklessness is highly unreasonable conduct which is extreme departure from standards of ordinary care, and while danger need not be known, it must be at least so
obvious that any reasonable man would have known of it. Mansbach v Prescott, Ball & Turben (1979, CA6 Ky) 598 F2d 1017, CCH Fed Secur L Rep P 96861
(superseded by statute as stated in Burns v Prudential Sec. (2000, ND Ohio) 116 F Supp 2d 917).
In context of both omissions and misstatements under 15 USCS § 78j(b), reckless conduct may be defined as highly unreasonable conduct involving not merely
simple, or even inexcusable negligence, but extreme departure from standards of ordinary care, and which presents danger of misleading buyers or sellers that is
either known to defendant or is so obvious that actor must have been aware of it; with reference to accountant, requirement is that plaintiff establish that defendant
lacked genuine belief that information disclosed was accurate and complete in all material respects. McLean v Alexander (1979, CA3 Del) 599 F2d 1190, CCH Fed
Secur L Rep P 96879, 49 ALR Fed 373.
Reckless conduct sufficient to meet scienter requirement of 15 USCS § 78j is extreme departure from standards of ordinary care presenting danger of misleading
buyers or sellers that is either known to defendant or is so obvious that actor must have been aware of it, and "reckless behavior" must not be so liberally construed
as to obliterate distinction between scienter and negligence. Broad v Rockwell International Corp. (1980, CA5 Tex) 614 F2d 418, CCH Fed Secur L Rep P 97326,
different results reached on reh (1981, CA5 Tex) 642 F2d 929, CCH Fed Secur L Rep P 97956, cert den (1981) 454 US 965, 70 L Ed 2d 380, 102 S Ct 506 and (ovrld
as stated in U.S. States Bank Nat'l Ass'n v U.S. Timberlands Klamath Falls (2004, Del Ch Ct) 2004 Del Ch LEXIS 106).
In action under SEC Rule 10b-5, district court instructing jury on scienter requirement should not have defined recklessness by use of phrase "indifference to the
consequences" instead of definition of recklessness as extreme departure from standards of ordinary care, which presents danger of misleading that is either known
to defendant or is so obvious that actor must have been aware of it. Healey v Catalyst Recovery of Pennsylvania, Inc. (1980, CA3 Pa) 616 F2d 641, CCH Fed Secur L
Rep P 97268.
Recklessness required for liability under SEC Rule 10b-5 must come close to being lesser form of intent to deceive rather than merely being greater degree of
ordinary negligence; what constitutes recklessness is not to be answered by simple reference to tort doctrines, and reckless disregard of auditor's narrow duty of
disclosure as to firm it audits is conduct of extreme sort to be found only sparingly. Pegasus Fund, Inc. v Laraneta (1980, CA9 Cal) 617 F2d 1335, CCH Fed Secur L
Rep P 97281, reh den, reh, en banc, den (1980, CA9 Cal) 1980 US App LEXIS 17417.
Under certain circumstances, recklessness is sufficient to establish scienter for purposes of cause of action under SEC Rule 10b-5, but conduct must involve more
than simple or even inexcusable negligence, requiring extreme departure from standards of ordinary care, which presents danger of misleading buyers or sellers that
is either known to defendant or so obvious that actor must have been aware of it. Huddleston v Herman & MacLean (1981, CA5 Tex) 640 F2d 534, CCH Fed Secur L
Rep P 97919, 8 Fed Rules Evid Serv 61, affd in part and revd in part on other grounds, remanded (1983) 459 US 375, 74 L Ed 2d 548, 103 S Ct 683, CCH Fed Secur
L Rep P 99058.
Recklessness which may satisfy element of scienter in civil action for damages under § 78j(b) and Rule 10b-5, is defined as highly unreasonable omission, involving
not merely simple or even inexcusable negligence, but extreme departure from standards of ordinary care, and which presents danger of misleading buyers or sellers
that is either known to defendant or is so obvious that actor must have been aware of it. Hollinger v Titan Capital Corp. (1990, CA9 Wash) 914 F2d 1564, CCH Fed
Secur L Rep P 95500, amd, reh den (1990, CA9) 1990 US App LEXIS 19892 and cert den (1991) 499 US 976, 113 L Ed 2d 719, 111 S Ct 1621 and (superseded by
statute as stated in In re Silicon Graphics Sec. Litig. (1997, ND Cal) 970 F Supp 746, CCH Fed Secur L Rep P 99468).
Recklessness, which will satisfy scienter requirement for primary violation of 15 USCS § 78j(b), is defined as conduct that is extreme departure from standards of
ordinary care, and which presents danger of misleading buyers or sellers that is either known to defendant or is so obvious that actor must have been aware of it.
Anixter v Home-Stake Prod. Co. (1996, CA10 Okla) 77 F3d 1215, CCH Fed Secur L Rep P 99056, 33 FR Serv 3d 1389 (criticized in In re Enron Corp. Secs., Derivative
& ERISA Litig. (2002, SD Tex) 235 F Supp 2d 549, CCH Fed Secur L Rep P 92239).
Extreme recklessness, which can satisfy scienter requirement, is not merely heightened form of ordinary negligence, rather, it is extreme departure from standards
of ordinary care which presents danger of misleading buyers or sellers that is either known to defendant or is so obvious that actor must have been aware of it; it is
lesser form of intent. SEC v Steadman (1992, App DC) 296 US App DC 269, 967 F2d 636, CCH Fed Secur L Rep P 96843, 133 ALR Fed 737.
Where shareholders amended complaint did not articulate scienter element in terms of motive and opportunity, court applied recklessness standard, which defined
recklessness under § 10(b) of the Securities Exchange Act of 1934 (15 USCS § 78j(b)) as an act so highly unreasonable and such an extreme departure from
standard of ordinary care as to have presented danger of misleading plaintiff to the extent that the danger was either known to defendant or so obvious that
defendant must have been aware of it. Arnlund v Deloitte & Touche LLP (2002, ED Va) 199 F Supp 2d 461, CCH Fed Secur L Rep P 91914.
Defendant's scienter was shown through defendant's reckless conduct in posting on Internet statements that falsely implied defendant was analyst following certain
stocks and that defendant's opinions were based on analysis. SEC v Gorsek (2002, CD Ill) 225 F Supp 2d 921, CCH Fed Secur L Rep P 91979, findings of
fact/conclusions of law (2002, CD Ill) 222 F Supp 2d 1112, CCH Fed Secur L Rep P 91977, injunction den, judgment entered, motion den (2002, CD Ill) 222 F Supp
2d 1124.
Recklessness, which satisfies scienter requirement, is defined as conduct that is extreme departure from standards of ordinary care and that presents danger of
misleading buyers or sellers, which danger is either known to defendant or is so obvious that actor must have been aware of it. SEC v C. Jones & Co. (2004, DC
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Colo) 312 F Supp 2d 1375.
Scienter is established by showing that defendant acted intentionally or with severe recklessness; recklessness is defined as highly unreasonable conduct involving
not merely simple or excusable negligence, but extreme departure from standards of ordinary care. In re Graystone Nash, Inc., et al. (1996) 1996 SEC LEXIS 3545.
49.----Acting on reasonable belief not reckless
Recklessness cannot be established where defendant entertains reasonable belief that all facts have been disclosed. Lanza v Drexel & Co. (1973, CA2 NY) 479 F2d
1277, CCH Fed Secur L Rep P 93959, 17 FR Serv 2d 365 (criticized in Sloane Overseas Fund v Sapiens Int'l Corp. (1996, SD NY) CCH Fed Secur L Rep P 99324) and
(criticized in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505) and (criticized in In re MicroStrategy Inc. Secs. Litig.
(2000, ED Va) 115 F Supp 2d 620, CCH Fed Secur L Rep P 91213).
Actions of defendants were not reckless where trial court specifically determined that defendants represented to plaintiff condition of corporation as they believed it
to be and that they were forthright in their dealings with plaintiff and did not deliberately misrepresent any aspect of corporation's status or operation and where only
information suggested which could have alerted corporation to inaccuracies was equally available to plaintiff. Coleco Industries, Inc. v Berman (1977, CA3 Pa) 567
F2d 569, CCH Fed Secur L Rep P 96253, 24 FR Serv 2d 516, cert den (1978) 439 US 830, 58 L Ed 2d 124, 99 S Ct 106, reh den (1978) 439 US 998, 58 L Ed 2d 671,
99 S Ct 601.
50.----In particular circumstances
District court's definition of recklessness as "carelessness approaching indifference" was not legally incorrect; finding that underwriter's representative in charge of
company's debenture offering did not act recklessly in approving confidential memorandum prepared for potential investors was not in error where (1) representative
relied upon company for information, (2) while representative did receive draft of memorandum for review, they were in incomplete form when he got them, and was
not involved in wording or composition of memo, (3) representative invested money of his own in company, and (4) there were no facts that would compel finding
that acts of commission or omission were reckless in that they were so highly unreasonable and such extreme departure from standards of ordinary care as to
present danger of misleading plaintiff to extent that danger was either known to representative or so obvious that representative must have been aware of it.
Hoffman v Estabrook & Co. (1978, CA1 Mass) 587 F2d 509, CCH Fed Secur L Rep P 96587.
District court properly found defendant in securities fraud case acted with sufficient recklessness to satisfy scienter requirement of 15 USCS § 78j(b) and SEC Rule
10b-5, where he encouraged plaintiff to invest in tire business on 50 percent-50 percent basis, then on 51 percent-49 percent basis when defendant insisted on
maintaining control, but later, on advise of counsel, changed terms of deal without telling plaintiff, so that plaintiff was not issued common stock but nonparticipating
preferred stock, and defendant failed to ensure that plaintiff understood he would not share in growth of company unless and until defendant permitted plaintiff to
convert his shares to common stock. Hackbart v Holmes (1982, CA10 Colo) 675 F2d 1114, CCH Fed Secur L Rep P 98639.
Complaint alleging violation of § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 promulgated thereunder, was adequate to satisfy
scienter requirement of Rule 10b-5 with respect to broker where at least one allegation indicated broker's failure to investigate verifiable fact; as to other defendants
who were alleged to have provided information which they knew would be included in registration statement and prospectus on which they knew potential investors
would rely, and were thus allegedly liable as aiders and abettors, complaint was sufficient on element of scienter where it alleged that these defendants participated
in making statements which they knew (or were reckless in not knowing) were false when made, and since these defendants were insiders or affiliates participating
in offer of securities in question, no specific connection between fraudulent representations and particular defendant was necessary. Auslender v Energy Management
Corp. (1987, CA6 Ky) 832 F2d 354, CCH Fed Secur L Rep P 93635, 9 FR Serv 3d 732.
Brokerage firm which sold short 55 Treasury Bond futures in client's account without client's authorization (client having been away and out of contact) to offset
declining value of 55 Treasury Bond futures which client held in long position could not be said to have been made with scienter necessary for client to bring action
against firm under § 10(b) Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 promulgated thereunder, since firm had acted to protect
account, decision was within bounds of accepted industry practice, and fact that firm also acted in its own interest did not render its decision reckless since interests
of client and firm were aligned rather than antagonistical, even if action did not ultimately serve client's interest. Messer v E.F. Hutton & Co. (1987, CA11 Fla) 833
F2d 909, CCH Fed Secur L Rep P 93545, amd, on reh (1988, CA11 Fla) 847 F2d 673, CCH Fed Secur L Rep P 93813.
Scienter requirement of action under § 78j(b), and SEC Rule 10b-5 can be met by showing of "severe recklessness," but such is limited to those highly unreasonable
omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but extreme departure from standards of ordinary care, and that
present danger of misleading buyers or sellers which is either known to defendant or so obvious that defendant must have been aware of it; plaintiff failed to meet
this standard where his expert testified merely that three securities recommended by account executive at defendant brokerage firm did not, at time transactions
were effected in them, have reasonable basis for achieving plaintiff client's expressed investment goals. McDonald v Alan Bush Brokerage Co. (1989, CA11 Fla) 863
F2d 809, CCH Fed Secur L Rep P 94177 (criticized in Malin v IVAX Corp. (1998, SD Fla) 17 F Supp 2d 1345).
In action under SEC Rule 10b-5, based on computer company's alleged failure to disclose material risks in making statements about newly developed products, there
was material issue of fact on essential element of scienter with respect to specific statement praising capabilities of new products and research that went into them,
since showing of recklessness can satisfy scienter requirement. In re Apple Computer Sec. Litigation (1989, CA9 Cal) 886 F2d 1109, CCH Fed Secur L Rep P 94714,
Summary judgment on securities fraud claim brought under § 10b of Securities Exchange Act of 1934, 15 USCS § 78j(b), 17 CFR § 240.10-5 (Rule 10b-5), and Ky.
Rev. Stat. 292.320(1) in favor of financial advisor was reversed because investor sufficiently alleged scienter because advisor was fully cognizant of prohibitions
against trading on non-public insider information; fact that advisor was also victim of scheme did not relieve him from liability. Brown v Earthboard Sports USA, Inc.
(2007, CA6 Ky) 481 F3d 901, CCH Fed Secur L Rep P 94182, 2007 FED App 102P.
Investors' lawsuit against pharmaceutical company and three of its directors failed to adequate allege scienter under Securities Act of 1934, 15 USCS § 78j(b),
because allegedly fraudulent statements did not create required strong inference of scienter, or wrongful intent, but rather, statements about company's experimental
drug raised inference indicating intent to protect company's competitive advantage. Cozzarelli v Inspire Pharms., Inc. (2008, CA4 NC) 549 F3d 618.
Purchasers' allegations that company improperly capitalized internal software development costs, including payroll costs of software engineers and other personnel,
were insufficient to allege scienter with particularity required by Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act where complaint failed to allege with
particularity facts supporting its assumptions that confidential witnesses were in position to be personally knowledgeable of information alleged, and few allegations
that had requisite level of particularity failed to demonstrate deliberate recklessness. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH Fed
Purchasers' allegations with respect to company's issuance of restatement of earnings were insufficient to allege scienter with particularity required by Fed. R. Civ. P.
9(b) and Private Securities Litigation Reform Act where allegations that company's management had access to purportedly manipulated quarterly accounting
numbers, or that management analyzed inventory numbers closely, did not support inference that management was in position to know that such data was being
manipulated. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH Fed Secur L Rep P 95038.
Purchasers' allegations with respect to company's issuance of restatement of earnings were insufficient to allege scienter with particularity required by Fed. R. Civ. P.
9(b) and Private Securities Litigation Reform Act where alleged misrepresentations were largely definitional and as such, falsity of representations would not have
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been immediately obvious to corporate management. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH Fed Secur L Rep P 95038.
Purchasers' allegations concerning boilerplate Sarbanes-Oxley certifications signed by company's officers were insufficient, without more, to allege scienter with
particularity required by Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH Fed
Purchasers' allegations concerning two company officers' executive compensation packages, which included significant bonuses tied to company's financial
performance, were insufficient to allege scienter with particularity required by Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act where there was no
allegation indicating how intimately bonuses were tied to company's financial performance. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH
Purchasers' voluminous allegations, even when considered holistically, were insufficient to allege scienter with particularity required by Fed. R. Civ. P. 9(b) and Private
Securities Litigation Reform Act where they failed to show any specific intent to fabricate accounting misstatements at issue; rather, they pointed to conclusion that
company was simply overwhelmed with integrating large new division into its existing business. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981,
Purchasers' allegations concerning two company officers' stock sales during class period were insufficient to allege scienter with particularity required by Fed. R. Civ.
P. 9(b) and Private Securities Litigation Reform Act where complaint did not provide any information on officers' trading history to compare to stock sales at issue.
Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH Fed Secur L Rep P 95038.
Purchasers' allegations concerning company's private placement of stock during class period were insufficient to allege scienter with particularity required by Fed. R.
Civ. P. 9(b) and Private Securities Litigation Reform Act where there was only one stock placement and there was no allegation that it was in any way inconsistent
with company's traditional business practices. Zucco Partners, LLC v Digimarc Corp. (2009, CA9 Or) 552 F3d 981, CCH Fed Secur L Rep P 95038.
Investment funds' suit alleging that corporation and its chief executive officer fraudulently misrepresented timing and magnitude of planned stock repurchase
program and dividend increase to induce them to participate in tender offer failed to state claims under §§ 10(b) and 14(e) of Securities Exchange Act, 15 USCS §§
78j(b) and 78n(e), because they failed to meet Tellabs requirement with regard to pleading scienter. Flaherty & Crumrine Preferred Income Fund Inc. v TXU Corp.
(2009, CA5 Tex) 565 F3d 200, CCH Fed Secur L Rep P 95204.
Where salespersons sold promissory notes used to finance conversion of mobile home parks to resident ownership, Securities and Exchange Commission properly
found that they violated Securities Exchange Act of 1934 because, inter alia, they represented that notes were secured by recorded trust deeds, but conducted no
meaningful independent investigation to confirm truth of their representations. Gebhart v SEC (2010, CA9) 595 F3d 1034.
Fact that trustees approved prospectus which was fraudulent for failure to disclose facts is not sufficient to establish recklessness since trustees were entitled to rely
on those who prepared statement to insure adequate disclosure. Steinberg v Carey (1977, SD NY) 439 F Supp 1233, CCH Fed Secur L Rep P 96215.
Brokerage firm does not act recklessly in describing oil drilling partnership as low risk investment when representation is made in context of comparing partnership to
exploratory oil and gas tax shelter program of even more highly speculative nature. Meier v Texas International Drilling Funds, Inc. (1977, ND Cal) 441 F Supp 1056,
Stock sellers did not act with willful or reckless disregard for truth where buyer claimed sellers failed to disclose exact percentage of lost sales when major account
was lost, because sellers told buyer of loss of account, said sales dropped, and provided buyer with complete access to all financial records. Wollins v Antman (1986,
ED NY) 638 F Supp 989, CCH Fed Secur L Rep P 92895, affd (1987, CA2 NY) 814 F2d 654.
Limited partners state 15 USCS § 78j(b) claim against general partners where final partnership agreement failed to include guarantee of percentage of annual profits
which general partners had included in negotiations prior to limited partners' investment, since issue of whether defendants' conduct rose to level of recklessness
necessary to fulfill scienter requirement for § 78j(b) claim is factual one for trial. Zaro v Mason (1987, SD NY) 658 F Supp 222, CCH Fed Secur L Rep P 93222.
Investors' 15 USCS § 78j(b) claims against accounting firms that performed work for corporation invested in are sufficiently pled, where complaint provides adequate
factual foundation for its allegation that firms acted recklessly in preparing and certifying financial statements concerning corporation, because reckless conduct
under § 78j(b) includes conduct which is "highly unreasonable" and which represents "extreme departure from standards of ordinary care," like gross
misrepresentation of corporation's 1984 finances alleged here. Bozsi Ltd. Partnership v Lynott (1987, SD NY) 676 F Supp 505, CCH Fed Secur L Rep P 93572.
Investors properly allege scienter under 15 USCS § 78j(b) in securites fraud action, where complaint alleges sellers knew (1) of certain material facts and (2) that
statements made to investors about securities were misleading absent disclosure of material facts, because reckless conduct is alleged. Carter v Signode Industries,
Inc. (1988, ND Ill) 694 F Supp 493, 10 EBC 1103, CCH Fed Secur L Rep P 94076.
Even if defendant corporate officers and board members aggressively pushed employees to increase company revenues, this did not constitute strong inference of
recklessness; otherwise, all incentives by corporate management to increase revenue at any company could be construed as reckless and could implicate
management in violation of SEC Rule 10b-5. Morse v McWhorter (1998, MD Tenn) 200 F Supp 2d 853, adopted, mod, dismd (2000, MD Tenn) 200 F Supp 2d 853 and
subsequent app (2002, CA6 Tenn) 290 F3d 795, 2002 FED App 176P (criticized in D.E. & J L.P. v Conaway (2003, ED Mich) 284 F Supp 2d 719).
Complaint alleging that auditing firm was intimately familiar with financial workings of company, knew of serious liquidity and credit issues of company, and
knowledge that company was positioning itself for bankruptcy raised strong inference of requisite state of mind based on conscious reckless behavior. Arnlund v
Deloitte & Touche LLP (2002, ED Va) 199 F Supp 2d 461, CCH Fed Secur L Rep P 91914.
Court denied motion to dismiss, finding plaintiffs alleged sufficient facts under Fleming standard to state claim for violation of Section 10(b) of Exchange Act, 15
USCS § 78j, including following: (1) failure to disclose corporation's $ 750 million guarantee of another entity on prospectuses used for two offerings; (2) omission of
material term of $ 1.4 billion guarantee whereby corporation's credit rating served as trigger on its obligations under this guarantee; (3) failure to disclose size of
compensation, bonuses, and loans extended to corporate defendants during class period and to include these figures in calculating earnings; and (4) manipulation of
valuation of contracts; additionally, recklessness standard was met because corporation, its senior management, and directors were in position to know this
information, understand its materiality, and realize that failure to provide complete and accurate information with regard to these subjects would likely mislead
investors. In re Williams Sec. Litig. (2003, ND Okla) 339 F Supp 2d 1242, motions ruled upon (2003, ND Okla) 339 F Supp 2d 1206.
Shareholder's securities fraud allegations failed because shareholder had not pleaded facts that indicated any of transactions company entered into with its
competitors were improper and, therefore, shareholder had failed to plead facts that demonstrate that company or individual officers and directors knew facts or had
access to information suggesting that their public statements were not accurate. In re Flag Telecom Holdings, LTD. (2004, SD NY) 308 F Supp 2d 249.
Record was replete with information about procedures that were in place before Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 913 P.2d 878 (Cal.
1995), and which were followed, even after Montrose, to ensure satisfactory reserves and profitability in business; certainly there was undisputed evidence that
insurance company defendants had some awareness of risks that were posed by Montrose, and they had some knowledge of claims numbers rising and falling, but
this evidence was not sufficient to create genuine issue that they acted recklessly. In re Acceptance Ins. Cos., Sec. Litig. (2004, DC Neb) 352 F Supp 2d 940.
Given management's knowledge, their failure to disclose expiration date of majority of advertising contracts and company's e-mail problems, as well as their failure
to correct misstatement concerning manger's degree, could have been viewed as conscious misbehavior. In re Initial Pub. Offering Sec. Litig. (2004, SD NY) 358 F
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In suit under 78 USCS § 78j(b), where shareholders alleged that corporation used improper method of accounting for its investment in another company, which led it
to report inflated financial results in numerous SEC filings and press releases, shareholders' claims were subject to dismissal because, given that financial statements
in question were approved by accounting firm that was not involved in any wrongdoing, shareholders failed to sufficiently allege that corporations' officers knew or
should have known that corporation was using inappropriate accounting method. Johnson v NYFIX, Inc. (2005, DC Conn) CCH Fed Secur L Rep 93531, amd,
complaint dismd (2005, DC Conn) 399 F Supp 2d 105.
Although defendant's statement about company's revenue goals may have proved incorrect, hindsight did not establish fraud, and every prediction of success that
failed to materialize could not create on that account action for securities fraud. SEC v Gane (2005, SD Fla) 18 FLW Fed D 401.
Scienter requirement under 15 USCS § 78u-4(b)(2) was satisfied in plaintiff investors' securities fraud class action under §§ 10(b), 20(a), of Securities Exchange Act
of 1934, 15 USCS §§ 78j(b), 78t(a), by identifying specific facts constituting strong circumstantial evidence of recklessness, through allegations that defendants,
company and its officers, knew of or recklessly ignored series of accounting improprieties. In re Veeco Instruments, Inc., Sec. Litig. (2006, SD NY) 235 FRD 220, CCH
Court could not conclude that defendants exhibited extreme departure from standards of ordinary care characteristic of recklessness because given apparently clear
distinction between "manage" and "treat," use of former term in disputed release suggested that defendants were forthright in disclosing that they had not obtained
approval for drug, but rather medical device, and true nature of FDA approval was reasonably available to public on date of release; most that could have been
inferred from defendants omission was that defendants were negligent in failing to anticipate how market would respond to "prescription product" statement. In re
GeoPharma, Inc. (2006, SD NY) 411 F Supp 2d 434.
Although shareholders had shown that another accountant would have handled matter differently and reached different audit conclusions, they had not shown that
firm's accounting practices were so deficient that audit amounted to no audit at all or that accounting judgments made were such that no reasonable accountant
would have made same decision if confronted with same facts, as required to prove "recklessness," for purposes of securities fraud claim against outside auditor;
thus, they failed to establish scienter element of their claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Securities and Exchange
Commission Rule 10b-5 promulgated thereunder, 17 CFR § 240.10b-5. In re Williams Sec. Litig. (2007, ND Okla) 496 F Supp 2d 1195.
Investor's allegation that investment advisor and its principals (defendants) violated § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5,
17 CFR § 240.10b-5, by failing to conduct promised comprehensive due diligence of particular fund, which it recommended as investment, did not establish required
strong inference of conscious recklessness because there were no allegations that defendants knew that fund was engaged in fraudulent Ponzi scheme and knowingly
acted with intent of deceiving investor. S. Cherry St. LLC v Hennessee Group LLC (In re Bayou Hedge Fund Litig.) (2007, SD NY) 534 F Supp 2d 405.
In putative class suit against pharmaceutical company and its officers and directors (defendants), based on statements regarding new drug to treat cardiovascular
disorders, investors failed to adequately allege scienter under 15 USCS § 78j(b) because defendants statements about new drug were not reckless, but rather, stated
honest belief about drug. In re AstraZeneca Sec. Litig. (2008, SD NY) 559 F Supp 2d 453, CCH Fed Secur L Rep P 94751.
Defendants' recklessness was ably summarized by magistrate and included, inter alia: (1) registered investment advisor's president attempted to conceal many
transfers by (1) converting funds to cash by writing checks directly to banks, (2) asking person to lie about purpose of $ 22,500 payment he received from his
investment firm, and (3) falsely characterizing contributions from his investment firm to another investment advisor firm as capital contribution from him; (2)
accounts where these funds were deposited were later used for personal expenditures, (3) he did not dispute that he overstated value of his investment firm's shares
to its investors after those shares dropped significantly in value, and (4) most significantly, defendants brought forward no evidence demonstrating that transfers in
question were for legitimate investment purposes. SEC v Brown (2008, DC Minn) 579 F Supp 2d 1228, CCH Fed Secur L Rep P 94868.
Shareholders failed to show recklessness, in violation of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, from
press release regarding developmental company's first major sale of its product to major entity, because press release was not misleading by failing to disclose
details about sale, since there was no duty to disclose, and there was nothing in undisclosed information showing that press release was false or misleading. Medis
Investor Group v Medis Techs., Ltd. (2008, SD NY) 586 F Supp 2d 136.
Where investors alleged that administrator of hedge funds recklessly failed to investigate and discover scheme of manager of funds in which net asset values of funds
were artificially inflated, there was no showing of requisite scienter based on recklessness to support claim for securities fraud under 15 USCS § 78j(b) until
independent auditor of funds began questioning manager's valuation methodology and expressed concern to administrator; prior memorandum from internal auditor
of administrator only indicated that valuation methodology was imprudent, rather than fraudulent, and any failure to verify values which were provided by manager
was at most negligence. Pension Comm. of Univ. of Montreal Pension Plan v Banc of Am. Sec., LLC (2009, SD NY) 592 F Supp 2d 608.
While plaintiff suggested that defendants should have been more alert and more skeptical, nothing alleged indicated that management was promoting fraud, thus
plaintiff's allegations failed to adequately plead scienter to commit securities fraud under Second Circuit's conscious misbehavior and recklessness prong. In re PXRE
Group, Ltd. Sec. Litig. (2009, SD NY) 600 F Supp 2d 510.
Plaintiff failed to allege that defendants had knowledge of specific contradictory information, or, in several instances, that information was available at same time that
defendants made challenged statements. In re PXRE Group, Ltd. Sec. Litig. (2009, SD NY) 600 F Supp 2d 510.
Shareholders failed to state claim under § 10(b) of Securities Exchange Act, 15 USCS § 78j(b), because shareholders failed to adequately allege scienter as required
by Private Securities Litigation Reform Act of 1995 on part of defendants, corporation and others, because shareholders had not pled motive and opportunity, or
conscious misbehavior or recklessness because (1) shareholders had not alleged any concrete and personal benefit; (2) even if defendants knew or should have
known that specific performance was likely to be unavailable, it was not misrepresentation for defendants to disclose merger agreement and proxy summarizing its
terms, which themselves conveyed to careful reader that agreement was fundamentally ambiguous on question of whether right to specific performance existed,
without disclosing substance of negotiations; and (3) shareholders had not pled strong inference of conscious misbehavior or recklessness based upon failure to
disclose suggestion of renegotiations because shareholders had not alleged occurrence of significant renegotiation efforts or other significant changes constituting
sharp break from prior public positions. DeCicco v United Rentals, Inc. (2009, DC Conn) 602 F Supp 2d 325.
Shareholders failed to state claim under § 10(b) of Securities Exchange Act, 15 USCS § 78j(b), because shareholders failed to adequately allege scienter as required
by Private Securities Litigation Reform Act of 1995 on part of defendants, partnership and others, because shareholders had not pled motive and opportunity, or
conscious misbehavior or recklessness because (1) shareholders did not adequately allege motive to commit fraud because it was apparent from reading of merger
agreement that under some, and possibly all circumstances, partnership could have abandoned acquisition of corporation upon paying $ 100 million fee; (2)
shareholders had not adequately alleged that defendants acted with scienter in not further disclosing what they believed was apparent from disclosure of agreement
itself--that corporation's remedy in event that partnership walked away from deal was $ 100 million termination fee; (3) shareholders had not adequately pled
scienter with regard to partnership's failure to disclose terms of limited guarantee because guarantee was not clearly material and defendants had no duty to disclose
it; (4) shareholders had not pled strong inference of conscious misbehavior or recklessness based upon failure to disclose suggestion of renegotiations because
shareholders had not alleged occurrence of significant renegotiation efforts or other significant changes constituting sharp break from prior public positions; and (5)
even if partnership had been obligated to amend its Schedule 13D, fact that partnership suggested that corporation revise its preliminary proxy to note partnership's
efforts at renegotiation supported conclusion that partnership did not act with scienter in failing to amend its Schedule 13D. DeCicco v United Rentals, Inc. (2009, DC
Conn) 602 F Supp 2d 325.
Securities fraud action, which was brought under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5(b),
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sufficiently alleged scienter because, while purchasers failed to state motive and opportunity to defraud because alleged motives fell within category of shared,
corporate objectives held to be insufficient to establish securities fraud scienter, (1) purchasers stated actionable claim of securities fraud as cogent as any competing
theory defendants, company and three of its officers, proffered to explain sequence of financial events and public disclosures concerning subsidiary and company
because inescapable fact was that in same document in which company told investors that newly acquired subsidiary suffered termination of government contract, it
also told investors that when such terminations were for default they were materially adverse events, but it withheld fact that disclosed termination was of this
materially adverse type, and defendants did not offer compelling explanation for glaring omission; and (2) purchasers established requisite state of mind through
strong circumstantial showing of recklessness because defendants knew, at time they released non-adverse, and affirmatively optimistic information about
subsidiary, that company was saddled with termination for default that would have damaged its capacity to compete for new business. Akerman v Arotech Corp.
(2009, ED NY) 608 F Supp 2d 372, CCH Fed Secur L Rep P 95231.
Investors failed to show that mutual fund acted recklessly under 15 USCS § 78j(b) in attempting, but failing, to control non-arranged market timing because fund did
not delay imposing redemption fees, it monitored trades below certain thresholds, and it engaged in extensive efforts to warn and restrict accounts it had identified
as market timers. In re Mut. Funds Inv. Litig. v Janus Inv. Fund (2009, DC Md) 626 F Supp 2d 530.
Investors' claims under §§ 10(b) and 20(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a) were dismissed because severe recklessness had not been
properly pled because it was stretch to say that defendants' "guaranteed" rentals and profitability; without § 10(b) claim there could be no control personal liability
under § 20(a). Sewell v D'Alessandro & Woodyard (2009, MD Fla) 655 F Supp 2d 1228.
Motion to dismiss was granted because statements did not rise to level of severe recklessness required to establish scienter and other statements contained
meaningful cautionary language; because § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b) claims suffered from pleading deficiencies, § 20(a) claims
also failed because they rested upon violations of § 10(b). Durgin v Mon (2009, SD Fla) 659 F Supp 2d 1240, CCH Fed Secur L Rep P 95355.
Unpublished: While viewed in retrospect it may have been poor decision for company to rely on its subsidiary's accounting which caused company to restate its
earnings three times, recklessness was not intended to encompass claims essentially grounded on corporate mismanagement; accordingly, district court did not err
in dismissing investors' claims under 15 USCS § 78j(b), and 17 CFR § 240.10b-5. Globis Capital Partners, L.P. v Stonepath Group, Inc. (2007, CA3 Pa) 2007 US App
LEXIS 16353.
Unpublished: Pharmaceutical service company's disclosure of projected revenues without disclosing baseline failed to provide strong circumstantial evidence of either
conscious or reckless misconduct giving rise to requisite strong inference of fraudulent intent with respect to shareholder's allegations of falsity as to projections and,
accordingly, shareholders' claims based on these statements were dismissed under 15 USCS § 78u-4(b)(3)(A). In re PDI Sec. Litig. (2005, DC NJ) CCH Fed Secur L
Rep P 93504.
Unpublished: Stockholders' 15 USCS § 78j(b) claim against accounting firm was dismissed pursuant to Fed. R. Civ. P. 9(b) and 15 USCS § 78u-4(b) where they failed
to allege facts sufficient to constitute strong inference that accounting firm knew that open-end investment company was not valuing restricted securities at fair
value and deliberately disregarded those red flags when it certified company's financial statements. In re Van Wagoner Funds, Inc. Sec. Litig. (2004, ND Cal) 382 F
Supp 2d 1173.
51. Negligence
Liability under 15 USCS § 78j(b) may not be imposed for negligent conduct alone. Ernst & Ernst v Hochfelder (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375,
CCH Fed Secur L Rep P 95479, reh den (1976) 425 US 986, 48 L Ed 2d 811, 96 S Ct 2194.
In action based upon antifraud provisions of federal securities acts, with regard to requirement of scienter, something short of specific intent to defraud is required
and something more than "mere" negligence. Republic Technology Fund, Inc. v Lionel Corp. (1973, CA2 NY) 483 F2d 540, CCH Fed Secur L Rep P 94069, cert den
(1974) 415 US 918, 39 L Ed 2d 472, 94 S Ct 1416; Marx v Computer Sciences Corp. (1974, CA9 Cal) 507 F2d 485, CCH Fed Secur L Rep P 94904; Mooney v Tallant
(1975, ND Ga) 397 F Supp 680, 20 FR Serv 2d 1161.
Party cannot be held liable in private suit for damages under SEC Rule 10b-5 for mere negligent conduct; it is not enough for plaintiff to show that defendant failed to
detect certain material facts when he had no reason to suspect their existence. Vohs v Dickson (1974, CA5 Ga) 495 F2d 607, CCH Fed Secur L Rep P 94589.
SEC Rule 10b-5 does not impose liability without fault nor require anyone to be an insurer against false or misleading statements made nonnegligently and in good
faith. White v Abrams (1974, CA9 Cal) 495 F2d 724, CCH Fed Secur L Rep P 94457, 18 FR Serv 2d 1408 (ovrld in part by Hollinger v Titan Capital Corp. (1990, CA9
Wash) 914 F2d 1564, CCH Fed Secur L Rep P 95500) and (ovrld in part as stated in Drnek v Variable Annuity Life Ins. (2004, DC Ariz) 2004 US Dist LEXIS 9490).
In civil action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), something additional by way of scienter or conscious fault, beyond mere
negligence, is required to prevail. Clegg v Conk (1974, CA10 Utah) 507 F2d 1351, CCH Fed Secur L Rep P 94897, cert den (1975) 422 US 1007, 45 L Ed 2d 669, 95
S Ct 2628.
Negligence in failing to discover falsity of information is not actionable under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5; Rule
incorporates scienter requirement, and defendant must know of falsity of information, or must act in reckless disregard of falsity, or must intend to deceive. First
Virginia Bankshares v Benson (1977, CA5 Ala) 559 F2d 1307, CCH Fed Secur L Rep P 96189, reh den (1977, CA5 Ala) 564 F2d 416 and cert den (1978) 435 US 952,
55 L Ed 2d 802, 98 S Ct 1580.
Mere negligent misstatement of fact in connection with sale of security is insufficient to warrant recovery in action for damages based on alleged violation of § 10(b)
of Securities Exchange Act (15 USCS § 78j(b)). Moerman v Zipco, Inc. (1969, ED NY) 302 F Supp 439, CCH Fed Secur L Rep P 92478, affd (1970, CA2 NY) 422 F2d
871.
In private civil action scienter is not essential to establishing violation of 15 USCS § 78j(b), but plaintiffs, in addition to proving other requisite elements, need to
show merely lack of due diligence or unreasonable or negligent conduct on part of defendant. Batchelor v Legg & Co. (1971, DC Md) 52 FRD 545, CCH Fed Secur L
Rep P 93119.
Present trend is that antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 thereunder, apply to negligent as well as
intentional representations. Corey v Bache & Co. (1973, SD W Va) 355 F Supp 1123, CCH Fed Secur L Rep P 94012.
Buyer of securities is permitted to sue under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 if conduct complained of rises to level of
fraud, and thus goes beyond unintentional or negligent misrepresentation. Stewart v Bennett (1973, DC Mass) 359 F Supp 878, CCH Fed Secur L Rep P 94140.
Allegations of mere failure to discover and disclose material facts that were omitted or distorted would be nothing more than assertion of negligence and would not
constitute violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5. Stewart v Bennett (1973, DC Mass) 362 F Supp 605, CCH Fed Secur
L Rep P 94192.
Only form of scienter required, in order for one to violate SEC Rule 10b-5, is lack of diligence, constructive fraud, or unreasonable or negligent conduct. SEC v
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Resch--Cassin & Co. (1973, SD NY) 362 F Supp 964, CCH Fed Secur L Rep P 93995.
Action under SEC Rule 10b-5 requires facts amounting to scienter, intent to defraud, reckless disregard for truth, or knowing use of device, scheme, or artifice to
defraud; mere negligence is not enough. Architectural League of New York v Bartos (1975, SD NY) 404 F Supp 304, CCH Fed Secur L Rep P 95329.
Under § 10(b)of Securities Exchange Act (15 USCS § 78j(b)) and Rule 10b-5 promulgated thereunder, liability must be based on something more than negligence;
some sort of scienter is required. Crook v Shearson Loeb Rhoades, Inc. (1983, ND Ind) 591 F Supp 40.
Negligence cannot serve as substitute for scienter, but individual may be liable for reckless conduct where conduct presents obvious danger of misleading buyers of
which individual should have been aware. Wise v Kidder Peabody & Co. (1984, DC Del) 596 F Supp 1391, CCH Fed Secur L Rep P 91878.
In order for criminal fraud to have occurred in violation of SEC Rule 10b-5, promulgated pursuant to § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), specific
intent to defraud is unnecessary, but it is necessary that there be more than showing of mere negligence. State v Cox (1977) 17 Wash App 896, 566 P2d 935, cert
den (1978) 439 US 823, 58 L Ed 2d 115, 99 S Ct 90.
52.--Standard of duty for various parties
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) does not extend to negligent conduct, and there is no exception for direct participants; closer
relationship of person charged to corporation and greater his participation in transactions attacked, easier it will be to prove requisite scienter, but that state of affairs
provides no justification for any inference that direct participants have any greater or different duty to buyers or sellers of securities than those whose connections
with transactions may be more remote. Robinson v Heilman (1977, CA9 Cal) 563 F2d 1304, CCH Fed Secur L Rep P 96233, 24 FR Serv 2d 724.
With respect to violations of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, lawyer has no special status, and his duty is no different
from that of nonlawyer, at least in criminal case; he cannot plead lack of knowledge while acting with wilful or reckless disregard for truth, but mere negligence will
not suffice to establish violation; except in case of SEC civil enforcement suit seeking injunctive relief, mere negligence by corporate officer or director is not
sufficient to impose civil liability based on violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and it certainly is not sufficient to impose criminal
liability. United States v Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
Seller's omission to disclose existence of liability not contained in balance sheet constituted violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
regardless of whether failure to do so was intentional or merely negligent. Lane v Midwest Bancshares Corp. (1972, ED Ark) 337 F Supp 1200, CCH Fed Secur L Rep
P 93466, 10 UCCRS 1114.
Scienter requirement of SEC Rule 10b-5 was met in complaint which charged that accounting firm had prepared annual statement for corporation which failed to
disclose material information when it knew or, in exercise of reasonable diligence, should have known of such facts; facts allegedly not disclosed were: (1)
transaction which had caused substantial loss for year covered by statement; (2) reason given for sale of subsidiary was false; (3) fact that certain debts solicited
were without full collectibility, and there was serious exposure of corporation to loan guaranty to another corporation; and (4) potential loss on certain transaction
was great enough to wipe out corporation's net equity. Oleck v Fischer (1975, SD NY) 401 F Supp 651, CCH Fed Secur L Rep P 95332, 21 FR Serv 2d 1247.
Alleged misstatements regarding future earnings of corporation and salary received by chairman of board of directors of corporation were not actionable under SEC
Rule 10b-5 where there was no evidence of scienter; mere negligence is not enough. Black v Riker-Maxson Corp. (1975, SD NY) 401 F Supp 693.
Mere negligence is not sufficient to entail liability under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5; lender, who accepted stock as
security for loan, could not recover against person who transferred stock to borrower on ground that transferor had negligently failed to affix legend to stock showing
that stock was restricted. Ford v Cannon (1976, MD Fla) 413 F Supp 1393, CCH Fed Secur L Rep P 95712, 19 UCCRS 653.
54. Duty to investigate
Neither language nor intent of antifraud provisions of § 10(b) of Securities Exchange Act, (15 USCS § 78j(b)) or SEC Rule 10b-5 will justify holding that, although
director does not conduct negotiations, participate therein, or have knowledge thereof, he is under duty to investigate each such transaction and to inquire as to
what representations had been made, by whom and to whom, and then independently check on truth or falsity of every statement made and document presented.
Lanza v Drexel & Co. (1973, CA2 NY) 479 F2d 1277, CCH Fed Secur L Rep P 93959, 17 FR Serv 2d 365 (criticized in Sloane Overseas Fund v Sapiens Int'l Corp.
(1996, SD NY) CCH Fed Secur L Rep P 99324) and (criticized in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505)
and (criticized in In re MicroStrategy Inc. Secs. Litig. (2000, ED Va) 115 F Supp 2d 620, CCH Fed Secur L Rep P 91213).
Merely because seller of securities is employee of issuer does not charge him with constructive knowledge of financial matters he might have discovered by expert
review of company books and he is under no duty to discover such information and disclose it to purchaser. Vohs v Dickson (1974, CA5 Ga) 495 F2d 607, CCH Fed
Flexible duty standard is desirable in area as complex as securities fraud litigation and, under such standard, duty to investigate and disclose material facts will vary
according to fact situation; where defendant derives great benefit from relationship of extreme trust and confidence with plaintiff, defendant knowing that plaintiff
completely relies upon him for information to which he has ready access, but to which plaintiff has no access, law imposes duty upon defendant to use extreme care
in assuring that all material information is accurate and disclosed and if defendant has breached such duty he is liable under SEC Rule 10b-5 provided other elements
of materiality, causation, and damages are established; but where defendant's relationship with plaintiff is so casual that reasonably prudent person would not rely
upon it in making investment decisions, defendant's only duty is not intentionally to misrepresent material facts. White v Abrams (1974, CA9 Cal) 495 F2d 724, CCH
Fed Secur L Rep P 94457, 18 FR Serv 2d 1408 (ovrld in part by Hollinger v Titan Capital Corp. (1990, CA9 Wash) 914 F2d 1564, CCH Fed Secur L Rep P 95500) and
(ovrld in part as stated in Drnek v Variable Annuity Life Ins. (2004, DC Ariz) 2004 US Dist LEXIS 9490).
Scienter of CPA attorney who recommends investment is not shown where he makes no material misrepresentations or omissions and could not have discovered
existence of such through exercise of reasonable care despite fact that he makes no investigation of investment; preparation of tax analysis based upon depreciation
figures presented to him is not "extreme departure from the standards of ordinary care." Croy v Campbell (1980, CA5 Tex) 624 F2d 709, CCH Fed Secur L Rep P
97615.
Investor failed to allege strong inference of fraudulent intent or conscious recklessness under § 10(b) of Securities Act of 1934, 15 USCS § 78j(b), from failure of
investment advisor and its two principals to conduct promised due diligence for recommended hedge fund investment because complaint did not show that advisor
and its principals knew that hedge fund was involved in Ponzi scheme. South Cherry St., LLC v Hennessee Group LLC (2009, CA2 NY) 573 F3d 98.
Person whose name appears in prospectus, at his request, as having received substantial sum for financial advisory services, is liable to one who relies upon untrue
statements or omissions contained in such prospectus even though he did not verify or attempt to verify any statements in prospectus, and even though he actually
did nothing other than give issuer or officer of issuer some general information about public offerings and refer such issuer or officer to lawyer experienced in public
offerings, since one who is presented in prospectus as financial advisor who has been paid substantial sum owes duty to at least make minimal investigation into
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accuracy of prospectus. Blakely v Lisac (1972, DC Or) 357 F Supp 255, CCH Fed Secur L Rep P 93788.
Attorney who drafts prospectus can avoid liability for injury sustained through reliance upon misleading statements or omissions in or from such prospectus only
through exercise of due diligence in his preparation thereof, and he cannot escape liability for fraud by closing his eyes to what he saw and readily could understand
since attorney, particularly if knowledgeable and experienced in securities law and public offerings, may be expected to know more than any other person involved in
preparation of prospectus and importance of carefully investigating validity of statements contained in prospectus or in reports which may be expected to influence
investment activities of potential buyers or sellers of issuer's stock; where errors in prospectus result from accountant's unaudited writeup, he is not charged with
information of which he was unaware or which would have been disclosed only by full audit, but even when performing unaudited writeup, accountant is under duty
to undertake at least minimal investigation into figures supplied to him, and he is not free to disregard suspicious circumstances. Blakely v Lisac (1973, DC Or) 357 F
Supp 267, 17 FR Serv 2d 153.
Failure or refusal of corporate officers to discover and disclose misstatements and omissions in registration statement and prospectus prepared by others, in face of
notification as to possible existence of such errors, was wilful and reckless disregard for truth which amounted to knowing and intentional act, and was violation of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Stewart v Bennett (1973, DC Mass) 362 F Supp 605, CCH Fed Secur L Rep P 94192;
Canizaro v Kohlmeyer & Co. (1974, ED La) 370 F Supp 282, CCH Fed Secur L Rep P 94515, affd (1975, CA5 La) 512 F2d 484.
Corporation directors who caused corporation to enter into inequitable transaction violated SEC Rule 10b-5 because they failed to disclose unfairness of transaction to
minority shareholders; actual knowledge of unfairness of transaction was not necessary where they knew of factors bearing upon limited worth of shares of buyer
and were grossly negligent in failing to determine unfairness. Bailey v Meister Brau, Inc. (1973, ND Ill) 378 F Supp 869, CCH Fed Secur L Rep P 94837, affd (1976,
CA7 Ill) 535 F2d 982, CCH Fed Secur L Rep P 95543.
Registered representative of securities brokerage who dealt with customer in personal capacity rather than as representative of brokerage was not in violation of SEC
Rule 10b-5 because of failure to conduct investigation with respect to recommended stock of magnitude which might be expected had he been acting on behalf of
brokerage. Jackson v Bache & Co. (1974, ND Cal) 381 F Supp 71.
Corporation engaged in providing services involving statistical reporting with regard to issuers of securities is under no duty to investigate or verify statistics of
companies which they collect and publish as submitted to them where they summarize facts and ascribe them to sources deemed reliable without vouching for them
as their own or adding any factual matter, and such corporation will not be liable, under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for inaccuracies
contained in their reports even where corporation express opinions as to attractiveness of investment in certain securities. In re Republic Nat'l Life Ins. Co. (1975, SD
Plaintiffs' § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), S.E.C. Rule 10b-5(b), 17 CFR § 240.10b-5(b), claims against three members of corporations
board of directors survived because although mere desire to increase compensation or stock prices did not give rise to strong inference, directors acted recklessly by
failing to undertake minimal inquiry required to uncover backdating scheme; red flags evident on face of unanimous consent forms, coupled with directors' likely
experience and knowledge, made it at least as plausible that they were aware of, but ignored, strong likelihood of wrongdoing when they signed unanimous consent
forms (the danger that they were committing fraud by signing unanimous consent forms was so obvious that they must have been aware of it). In re Comverse
Tech., Inc. Sec. Litig. (2008, ED NY) 543 F Supp 2d 134.
Complaint alleged that selling broker took certain actions without disclosing excessive commissions that he and his co-defendant brokers were receiving, and as
unregistered broker he could not offer investments simply by relying on promoter; thus, selling broker's failure to investigate constituted fraud, SEC's complaint
adequately alleged scienter, and selling broker's motion to dismiss SEC's claims against him brought pursuant to 15 USCS §§ 78j, 77q(a)(1), inter alia, was denied.
United States SEC v Kelly (2008, ND Ill) 545 F Supp 2d 808, CCH Fed Secur L Rep P 94642.
55. Reliance on advice or expertise of others
Broker-dealer could not avoid responsibility for violation of SEC Rule 10b-5, with respect to improper "give-ups", through assertion of reliance upon advice of counsel
where counsel informed broker-dealer that advice ran counter to position as to illegality of give-ups on over-the-counter transactions taken by SEC staff, and where
attorney was not in position to give wholly disinterested advice. Arthur Lipper Corp. v SEC (1976, CA2) 547 F2d 171, CCH Fed Secur L Rep P 95796, reh den (1976,
CA2) 551 F2d 915, CCH Fed Secur L Rep P 96001 and cert den (1978) 434 US 1009, 54 L Ed 2d 752, 98 S Ct 719.
Investor adequately pleaded reliance element of securities fraud claim against Swiss corporation, even though at time he purchased corporation's American
Depository Receipts (ADRs) he knew that private antitrust lawsuit had been filed against corporation based on alleged price fixing, where investor alleged that
corporation pleaded guilty to criminal antitrust charges after he purchased ADRs. Pinker v Roche Holdings, Ltd. (2002, CA3 NJ) 292 F3d 361, CCH Fed Secur L Rep P
91918.
Investment newsletter editor was properly found to have violated 15 USCS § 78j(b) because his mass solicitation e-mails falsely touting insider information, which
induced investors to buy a report divulging the details of a proposed Russian uranium sale, was made in "connection with" a sale of securities, even though the
parties did not enjoy a trading relationship; under the Texas Gulf standard, mass solicitation e-mails from a purveyor of Internet investment advice were the types of
communications upon which investors would reasonably rely. United States SEC v Pirate Investor LLC (2009, CA4 Md) 580 F3d 233.
In imposing sanctions against vice-president of broker-dealer under 15 USCS §§ 78u-2(a), 78u-3(a), and 78o(b)(4), (6), SEC applied incorrect scienter standard;
although SEC held that "awareness of wrongdoing" was necessary element of aiding and abetting, there was no evidence to show that vice-president had any
awareness that broker-dealer and hotel corporation counted non-bona fide purchases made in part-or-none offering, and substantial evidence did not show violations
of 15 USCS §§ 77q(a), 78j(b) and of 17 C.F.R. §§ 240.10b-5, 240.10b-9, but showed only that vice-president had relied on competent and experienced inside and
outside counsel and that there had been no danger signals or red flags so obvious that vice-president should have noticed them. Howard v SEC (2004, App DC) 376
F3d 1136.
Director who relies upon expertise of others in evaluating accuracy of prospectus with respect to areas in which he has no experience or knowledge is not liable for
losses incurred by reason of reliance upon misinformation or omissions in prospectus since he may reasonably rely upon portions of prospectus which are outside his
field and which are based upon expertise of other persons, but where director admits that he was aware of increasing losses, his acquiescence to subsequent report,
which effectively conceals deteriorating business condition of company, makes him liable to those who purchase in reliance upon such subsequent report. Blakely v
Lisac (1972, DC Or) 357 F Supp 255, CCH Fed Secur L Rep P 93788.
Although reliance upon advice of counsel may constitute defense in action alleging violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS §
78j(b)), fundamental requirement is that all relevant information is disclosed to counsel and opinion followed. SEC v Senex Corp. (1975, ED Ky) 399 F Supp 497,
CCH Fed Secur L Rep P 95001, affd (1976, CA6 Ky) 534 F2d 1240.
Companies' motion for summary judgment on sophisticated investor's claims alleging common law fraud and violations of §§ 10 and 20 of Securities and Exchange
Act of 1934 was denied because companies did not show investor's reliance was unreasonable under circumstances; investor did not have fiduciary relationship or
business relationship directly with companies, but evidence suggested that investor had no reason to doubt truthfulness of information that companies transmitted
and established that companies might have engaged in fraudulent scheme. Tracinda Corp. v DaimlerChrysler AG (In re DaimlerChrysler AG Sec. Litig.) (2003, DC
Del) 294 F Supp 2d 616, CCH Fed Secur L Rep P 92621.
Investors failed to state 15 USCS § 78j(b) claim where complaint did not state defendants made representation investors relied on and complaint did not show that
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any defendant intended to deceive investors or depress stock price or knowingly or recklessly made any material misrepresentation to investors. Jag Media Holdings
Inc. v A.G. Edwards & Sons Inc. (2004, SD Tex) 387 F Supp 2d 691.
Misrepresentations which amounted to assurance that plaintiff could make money with no risk did not constitute actionable securities fraud under § 10(b) of
Securities Exchange Act of 1934 because defendant was under no obligation to disclose information (namely that there are risks inherent in stock market
investment) so basic that any investor could be expected to know it. Louros v Kreicas (2005, SD NY) 367 F Supp 2d 572, CCH Fed Secur L Rep P 93233.
Though plaintiff investors set forth each statement in detail, they failed to provide specific evidence of "entanglement" and did not plead facts showing that analysts
and reporters were aware of corporation's inaccurate reporting; consequently, corporate defendants could not be held liable for allegedly false and misleading
statements of various analysts and reporters. In re Cardinal Health, Inc. Sec. Litigs. (2006, SD Ohio) 426 F Supp 2d 688.
Reliance need not be demonstrated in SEC proceedings to enforce statutory antifraud provisions. Re Martin Herer Engelman, et al. (1995) 52 SEC 271.
Unpublished: Investors' claim against banks for violations of § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 C.F.R. §
240.10b-5, based on stock-for stock merger where investors averred that banks' sham transactions enabled transferee company to falsely inflate its stock failed
because they did not show reliance on banks' allegedly false loan confirmations to auditors. Filler v Hanvit Bank (2005, CA2 NY) 156 Fed Appx 413, CCH Fed Secur L
Rep P 93599.
56. Strict liability
Neither language nor intent of antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 will justify holding that director is
insurer of honesty of individual officers of corporation in their negotiations involving purchase or sale of corporation's stock. Lanza v Drexel & Co. (1973, CA2 NY) 479
F2d 1277, CCH Fed Secur L Rep P 93959, 17 FR Serv 2d 365 (criticized in Sloane Overseas Fund v Sapiens Int'l Corp. (1996, SD NY) CCH Fed Secur L Rep P 99324)
and (criticized in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505) and (criticized in In re MicroStrategy Inc. Secs.
Litig. (2000, ED Va) 115 F Supp 2d 620, CCH Fed Secur L Rep P 91213).
SEC Rule 10b-5 does not impose liability without fault nor require anyone to be insurer against false or misleading statements made nonnegligently and in good faith.
White v Abrams (1974, CA9 Cal) 495 F2d 724, CCH Fed Secur L Rep P 94457, 18 FR Serv 2d 1408 (ovrld in part by Hollinger v Titan Capital Corp. (1990, CA9 Wash)
914 F2d 1564, CCH Fed Secur L Rep P 95500) and (ovrld in part as stated in Drnek v Variable Annuity Life Ins. (2004, DC Ariz) 2004 US Dist LEXIS 9490).
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), there is flexible standard of duty based on relationship between parties, availability of information to
them, and variety of other factors relating to context of representation in question and, under that standard, § 10(b) does not impose duty of strict liability to insure
truth and reliability of material representations. Robinson v Cupples Container Co. (1975, CA9 Cal) 513 F2d 1274.
While antifraud provisions of federal securities statutes have substituted full disclosure approach for that of caveat emptor, they do not impose absolute liability
standard, and full disclosure is only required where law imports duty to speak; that duty exists only in circumstances which indicate investment or fiduciary
relationship between seller and buyer, or knowledge, actual or implied, on part of seller that unless he speaks buyer may act to his detriment. Branham v Material
Systems Corp. (1973, SD Fla) 354 F Supp 1048, CCH Fed Secur L Rep P 93988.
57. Effect of good faith
Neither scienter nor reckless disregard for truth is shown where corporation's accounting firm thoroughly investigates acquired company prior to purchase and
determines in good faith that company's reserve is sufficient to cover outstanding debts and purchase note. Oleck v Fischer (1980, CA2 NY) 623 F2d 791, CCH Fed
Fact that corporate president may have acted in good faith in making misleading statements as to corporate earnings was immaterial insofar as violation of SEC Rule
10b-5 was concerned, since proof of specific intent to defraud is unnecessary. Butler Aviation International, Inc. v Comprehensive Designers, Inc. (1969, SD NY) 307
F Supp 910, CCH Fed Secur L Rep P 92543, affd (1970, CA2 NY) 425 F2d 842, CCH Fed Secur L Rep P 92557.
Finding that dealer in commercial paper acted at all times in good faith foreclosed recovery by customer under § 10(b) of Securities Exchange Act (15 USCS §
78j(b)) or SEC Rule 10b-5. University Hill Foundation v Goldman, Sachs & Co. (1976, SD NY) 422 F Supp 879, CCH Fed Secur L Rep P 95749.
Antifraud provisions of Securities Exchange Act (l5 USCS § 78j(b)) are inapplicable to transaction involving sale of defendant's European photocopy business to
plaintiff, notwithstanding that transfer of ownership as evidenced by stock was to have occurred, since claimed frauds of overstated assets on part of plaintiff and
inflated income on part of defendant were not made with scienter, but were made in good faith. Reprosystem, B. V. v SCM Corp. (1981, SD NY) 522 F Supp 1257,
Unpublished: In determining that defendant violated § 17(a) of Securities Act of 1933, 15 USCS § 77q(a), and §§ 10(b), 13(a), and 13(b)(2)(A) of Securities and
Exchange Act of 1934, 15 USCS §§ 78j(b), 78m(a), and 78m(b)(2)(A), district court properly rejected defendant's good faith reliance defense because there was
ample evidence that he did not make full disclosure to auditors, who testified that they did not learn of material facts until after creation of documents that were
submitted to Securities and Exchange Commission. SEC v Yuen (2008, CA9 Cal) 2008 US App LEXIS 7606.
58. "Aiding and abetting"
Section 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) prohibits only making of material misstatement or omission or commission of manipulative act
in connection with purchase or sale of securities; proscription does not include giving aid to person who commits manipulative or deceptive act. Central Bank, N.A. v
First Interstate Bank, N.A. (1994) 511 US 164, 128 L Ed 2d 119, 114 S Ct 1439, 94 CDOS 2687, 94 Daily Journal DAR 5160, CCH Fed Secur L Rep P 98178, 8 FLW
Fed S 33, on remand, remanded sub nom First Interstate Bank v DBLKM, Inc. (1994, CA10 Colo) 1994 US App LEXIS 16507 and (superseded by statute as stated in
United States SEC v Fehn (1996, CA9 Nev) 97 F3d 1276, 96 CDOS 7516, 96 Daily Journal DAR 12375, CCH Fed Secur L Rep P 99330) and (superseded by statute as
stated in United States v Irwin (1998, CA7 Ill) 149 F3d 565) and (superseded by statute as stated in Trustees of Boston Univ. v ASM Communs., Inc. (1998, DC
Mass) 33 F Supp 2d 66, RICO Bus Disp Guide (CCH) P 9642) and (criticized in Grubaugh v DeCosta (1999, Ariz App) 1999 Ariz App LEXIS 35) and (superseded by
statute as stated in Scachitti v Prudential Sec., Inc. (1999, ND Ill) 1999 US Dist LEXIS 19391).
Person may aid and abet violation of antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) through inaction in combination with affirmative
action, but if civil action is to be based upon aiding and abetting solely by inaction, party charged with aiding and abetting must be shown to have had knowledge of
or, but for breach of duty of inquiry, should have had knowledge of fraud, and possessing such knowledge, person failed to act due to improper motive. Hochfelder v
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Midwest Stock Exchange (1974, CA7 Ill) 503 F2d 364, CCH Fed Secur L Rep P 94499, cert den (1974) 419 US 875, 42 L Ed 2d 114, 95 S Ct 137.
In action charging accountant with aiding and abetting securities broker's violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and SEC Rule 10b-5,
extent of statutory duty of inquiry imposed upon accountant in auditing broker was duty to audit in accordance with generally accepted auditing standards, as
required by SEC form X-17A-5 under SEC Rule 17a-5. Hochfelder v Ernst & Ernst (1974, CA7 Ill) 503 F2d 1100, CCH Fed Secur L Rep P 94781, revd on other
grounds (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375, CCH Fed Secur L Rep P 95479, reh den (1976) 425 US 986, 48 L Ed 2d 811, 96 S Ct 2194.
Registered securities exchange had no obligation to disclose to principals of member firm, which contemplated merger with another member firm, that other member
firm had cured net capital deficiencies by liquidating certain "long" security count differences not traced to specific errors where principals had made extensive
investigation into position and status of other firm and exchange was entitled to conclude that principals had fully informed themselves concerning all facts relating to
firm and had decided to go forward with merger, fully advised of those facts; scienter requirement for finding of aider-abettor liability under § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 is not present where defendant entertains reasonable belief that all facts have been fully disclosed. Hirsch v
Du Pont (1977, CA2 NY) 553 F2d 750, CCH Fed Secur L Rep P 96011.
Recklessness satisfies scienter requirement of cause of action under SEC Rule 10b-5 for aiding and abetting fraud where alleged aider and abettor owes fiduciary
duty to defrauded party. Rolf v Blyth, Eastman Dillon & Co. (1978, CA2 NY) 570 F2d 38, CCH Fed Secur L Rep P 96275, cert den (1978) 439 US 1039, 58 L Ed 2d
698, 99 S Ct 642 and amd (1978, CA2) CCH Fed Secur L Rep P 96525.
Although reckless conduct generally satisfies scienter requirement for action under SEC Rule 10b-5, there are special considerations in applying this general principle
to aiders and abettors; if alleged aider and abettor owes fiduciary duty to defrauded party, recklessness satisfies scienter requirement, but if there is no such
fiduciary duty scienter requirement scales upward so that assistance rendered by alleged aider and abettor should be both substantial and knowing. IIT, International
Inv. Trust v Cornfeld (1980, CA2 NY) 619 F2d 909, CCH Fed Secur L Rep P 97320.
Summary judgment was properly entered in favor of woman who was corporate secretary and director of corporation and wife of president of corporation where
woman was alleged to be liable as aider and abettor under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) for fraud allegedly committed by her
husband in connection with offer and sale of securities, but there was no evidence in record that she provided substantial assistance or that she had actual
knowledge of alleged illegal activities, since it would be absurd to hold her responsible as aider and abettor without proof of scienter merely because she was director
of corporation and married to person who may have been guilty of violations of Act. Durham v Kelly (1987, CA9 Cal) 810 F2d 1500, CCH Fed Secur L Rep P 93149, 7
FR Serv 3d 102.
Account executive who helped former administrator embezzle funds from estate was not liable to executor of estate for fraud under § 10(b) of Securities Exchange
Act of 1934, 15 USCS § 78j(b), because aiding and abetting primary violations does not support damages in private actions; executive did not deceive executor or
estate and § 10(b) of Act did not turn all transactions using proceeds of crime into species of fraud and, because executive was not liable, his firm could not have
been held vicariously liable under § 20(a) of Securities Exchange Act of 1934, 15 USCS § 78t(a). Foss v Bear, Stearns & Co. (2005, CA7 Ill) 394 F3d 540, CCH Fed
While statutory silence on subject of secondary liability generally meant there was none, in that it had been held that § 10(b) of Securities and Exchange Act of 1934
did not reach aiding and abetting for failing to reference to secondary liability of kind that statutes such as 18 USCS §§ 2, 3, created, by chain of incorporations by
reference, 18 USCS § 2333(a) to 18 USCS § 2331(1), to 18 USCS § 2339A, to 18 USCS § 2332, donation to terrorist group that targets Americans abroad can
violate § 2333, and it is contribution itself, not amount of contribution, that is key to liability, but one must either know that organization engages in such acts or is
deliberately indifferent to whether it does or not. Boim v Holy Land Found. for Relief & Dev. (2008, CA7 Ill) 549 F3d 685.
Former state senator who was not registered lobbyist was properly found liable for violating 15 USCS § 78j(B) and S.E.C. Rule 10-5, as aider and abettor because he
served as go-between who solicited former state treasurer to invest state retirement trust fund assets with private brokerage firm in exchange for finder's fee.
Substantial evidence proved his knowing participation in fraud. SEC v DiBella (2009, CA2) 587 F3d 553.
Liability under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 can be extended to aiders and abettors, essential elements to such liability
being scienter and substantial assistance by defendants to primary wrongful conduct; complaint satisfies scienter requirement where it alleges that each defendant
knew or should have known of alleged fraud. Lewis v Marine Midland Grace Trust Co. (1973, SD NY) 63 FRD 39, CCH Fed Secur L Rep P 94206, 17 FR Serv 2d 1517.
Knowing assistance of or participation in fraudulent scheme gives rise to liability under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) as aider and abettor,
but requisite scienter is not present where defendant entertains reasonable belief that all facts have been disclosed; knowledge of fraud, and not merely undisclosed
material facts, is indispensable to liability, and concept of aider and abettor liability cannot be stretched to encompass situation where there is in fact no active
participation. Steinberg v Carey (1977, SD NY) 439 F Supp 1233, CCH Fed Secur L Rep P 96215.
Reckless conduct is sufficient to satisfy "knowing or intentional" requirement for aiding and abetting liability. Felts v National Account Sys. Ass'n (1978, ND Miss) 469
F Supp 54, CCH Fed Secur L Rep P 96860.
Scienter necessary to support liability as aider and abettor of violations of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 includes
recklessness, and allegations of failure by brokerage house to make reasonable investigation into broker's actions adequately pleads recklessness. Troyer v Karcagi
Aider and abettor liability based on recklessness satisfies requirement of scienter in action under 15 USCS § 78j(b) only when defendant has special duty of
disclosure. Hudson v Capital Management International, Inc. (1983, ND Cal) 565 F Supp 615, CCH Fed Secur L Rep P 99223.
Lender did not aid and abet securities fraud where evidence shows absence of actual knowledge of principal's fraud or conscious and intentional assistance in fraud.
Metge v Baehler (1984, SD Iowa) 577 F Supp 810, CCH Fed Secur L Rep P 99665, affd in part and revd in part (1985, CA8 Iowa) 762 F2d 621, CCH Fed Secur L Rep
P 92037, cert den (1986) 474 US 1057, 88 L Ed 2d 774, 106 S Ct 798 and cert den (1986) 474 US 1072, 88 L Ed 2d 804, 106 S Ct 832 and (criticized in Maher v
Durango Metals (1998, CA10 Colo) 144 F3d 1302, CCH Fed Secur L Rep P 90214, 1998 Colo J C A R 2478) and (criticized in Rieger v Drabinsky (In re Livent, Inc.
Noteholders Sec. Litig.) (2001, SD NY) 151 F Supp 2d 371, CCH Fed Secur L Rep P 91495).
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) liability for recklessness requires fiduciary relationship only in aiding and abetting context, in which
context defendants' participation is arguably more attenuated. Zuckerman v Harnischfeger Corp. (1984, SD NY) 591 F Supp 112, CCH Fed Secur L Rep P 91470.
Individual may not be held liable as control person for acts occurring before that individual took control and, similarly, individual may not be held liable as aider and
abettor when acts constituting alleged aiding and abetting occur after fraudulent transaction is completed, as where defendants become involved with defrauding
company subsequent to fraudulent activities. Kaliski v Hunt International Resources Corp. (1985, ND Ill) 609 F Supp 649, CCH Fed Secur L Rep P 92282.
Fraud is essential element of claim for aiding and abetting violation of 15 USCS § 78j(b). In re Storage Tech. Corp. Sec. Litig. (1993, DC Colo) 147 FRD 232, CCH Fed
Securities fraud complaint is dismissed for failure to state claim, where purchasers of tax shelters claim that accountants for sellers received sales commissions on
allegedly fraudulent securities sales, and accountants had employee who allegedly knew that tax benefits of similar deals by sellers had been disallowed by IRS,
because securities fraud complaint must contain allegation that seller made knowing misrepresentation upon which buyer relied, and because of which buyer was
injured, and allegations about commissions and employment of accountant do not support inference of scienter or reliance. Aquino v Trupin (1993, SD NY) 833 F
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Purchasers of securities stated claim for aiding and abetting violation of securities laws against attorneys for sellers, where purchasers alleged that attorneys knew of
material omissions in offering memorandum, alleged specific facts in support of knowledge allegation, and alleged that attorneys drafted offering memorandum,
because allegation of actual knowledge is sufficient to meet pleading requirement of scienter, and drafting of offering memorandum is substantial assistance of fraud,
rather than mere clerical work. Powell v H.E.F. Partnership (1993, DC Vt) 835 F Supp 762, CCH Fed Secur L Rep P 98209.
Central Bank requires plaintiff to allege that each and every defendant committed its own independent primary violation of securities laws in order to state claim,
while 17 CFR § 240.10b-5 makes it unlawful for any person to employ any scheme to defraud in connection with any security; where there are many participants in
"scheme," there may be primary violators and secondary violators; those who actually "employ" scheme to defraud investors are primary violators, while those who
merely participate in or facilitate scheme are secondary violators, who are not liable. In re Homestore.com, Inc. Sec. Litig. (2003, CD Cal) 252 F Supp 2d 1018.
Mutual fund executives' motion to dismiss Securities Exchange Commission deceptive devices claim was denied where, at same time that fund company assured
investors that it would act to stop market timing activities and limit number of "round trip" exchanges investor may make, company was negotiating preferred
market timing arrangement with another firm; to that end, one executive who signed disclosures and was responsible for company's market timing police procedures
could reasonably be held primarily liable for disclosures and, similarly, another non-signatory executive could be found liable on aiding and abetting claim for his
failure to correct his own funds' market timing-related disclosures when they were rendered materially misleading. SEC v PIMCO Advisors Fund Mgmt. LLC (2004, SD
NY) 341 F Supp 2d 454.
Second Circuit has clearly stated that defendant must actually make false or misleading statement in order to be held primarily liable under § 10(b) of Securities
Exchange Act of 1934, 42 USCS § 78j(b); anything short of such conduct is merely aiding and abetting and, no matter how substantial that aid may be, it is not
enough to trigger primary liability under § 10(b). SEC v PIMCO Advisors Fund Mgmt. LLC (2004, SD NY) 341 F Supp 2d 454.
Because bank and its affiliates purportedly substantially assisted fraud with culpable knowledge, claims amounted only to aiding and abetting and did not as matter
of law constitute primary violations of § 10(b) and § 20(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a), and S.E.C. Rule 10b-5(a) and (c). Thus,
they were entitled to judgment on pleadings under Fed. R. Civ. P. 12(c). Enron Corp. Secs. v Enron Corp. (2006, SD Tex) 439 F Supp 2d 692.
Claims of aiding and abetting violation of Securities Exchange Act § 10b were dismissed against three employees of mutual fund services company because SEC's
allegations did not demonstrate that alleged aiders and abetters provided substantial assistance and acted with requisite scienter; SEC failed to allege sufficiently
that employees provided knowing and substantial assistance regarding either fraudulent scheme or material omissions. SEC v Durgarian (2007, DC Mass) 477 F Supp
2d 342.
Because defendant insurer to defendant Federal National Mortgage Association (FNMA) was merely third party alleged to have provided FNMA with means to
misrepresent its finances by entering into transaction that FNMA may have mischaracterized to plaintiff investors, investors' 15 USCS § 78j(b) claim against insurer
was dismissed; there was no private aiding and abetting liability under § 78j(b). Evergreen Equity Trust v Fannie Mae (In re Fannie Mae Sec.) (2007, DC Dist Col)
503 F Supp 2d 25.
Decisive question was whether allegations against law firm were sufficient to show that misstatements and omissions made by firm could be attributed to them such
that statements on which plaintiff relied were statements of firm; they were not; firm's mere association with statements made by others--by relaying statement that
was attributed to authority of another--was insufficient to make secondary actor liable under 15 USCS § 78j(b). Thomas H. Lee Equity Fund V, L.P. v Mayer Brown,
Rowe & Maw LLP (2009, SD NY) 612 F Supp 2d 267, CCH Fed Secur L Rep P 95100.
Plaintiffs did not know that law firm helped facilitate fraudulent transactions, so no liability could attach where plaintiffs could not have relied on firm's conduct;
plaintiffs sought to substitute firm's deceitful conduct for plaintiffs' reliance on that conduct, but only reliance mattered. Thomas H. Lee Equity Fund V, L.P. v Mayer
Brown, Rowe & Maw LLP (2009, SD NY) 612 F Supp 2d 267, CCH Fed Secur L Rep P 95100.
Innocent agent who conveys on behalf of another message he believes in good faith to be true does nothing wrong; agent who understands that his employer's
statement is lie, aids and abets fraud; he remains, however, aider and abettor under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j, not primary violator.
Thomas H. Lee Equity Fund V, L.P. v Mayer Brown, Rowe & Maw LLP (2009, SD NY) 612 F Supp 2d 267, CCH Fed Secur L Rep P 95100.
Because conduct of secondary actor must satisfy each of elements or preconditions for liability, mere allegation of scheme liability does not answer objection that
petitioner did not in fact rely upon defendant's own deceptive conduct. Thomas H. Lee Equity Fund V, L.P. v Mayer Brown, Rowe & Maw LLP (2009, SD NY) 612 F
Because executive signed representation letter to auditors, reasonable fact-finder could have determined that he was primary violator of Antifraud Provisions, § 10(b)
(15 USCS § 78j(b)) of Securities Exchange Act of 1934, and Rule 10b-5, 17 CFR § 240.10b-5,. Similarly, fact-finder could have also determined that executive
substantially assisted, aided and abetted, violation of Antifraud Provisions. SEC v May (2009, DC Dist Col) 648 F Supp 2d 70, CCH Fed Secur L Rep P 95336.
No reasonable fact-finder could determine that executive was primary violator of Antifraud Provisions, § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of
1934, and Rule 10b-5, 17 CFR § 240.10b-5, for his role regarding Report on Form 20-F, although reasonable fact-finder could have determined that he aided and
abetted violations because: (1) although fact-finder could have reasonably concluded that executive provided substantial assistance in compiling Form 20-F, he could
not have been said to have caused misstatements to be made by devising model that generated expected number of claims; (2) executive was not responsible for
drafting Form 20-F; and (3) executive did not have ultimate authority over it. SEC v May (2009, DC Dist Col) 648 F Supp 2d 70, CCH Fed Secur L Rep P 95336.
Unpublished: Investors' claim against banks for violations of § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 C.F.R. §
240.10b-5, based on stock-for stock merger where investors averred that banks' sham transactions enabled transferee company to falsely inflate its stock failed
because none of alleged false statements relied upon by investors were attributed to banks. Filler v Hanvit Bank (2005, CA2 NY) 156 Fed Appx 413, CCH Fed Secur L
Rep P 93599.
59. SEC disciplinary cases
SEC must establish scienter as element of its civil enforcement in seeking injunctive relief under 15 USCS §§ 77t, 78u for violations of §§ 77q(a)(1), 78j but not for
violations of §§ 77q(a)(2) or 77q(a)(3). Aaron v SEC (1980) 446 US 680, 64 L Ed 2d 611, 100 S Ct 1945, CCH Fed Secur L Rep P 97511.
Element of scienter required to establish violation of § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)), was established by SEC in disciplinary
proceedings against corporate broker-dealer and individual who was registered broker and president of corporate broker-dealer for their part in activities in closing
offering of common stock for which corporate-dealer was underwriter, where SEC had introduced substantial evidence to establish that parties were aware of
provision in offering prospectus which stated that offering was to be made on "best efforts, part-or-none" basis, according to which proceeds from offering were to be
held in escrow and returned to investors if requisite number of shares were not sold within offering period, with requisite number of shares to be sold in manner not
inconsistent with public distribution, yet, rather than wait for additional public sales or return funds of subscribers when sales fell short of stipulated number, parties
had arranged for non-public sales to close offering and then retained funds. C.E. Carlson, Inc. v SEC (1988, CA10) 859 F2d 1429, CCH Fed Secur L Rep P 93800, reh
den (1988, CA10) 859 F2d 1429, CCH Fed Secur L Rep P 94100.
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In action seeking equitable prophylactic relief based upon violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and SEC Rule 10b-5 thereunder,
negligence is sufficient basis for liability and, while reliance on erroneous advice of counsel might be evidence of good faith in defending against charge of actual
fraud, it is insufficient in Rule 10b-5 action where defendant was in possession of all relevant facts necessary to support finding of negligence. SEC v Lum's, Inc.
In action to enjoin violations of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, scienter must be pleaded and proved
whether suit is brought by SEC or by private litigant. Securities & Exchange Com. v Bausch & Lomb, Inc. (1976, DC NY) 420 F Supp 1226, CCH Fed Secur L Rep P
95722, affd (1977, CA2) 565 F2d 8, CCH Fed Secur L Rep P 96186.
Securities and Exchange Commission failed to prove allegations of material misstatements concerning value of corporate stock by defendant officers under 15 USCS
§ 78j(b), where there was no evidence of violation of Generally Accepted Accounting Principles or scienter on part of corporate officers. SEC v Guenthner (2005, DC
Neb) 395 F Supp 2d 835, CCH Fed Secur L Rep P 93512.
In securities fraud litigation brought by United States Security Exchange Commission (SEC) against corporation's chief executive officer, its president, executive vice
president of strategic development, and senior vice president of global sales (defendants), motion to dismiss filed by defendants was denied as to all claims against
corporation's chief executive officer and its president, all claims against senior vice president of global sales, and aiding and abetting claims against executive vice
president of strategic development since amended complaint set forth sufficient allegations that material misstatements were made in filings to SEC and that
corporation's chief executive officer and its president had motive and opportunity to commit fraud because they used inflated stock as collateral for lines of credit and
were either aware or recklessly unaware that corporation's disclosures misstated amount of company's barter revenue and thus misstated percentage of revenue
attributable to barter transactions; motion to dismiss was granted as to amended complaint's § 17(a), § 10(b), and Rule 10b-5 claims against executive vice
president of strategic development with respect to her role in incremental revenue transactions only. SEC v Espuelas (2010, SD NY) 698 F Supp 2d 415, CCH Fed
In securities fraud litigation brought by United States Security Exchange Commission (SEC) against various named corporate officers, district court granted motion
for summary judgment filed by corporation's vice president for strategic development because none of evidence collected attributed any misstatement to her and did
not prove that she acted with scienter; however, court found that SEC's Rule 13b2-1, 17 CFR § 240.13b2-1, claim survived summary judgment because scienter was
not required, and liability depended on standards of reasonableness. SEC v Espuelas (2010, SD NY) 699 F Supp 2d 655, CCH Fed Secur L Rep P 95657.
Proof of intent to defraud is unnecessary in administrative proceedings by Securities and Exchange Commission with respect to imposition of sanctions against
registered broker-dealer or investment advisor, under § 15 of Securities Exchange Act (15 USCS § 78o) based upon broker's violation of fraud provisions of Securities
Exchange Act, scienter requirements established by United States Supreme Court are inapplicable to administrative proceedings initiated by Commission; though
relevant to administrative proceedings initiated by Commission, scienter has no bearing on willful violation issues in them but goes only to sanction question. In re
Steadman Secur. Corp. (1977) 46 SEC 896.
In administrative proceeding for willful violation of 15 USCS § 78j(b), term "willful" requires, at minimum, only that respondent's actions were voluntarily performed
in sense that respondent was aware of his actions. In re Bernhardt (1981) 1981 SEC LEXIS 1867.
In remedial proceeding instituted by SEC for prophylactic purpose of protecting public interest, finding of scienter is unnecessary to establish violations of § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)) and Rule 10b-5. In re Nasser & Co., Securities Exchange Act of 1934, Release No. 15347, SEC Dkt Vol 16, No. 4, Dec. 5,
1978, p. 222, 1978 SEC LEXIS 265.
C.Materiality
60. Generally
Corporate insider's nondisclosure in connection with purchase or sale of corporation's stock is prohibited under SEC Rule 10b-5 only if it concerns material fact.
Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486.
In civil action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, plaintiff must show materiality of information misrepresented or not
disclosed. Straub v Vaisman & Co. (1976, CA3 NJ) 540 F2d 591, CCH Fed Secur L Rep P 95623; Holdsworth v Strong (1976, CA10 Utah) 545 F2d 687, CCH Fed Secur
L Rep P 95744, cert den (1977) 430 US 955, 51 L Ed 2d 805, 97 S Ct 1600; Entin v Barg (1976, ED Pa) 412 F Supp 508.
When dealing with disclosure requirements of federal securities laws, material fact need not be outcome-determinative (i.e. it need not be important enough that it
would have caused reasonable investor to change his vote), rather, information need only be important enough that it would have assumed actual significance in
deliberations of reasonable shareholder. Folger Adam Co. v PMI Industries, Inc. (1991, CA2 NY) 938 F2d 1529, CCH Fed Secur L Rep P 96131, cert den (1991) 502
US 983, 116 L Ed 2d 612, 112 S Ct 587.
Violation of stock exchange or NASD (National Association of Securities Dealers) rule will not support private claim; further, violation of exchange rules governing
disclosure may not be imported as surrogate for straight materiality analysis under 15 USCS § 78j(b) and Rule 10b-5. Halkin v VeriFone Inc. (In re VeriFone Sec.
Litig.) (1993, CA9 Cal) 11 F3d 865, 93 CDOS 8485, 93 Daily Journal DAR 14496, CCH Fed Secur L Rep P 97820.
Issue of whether omitted fact is material as matter of law turns on whether defendant has duty to disclose. Banc One Capital Partners Corp. v Kneipper (1995, CA5
Tex) 67 F3d 1187, CCH Fed Secur L Rep P 98935, 33 FR Serv 3d 949.
Question of materiality of omitted information, although generally more factual question, is to be resolved as matter of law when information is so obviously
important (or unimportant) to investor, that reasonable minds cannot differ on question of materiality. Connett v Justus Enters. (1995, CA10 Kan) 68 F3d 382, CCH
Fed Secur L Rep P 98919, cert den (1996) 516 US 1147, 134 L Ed 2d 98, 116 S Ct 1018.
Adoption of bright-line rule assuming that stock price will instantly react would fail to address realities of market; thus, court declines to adopt bright-line rule, and,
instead, engages in "fact-specific inquiry" set forth in Basic, Inc. v. Levinson, 485 U.S. 224 (1988). No. 84 Employer-Teamster Joint Council Pension Trust Fund v Am.
West Holding Corp. (2003, CA9 Ariz) 320 F3d 920, 2003 CDOS 1328, 2003 Daily Journal DAR 1721, CCH Fed Secur L Rep P 92278, reh den, reh, en banc, den,
request den (2003, CA9 Ariz) 2003 US App LEXIS 10783 and (criticized in In re Seebeyond Techs. Corp. Secs. Litig. (2003, CD Cal) 266 F Supp 2d 1150, CCH Fed
Secur L Rep P 92425) and cert den (2003) 540 US 966, 157 L Ed 2d 311, 124 S Ct 433 and (criticized in In re Nextcard, Inc. Sec. Litig. (2005, ND Cal) 2005 US Dist
LEXIS 9234).
Fact that bank's reputation is undeniably important, does not render particular statement by bank regarding its integrity per se material. Eca & Local 134 IBEW Joint
Pension Trust of Chi. v JP Morgan Chase Co. (2009, CA2 NY) 549 F3d 187.
In action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), based upon untrue statement or omission, materiality must be shown.
Moerman v Zipco, Inc. (1969, ED NY) 302 F Supp 439, CCH Fed Secur L Rep P 92478, affd (1970, CA2 NY) 422 F2d 871.
In order to state claim under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, plaintiff must prove misrepresentations, omissions, or
employment of some deceptive scheme, and materiality. Gordon v Burr (1973, SD NY) 366 F Supp 156, CCH Fed Secur L Rep P 94221, 18 FR Serv 2d 1112, affd in
part and revd in part on other grounds (1974, CA2 NY) 506 F2d 1080, CCH Fed Secur L Rep P 94874 (criticized in In re Leslie Fay Cos., Sec. Litig. (1996, SD NY) 918
F Supp 749, CCH Fed Secur L Rep P 99242) and (criticized in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505) and
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(criticized in In re MicroStrategy Inc. Secs. Litig. (2000, ED Va) 115 F Supp 2d 620, CCH Fed Secur L Rep P 91213).
In case alleging violation of 15 USCS § 78j(b), and SEC Rule 10b-5, plaintiff must prove not only that there was false representation or omission of information by
defendant but also that alleged items of information were material to plaintiff's decision to participate in transaction. Chelsea Associates v Rapanos (1974, ED Mich)
376 F Supp 929, affd (1975, CA6 Mich) 527 F2d 1266, CCH Fed Secur L Rep P 95374.
Antifraud provisions of federal securities acts prohibit not mere inaccuracies but only material misrepresentations or omissions; term "material" limits information
covered to those matters as to which average prudent investor ought reasonably to be informed before purchasing securities. Smith v Manausa (1974, ED Ky) 385 F
Supp 443, mod (1976, CA6 Ky) 535 F2d 353, CCH Fed Secur L Rep P 95556.
In action charging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 based upon failure of press release to describe facts
accurately and failure to disclose sufficient information, statements made or facts omitted must be materially misleading if violation is to be shown. United States v
Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
To prevail on nondisclosure claim under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), plaintiff must establish that there devolved upon defendant legal
duty to disclose information concerned and that such information would have been material to potential purchaser of securities. Elkind v Liggett & Myers, Inc. (1975,
SD NY) 66 FRD 36, CCH Fed Secur L Rep P 94984, 21 FR Serv 2d 20.
It is essential to recovery in action under SEC Rule 10b-5 that there be finding of nondisclosure or misrepresentation of material fact. Gelman v Westinghouse
Electric Corp. (1976, WD Pa) 73 FRD 60, 22 FR Serv 2d 928, app dismd (1977, CA3 Pa) 556 F2d 699, CCH Fed Secur L Rep P 96084, 23 FR Serv 2d 546.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 are designed to protect investing public by promoting disclosure and free flow of
information, and do not attempt to create violations for misstatements or omissions of trivial nature; in order to be actionable, misstatement or omission must be
material. McLean v Alexander (1976, DC Del) 420 F Supp 1057, CCH Fed Secur L Rep P 95725.
To establish cause of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, plaintiff must prove, inter alia, that defendant made
material misrepresentation either through affirmation or omission. Coleco Industries, Inc. v Berman (1976, ED Pa) 423 F Supp 275, CCH Fed Secur L Rep P 95764,
affd in part and remanded in part on other grounds (1977, CA3 Pa) 567 F2d 569, CCH Fed Secur L Rep P 96253, 24 FR Serv 2d 516, cert den (1978) 439 US 830, 58
L Ed 2d 124, 99 S Ct 106, reh den (1978) 439 US 998, 58 L Ed 2d 671, 99 S Ct 601.
Liability for misstatement or omission can only be found if non-disclosure is material one, or materially affects another disclosure made. In re Bristol Myers Squibb
Co. Sec. Litig. (2008, SD NY) 586 F Supp 2d 148.
For purposes of § 10(b) claim, misrepresentation or omission is material if there is substantial likelihood that reasonable investor would have acted differently if
misrepresentation had not been made or truth had been disclosed. Armstrong v Am. Pallet Leasing Inc. (2009, ND Iowa) 678 F Supp 2d 827.
61. Materiality as distinct from duty to disclose
Jury instructions given by trial court in action under § 78j(b) and SEC Rule 10b-5, which equated materiality of information not disclosed with duty to disclose,
contravened accepted principle that materiality and duty to disclose are distinct elements of any allegation of securities fraud under § 78j(b) and Rule 10b-5.
Backman v Polaroid Corp. (1990, CA1 Mass) 893 F2d 1405, CCH Fed Secur L Rep P 94899, op withdrawn, substituted op (1990, CA1 Mass) 910 F2d 10, CCH Fed
Mere possession of inside information does not create duty to disclose and, absent specific duty to disclose, even most material information imaginable may be
withheld from public. Polak v Continental Hosts, Ltd. (1985, SD NY) 613 F Supp 153, CCH Fed Secur L Rep P 92206.
62. Test of materiality
Material fact within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is one which would cause reasonable investor to have acted differently in
respect to securities transaction. Vohs v Dickson (1974, CA5 Ga) 495 F2d 607, CCH Fed Secur L Rep P 94589.
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), material fact is one which reasonable investor might consider important in making decision. Little v
First California Co. (1976, CA9 Ariz) 532 F2d 1302, CCH Fed Secur L Rep P 95545; Wheat v Hall (1976, CA5 Tex) 535 F2d 874, CCH Fed Secur L Rep P 95661;
Sundstrand Corp. v Sun Chemical Corp. (1977, CA7 Ill) 553 F2d 1033, CCH Fed Secur L Rep P 95887, cert den (1977) 434 US 875, 54 L Ed 2d 155, 98 S Ct 224, 98
S Ct 225; Holmes v Bateson (1977, DC RI) 434 F Supp 1365, CCH Fed Secur L Rep P 96228, affd in part and revd in part on other grounds (1978, CA1 RI) 583 F2d
542, CCH Fed Secur L Rep P 96532; SEC v Zimmerman (1976, DC Dist Col) 407 F Supp 623, CCH Fed Secur L Rep P 95425, affd in part and vacated in part (1978,
App DC) 190 US App DC 252, 587 F2d 1149, CCH Fed Secur L Rep P 96497, cert den (1979) 440 US 913, 59 L Ed 2d 462, 99 S Ct 1227; Harriman v E. I. Du Pont de
Nemours & Co. (1975, DC Del) 411 F Supp 133, CCH Fed Secur L Rep P 95386; IIT v Vencap, Ltd. (1975, SD NY) 411 F Supp 1094, CCH Fed Secur L Rep P 95398;
Entin v Barg (1976, ED Pa) 412 F Supp 508; Ketchum v Green (1976, WD Pa) 415 F Supp 1367, affd (1977, CA3 Pa) 557 F2d 1022, CCH Fed Secur L Rep P 96107,
cert den (1977) 434 US 940, 54 L Ed 2d 300, 98 S Ct 431; McLean v Alexander (1976, DC Del) 420 F Supp 1057, CCH Fed Secur L Rep P 95725; SEC v American
Realty Trust (1977, ED Va) 429 F Supp 1148, CCH Fed Secur L Rep P 95913, revd on other grounds (1978, CA4 Va) 586 F2d 1001, CCH Fed Secur L Rep P 96605;
Gelman v Westinghouse Electric Corp. (1976, WD Pa) 73 FRD 60, 22 FR Serv 2d 928, app dismd (1977, CA3 Pa) 556 F2d 699, CCH Fed Secur L Rep P 96084, 23 FR
Serv 2d 546.
Statement or omission is material within meaning of Rule 10b-5 if it reasonably could have been expected to influence decision to sell. Nelson v Serwold (1978, CA9
Wash) 576 F2d 1332, CCH Fed Secur L Rep P 96399, cert den (1978) 439 US 970, 58 L Ed 2d 431, 99 S Ct 464.
Proper test for materiality in securities fraud case is not whether investor could have used withheld or misstated information to obtain state injunction against
transaction but whether there is substantial likelihood that reasonable investor would view disclosure of withheld or misstated information as having significantly
altered total mix of information made available and use it to protect himself from possible financial loss. United States v Margala (1981, CA9 Cal) 662 F2d 622, CCH
Required element of proof to be pled in suits brought under 15 USCS §§ 77l, 77q, 78j, and 78t is misstatement or omission of material fact in connection with offer
or sale of security, and fact is considered "material" if its existence or nonexistence is matter to which reasonable person would attach importance in determining
choice of action in transaction. Toombs v Leone (1985, CA9 Cal) 777 F2d 465, CCH Fed Secur L Rep P 92394.
In action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 there is no "put-it-in-writing" rule, according to which asserted
rule, when there is negotiated contract pertaining to sale of securities, failure to state oral representation in written agreement would preclude later contention by
party drafting agreement that oral representation was material or that drafter could justifiably rely on it, since both materiality and reliance depends upon specific
facts of case. Rowe v Maremont Corp. (1988, CA7 Ill) 850 F2d 1226, CCH Fed Secur L Rep P 93906.
Information is "material" if there is substantial likelihood that, under all circumstances, information would have assumed actual significance in deliberations of
reasonable shareholder. Lewis v Chrysler Corp. (1991, CA3 Pa) 949 F2d 644, CCH Fed Secur L Rep P 96295, 21 FR Serv 3d 468.
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Materiality is mixed question of law and fact, and delicate assessments of inferences reasonable shareholder would draw from given set of facts are peculiarly for
trier of fact. Shapiro v UJB Fin. Corp. (1992, CA3 NJ) 964 F2d 272, CCH Fed Secur L Rep P 96651, 23 FR Serv 3d 24, reh, en banc, den (1992, CA3) 1992 US App
LEXIS 15567 and cert den (1992) 506 US 934, 121 L Ed 2d 278, 113 S Ct 365 and (criticized in In re Royal Ahold N.V. Sec. & ERISA Litig. (2004, DC Md) 351 F Supp
2d 334, CCH Fed Secur L Rep P 93061).
"Materiality" is relative concept, so that court must appraise misrepresentation or omission in complete context in which author conveys it; thus, particular
misrepresentation or omission significant to reasonable investor in one document or circumstance may not influence reasonable investor in another. In re Donald J.
Trump Casino Sec. Litig. (1993, CA3 NJ) 7 F3d 357, CCH Fed Secur L Rep P 97789, 130 ALR Fed 633, cert den (1994) 510 US 1178, 127 L Ed 2d 565, 114 S Ct 1219.
Test of materiality, with regard to information misrepresented or omitted within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule
10b-5, must necessarily be conservative one, since many actions under statute are brought on basis of hindsight; it is appropriate that management's duty of
disclosure under Rule 10b-5 be limited to those situations which are essentially extraordinary in nature and which are reasonably certain to have substantial effect on
market price of security if disclosed. Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, SD NY) 258 F Supp 262, affd in part and revd in part on other
grounds (1968, CA2 NY) 401 F2d 833, CCH Fed Secur L Rep P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
Material fact, under 15 USCS § 78j(b) is fact which, concealed or omitted, influenced or should have influenced issuer in its decision to issue stock in question, or
would under circumstances influence buyer in market. Securities & Exchange Com. v Great American Industries, Inc. (1966, SD NY) 259 F Supp 99, remanded on
other grounds (1968, CA2 NY) 407 F2d 453, CCH Fed Secur L Rep P 92325, cert den (1969) 395 US 920, 23 L Ed 2d 237, 89 S Ct 1770.
Material information, under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), simply consists of facts which may affect desire of reasonable investors to buy,
sell, or hold company's securities. Securities & Exchange Com. v Shapiro (1972, SD NY) 349 F Supp 46, CCH Fed Secur L Rep P 93623, affd (1974, CA2 NY) 494 F2d
Since fact misrepresented or omitted must be material in sense that reasonable man would attach importance to it in determining choice of action, defendant is not
required to search out details that presumably would not influence judgment of person with whom he is dealing. Jackson v Oppenheim (1974, SD NY) 411 F Supp
659, CCH Fed Secur L Rep P 94894, affd in part and revd in part (1976, CA2) 533 F2d 826, CCH Fed Secur L Rep P 95497.
Whether misrepresentation or omission in prospectus is material, within meaning of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)),
depends on whether it is something about which average prudent investor ought reasonably to be informed before purchasing security. Grenader v Spitz (1975, SD
Provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) prohibit making any untrue statement of material fact or omitting to state material fact
necessary to avoid making statements misleading in light of circumstances; materiality centers about significance of misstatement or omission of fact to reasonable
investors' deciding to buy or sell and can be determined only by considering all circumstances surrounding transaction. Spielman v General Host Corp. (1975, SD NY)
402 F Supp 190, CCH Fed Secur L Rep P 95267, affd (1976, CA2 NY) 538 F2d 39, CCH Fed Secur L Rep P 95656.
Material defect, under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, must relate to facts, misrepresented or withheld, which
reasonable investor might consider important in making decision; material fact is one that has significant propensity to affect voting process. Ash v G. P. Putnam's
Sons (1976, ED Pa) 410 F Supp 1129.
Whether any particular fact is material, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, is determination which cannot
be made in vacuum; each case must be viewed as discrete set of circumstances and judged on its own facts. Securities & Exchange Com. v Bausch & Lomb, Inc.
(1976, DC NY) 420 F Supp 1226, CCH Fed Secur L Rep P 95722, affd (1977, CA2) 565 F2d 8, CCH Fed Secur L Rep P 96186.
Omitted or misstated fact is material under SEC Rule 10b-5 if there is substantial likelihood that reasonable investor would consider it important in deciding whether
to purchase securities, i.e., if it would have assumed actual significance in investor's deliberation or would have been viewed by investor as having significantly
altered total mix of information made available. Seiffer v Topsy's International, Inc. (1980, DC Kan) 487 F Supp 653, CCH Fed Secur L Rep P 97352.
In action under 15 USCS § 78j(b), materiality of statement is measured in terms of its market impact, and does not vary among similarly situated investors.
Dura-Bilt Corp. v Chase Manhattan Corp. (1981, SD NY) 89 FRD 87, CCH Fed Secur L Rep P 97835, 31 FR Serv 2d 1083.
Material information consists of those acts that reasonable investor might have considered important in making decision to buy or sell securities. Paul v Berkman
(1985, WD Pa) 620 F Supp 638, CCH Fed Secur L Rep P 92422.
Companies' statements of optimism regarding regulators' approval were predictive in nature and appeared to fall outside normal spectrum of material statements
under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, where each statement expressed "confidence" about or
"expectation" of outcome regarding uncertain proceeding. In re Sprint Corp. Secs. Litig. (2002, DC Kan) 232 F Supp 2d 1193, CCH Fed Secur L Rep P 92002.
Statement is only material if reasonable investor would consider it important in determining whether to buy or sell stock. SEC v C. Jones & Co. (2004, DC Colo) 312 F
Supp 2d 1375.
Language that company is "very confident" about "long term growth" is precisely type of expression of corporate optimism that courts have found to be immaterial.
Rosen v Textron, Inc. (2004, DC RI) 321 F Supp 2d 308.
Plaintiff failed to plead materiality adequately under § 10(b) of Securities and Exchange of 1934, 15 USCS § 78j(b), because in absence of any allegations that
quantified financial impact, plaintiff had failed to allege enough to allow court to discern whether alleged accounting violations were minor or technical in nature, or
whether they constituted widespread and significant inflation of revenue. In re Hansen Natural Corp. Sec. Litigation (2007, CD Cal) 527 F Supp 2d 1142.
Information is material if there is substantial likelihood that reasonable investor would consider it important in making investment decisions. In re Amre, Inc., et al.
(1992) 50 SEC 866.
Information is deemed material upon showing that there is substantial likelihood that omitted facts would have assumed actual significance in investment
deliberations of reasonable investor. In re Graystone Nash, Inc., et al. (1996) 1996 SEC LEXIS 3545.
63.--Balancing of probability and magnitude
In action alleging violation of 15 USCS § 78j(b), whether facts relating to future event are material depends upon balancing of indicated probability that event will
occur and anticipated magnitude of event in light of totality of company activity. SEC v Shapiro (1974, CA2 NY) 494 F2d 1301, CCH Fed Secur L Rep P 94494.
Summary judgment under Rule 56 should not have been granted against plaintiff in action under § 11 of Securities Act of 1933 (15 USCS § 77k) and § 10(b) of
Securities Exchange Act of 1934 (15 USCS § 78j(b)), and SEC Rule 10b-5 promulgated thereunder, alleging that corporation which was subsidiary of larger
corporation should have revealed in prospectus that parent corporation had engaged firm to study possibility of parent corporation's termination of relationship with
subsidiary since test of materiality of omission required balancing of likelihood of event's occurrence with its anticipated magnitude if it occurred, in light of totality of
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company activity, and disclosure could be material even though no proposal for termination of subsidiary's status had yet been presented to parent is corporation's
board of directors. Kronfeld v Trans World Airlines, Inc. (1987, CA2 NY) 832 F2d 726, CCH Fed Secur L Rep P 93510, cert den (1988) 485 US 1007, 99 L Ed 2d 700,
108 S Ct 1470.
64.--Test as objective
Test of materiality of alleged undisclosed or misrepresented facts in action alleging violation of 15 USCS § 78j(b) is objective one: whether reasonable man would
attach importance to facts in determining his course of action in transaction in question. Rochez Bros., Inc. v Rhoades (1973, CA3 Pa) 491 F2d 402, CCH Fed Secur L
Rep P 94339, CCH Fed Secur L Rep P 94386.
Applicable test of materiality of false or misleading statements or omissions under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is essentially objective:
Whether reasonable man would attach importance to fact misrepresented in determining his choice of action in transaction in question; where representation is
promise of one of parties, representation must be viewed in light of relationship of parties, context in which statement was made, experience and bargaining position
of investor and nature of transaction as well as character of underlying fact. Robinson v Cupples Container Co. (1975, CA9 Cal) 513 F2d 1274.
Materiality of omissions is measured by objective standard, that is, whether fact's existence or nonexistence is matter to which reasonable man would attach
importance in determining his choice of action in transaction in question. Lewelling v First California Co. (1977, CA9 Or) 564 F2d 1277, CCH Fed Secur L Rep P
96264.
Although objective determination of materiality requires assessment of inferences reasonable shareholder would draw from given set of undisputed facts and
significance of those inferences to him and that assessment is peculiarly one for trier of fact, summary judgment is warranted nonetheless, if reasonable minds could
not differ as to materiality of undisclosed information. Milton v Van Dorn Co. (1992, CA1 Mass) 961 F2d 965, CCH Fed Secur L Rep P 96601.
Whether omission is material is determination that requires delicate assessments of inferences reasonable shareholder would draw from given set of facts and
significance of those inferences to him; such assessments are peculiarly ones for trier of fact. Provenz v Miller (1996, CA9 Cal) 95 F3d 1376, 96 CDOS 6780, 96 Daily
Journal DAR 11109, CCH Fed Secur L Rep P 99311, withdrawn by publisher and amd (1996, CA9 Cal) 102 F3d 1478, 96 CDOS 9137, 96 Daily Journal DAR 15131,
Material information, under 15 USCS § 78j(b), encompasses those facts which in reasonable and objective contemplation might affect value of corporation's stock or
securities. SEC v Shattuck Denn Mining Corp. (1968, SD NY) 297 F Supp 470, CCH Fed Secur L Rep P 92177; United States v Koenig (1974, SD NY) 388 F Supp 670,
Misstatement of fact or nondisclosure is considered material, under 15 USCS § 78j(b), if it concerns something that reasonable man would consider important in
deciding what he should do in particular transaction; concept of materiality encompasses those facts which in reasonable or objective contemplation might affect
value of corporation's stock or securities. Lane v Midwest Bancshares Corp. (1972, ED Ark) 337 F Supp 1200, CCH Fed Secur L Rep P 93466, 10 UCCRS 1114.
Materiality is objective rather than subjective standard and surrounding circumstances must be examined to determine whether reasonable investor, not individual
investor, would attach importance to alleged misrepresentation or omission. Tucker v Arthur Andersen & Co. (1975, SD NY) 67 FRD 468, CCH Fed Secur L Rep P
95107, 20 FR Serv 2d 411; In re U. S. Financial Sec. Litigation (1975, SD Cal) 69 FRD 24; In re Home-Stake Prod. Co. Sec. Litig. (1977, ND Okla) 76 FRD 351, CCH
Fed Secur L Rep P 96140, 23 FR Serv 2d 1373.
In action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), brought by estate of former president of corporation against corporation and its officers
based upon alleged fraud in repurchase of deceased president's stock by corporation, material facts are those facts about corporation's business which in reasonable
and objective contemplation might affect value of its stock. Holmes v Bateson (1977, DC RI) 434 F Supp 1365, CCH Fed Secur L Rep P 96228, affd in part and revd
in part on other grounds (1978, CA1 RI) 583 F2d 542, CCH Fed Secur L Rep P 96532.
65.--Failure to disclose; omission
In case alleging violation of SEC Rule 10b-5, and involving primarily failure to disclose, it is necessary that facts withheld be material in the sense that reasonable
investor might have considered them important in making his decision. Affiliated Ute Citizens v United States (1972) 406 US 128, 31 L Ed 2d 741, 92 S Ct 1456, CCH
Fed Secur L Rep P 93443, reh den (1972) 407 US 916, 32 L Ed 2d 692, 92 S Ct 2430 and reh den (1972) 408 US 931, 33 L Ed 2d 345, 92 S Ct 2478 and (criticized
in Sandwich Chef of Tex., Inc. v Reliance Nat'l Indem. Ins. Co. (2001, SD Tex) 202 FRD 484, RICO Bus Disp Guide (CCH) P 10139).
Definition of materiality in the proxy-solicitation context of § 14(a) of Securities Exchange Act of 1934 (15 USCS § 78n(a)) and SEC Rule 14a-9 (17 CFR §
240.14a-9), under which omitted fact is material if there is a substantial likelihood that reasonable shareholder would consider it important in deciding how to vote
and its disclosure would have been viewed by reasonable investor as having significantly altered total mix of information available, applies in context of antifraud
provisions of § 10(b) of Act (15 USCS § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5). Basic Inc. v Levinson (1988) 485 US 224, 99 L Ed 2d 194, 108 S Ct 978,
CCH Fed Secur L Rep P 93645, 24 Fed Rules Evid Serv 961, 10 FR Serv 3d 308.
Only material facts, those substantially likely to affect deliberations of reasonable shareholder, must be disclosed, and then only if nondisclosure of particular material
facts would make misleading any affirmative statement otherwise required by federal securities laws and SEC regulations. Starkman v Marathon Oil Co. (1985, CA6
Ohio) 772 F2d 231, CCH Fed Secur L Rep P 92290, cert den (1986) 475 US 1015, 89 L Ed 2d 310, 106 S Ct 1195, reh den (1988) 486 US 1018, 100 L Ed 2d 221,
108 S Ct 1759 and (ovrld in part as stated in Pittiglio v Michigan Nat'l Corp. (1995, ED Mich) 906 F Supp 1145, CCH Fed Secur L Rep P 99089).
Chief executive officer of investment management firm was properly disciplined when firm failed to inform its customers fully about way it was conducting trades as
principal, thus depriving its customers of opportunity to obtain for themselves more favorable prices than firm was realizing. Geman v SEC (2003, CA10) 334 F3d
Investors failed to state 15 USCS § 78j(b) claim arising from pharmaceutical company's alleged nondisclosure of subsidiary's revenue recognition methods, as
nondisclosure was not material; company's stock price continued to rise for five days following initial disclosure of information, so test for materiality in efficient
market was not met. In re Merck & Co. Sec. Litig. (2005, CA3 NJ) 432 F3d 261, CCH Fed Secur L Rep P 93606.
Allegations in complaint claiming violations of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10(b)(5)--that defendants failed to disclose
information about manufacturing change prior to July 2, 2004, and this information was material, and defendants wanted to build up inventory before announcing
product recalls--raised reasonable inference that this was material omission. Miss. Pub. Emples. Ret. Sys. v Boston Sci. Corp. (2008, CA1 Mass) 523 F3d 75, CCH Fed
In civil action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, materiality of omitted fact was to be tested by determining whether
reasonable investor might have considered it important in making his investment decision, considering facts of case including relationship of parties, experience of
investor, nature of transaction and nature of omitted fact. Taylor v Smith, Barney & Co. (1973, DC Utah) 358 F Supp 892, CCH Fed Secur L Rep P 93982.
Materiality requirement for securities fraud under 15 USCS § 78j(b) and Rule 10b(5) was satisfied by claim that corporation's failure to disclose that shareholder had
been released from standstill agreement prohibited him from soliciting acquisition offers and, thus, constituted material omission. Kalnit v Eichler (1999, SD NY) 85 F
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Supp 2d 232, CCH Fed Secur L Rep P 90720 (criticized in APA Excelsior III, L.P. v Windley (2004, ND Ga) 329 F Supp 2d 1328).
Alleged failure to disclose dispute with another company costing $ 50,000 per day in revenue was immaterial as matter of law as it was less than 1.5 percent of
quarter's revenue, and thus, plaintiff investors' claims under §§ 10(b), 20(a), of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), 78t, filed against defendants,
company and its insiders, were dismissed with prejudice. Taubenfeld v Hotels (2004, ND Tex) 385 F Supp 2d 587.
Main source of company's revenues came from three products still in development, and any investor would have considered that fact in deciding whether to buy or
sell stock; omission was not rendered immaterial by company's SEC filings. SEC v Gane (2005, SD Fla) 18 FLW Fed D 401.
As to policyholders' 15 USCS § 771(a)(2) claim, demutualized insurance company's conclusion that individual trials would be necessary to determine extent of each
class member's knowledge of omitted facts at time of demutualization vote, was without merit because policyholders maintained that only insurance company had
knowledge of omitted facts; as such, common issue effecting proposed class was whether insurance company knowingly withheld material facts from prospectus in
effort to gain votes in support of demutualization; the effect on voter, then, was class wide phenomenon and materiality presented issue common to all members of
proposed class. In re MetLife Demutualization Litig. (2005, ED NY) 229 FRD 369, 62 FR Serv 3d 462.
Complaint alleging violations of Securities Exchange Act § 10(b), 15 USCS § 78j, claimed that defendants acted in manner that caused significant losses, including
their failure to inform retirement and defined contribution plan of estimated $ 4 million loss and scheme to conduct "as of" trades which caused aggregate $ 2.7
million loss to another fund; those losses were clearly material. SEC v Durgarian (2007, DC Mass) 477 F Supp 2d 342.
Where investors' suit against company and others under §§ 10(b) of Exchange Act, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, based on disclosures in
company's registration statement for secondary offering with respect to "swap" of company's brokerage unit for another entity's asset management division, failed to
plead alleged fraud with required particularity, investors also failed to allege that any of these alleged omissions were material, which provided independent basis for
dismissing these claims. Garber v Legg Mason, Inc. (2008, SD NY) 537 F Supp 2d 597.
Securities fraud action, which was brought under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5(b),
alleged statement or omission that was material because (1) purchasers claimed that defendants, company and three of its officers, never disclosed termination for
default (T4D); (2) company itself chose to characterize terminations for default of government contracts as having material adverse effect on its ability to recompete
for future contracts and orders and admitted that such terminations could have exposed company to liability; and (3) nature of termination was material because
occurrence of T4D was fact that reasonable shareholder would have considered important in deciding how to act, and therefore disclosure of omitted fact would have
been viewed by reasonable investor as having significantly altered total mix of information available. Akerman v Arotech Corp. (2009, ED NY) 608 F Supp 2d 372,
Investors failed to state securities fraud claim under 15 USCS § 78j(b) and 17 CFR § 240.10b-5 based on allegations of false statements and omissions regarding
manufacturer's medical device; allegations did not satisfy heightened pleading requirements of 15 USCS § 78u-4(b) as to materiality; omitted information about
potential problems with device was not statistically significant and not material; application for design change did not indicate that omitted information was material.
In re Medtronic Inc., Sec. Litig. (2009, DC Minn) 618 F Supp 2d 1016, CCH Fed Secur L Rep P 95090.
Omissions from Management's Discussion and Analysis on liquidity and financial condition in Form 10-Q for interim quarter, made in compliance with S.E.C. Reg. S-K,
Item 303, 17 CFR § 229.303, can form basis for liability for false and misleading statements under § 10(b) of Securities Exchange Act, 15 USCS § 78j(b), and S.E.C.
Rule 10b-5(b) if omissions are material. SEC v Conaway (2010, ED Mich) 698 F Supp 2d 771, CCH Fed Secur L Rep P 95580, findings of fact/conclusions of law,
motion gr, in part, motion to strike den, injunction den (2010, ED Mich) 695 F Supp 2d 534, CCH Fed Secur L Rep P 95622.
Unpublished: Pharmaceutical company did not violate 15 USCS § 78j(b) and Rule 10b-5 by not timely disclosing allegedly adverse results of certain research trials,
and by sponsoring researchers to publish false and misleading materials, concerning safety and efficacy of Paxil for treatment of children and adolescents because
plaintiff's complaint did not explain how results of research trials at issue could be deemed statistically significant in light of test results from another trial that
pharmaceutical company did disclose. Masters v GlaxoSmithKline (2008, CA2) 2008 US App LEXIS 6392.
Unpublished: Allegation that surviving party to merger failed to disclose to acquiring party that surviving party had losses of over $ 270 million in first quarter of year
in which merger was negotiated, did not survive motion to dismiss fraud claim under § 10(b) of Securities and Exchange Act, 15 USCS § 78j, because failure to
disclose loss was not basis of fraud claim. E*Trade Fin. Corp. v MarketXT Holdings Corp. (In re MarketXT Holdings Corp.) (2006, BC SD NY) 2006 Bankr LEXIS 2746.
66.--Misstatement or misrepresentation
Materiality standard of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is whether reasonable man would attach importance to fact misrepresented in
determining choice of action in transaction in question, such materiality test being concerned only with whether prototype reasonable investor would have relied;
account must be taken of all surrounding circumstances to determine whether fact under consideration is of such significance that reasonable investor would weigh it
in his decision whether or not to invest. Republic Technology Fund, Inc. v Lionel Corp. (1973, CA2 NY) 483 F2d 540, CCH Fed Secur L Rep P 94069, cert den (1974)
415 US 918, 39 L Ed 2d 472, 94 S Ct 1416.
Test of materiality of misstatement, where, as in derivative action, deception is alleged to have been practiced on corporation, even though all directors were party to
it, must be whether facts that were not disclosed or were misleadingly disclosed to shareholders would have assumed actual significance in deliberations of
reasonable and disinterested directors or created substantial likelihood that such directors would have considered total mix of information available to have been
significantly altered. Goldberg v Meridor (1977, CA2 NY) 567 F2d 209, CCH Fed Secur L Rep P 96162, cert den (1978) 434 US 1069, 55 L Ed 2d 771, 98 S Ct 1249
and (criticized in Isquith v Caremark Int'l (1998, CA7 Ill) 136 F3d 531, CCH Fed Secur L Rep P 90141) and (ovrld as stated in Krieger v Gast (1998, ND Ill) 1998 US
Dist LEXIS 15422).
In action brought by SEC, evidence established that stockbroker violated bar order where stockbroker supplied false and misleading information as to funds'
management and investment strategies, in violation of 15 USCS §§ 77q(a), 78j(b), and 80b-6(1). SEC v Saxena (2001, CA1 Mass) 26 Fed Appx 22, CCH Fed Secur L
Rep P 91657.
Whether or not founder and leader of publicly traded venture capital firm had obtained bachelor's degree in economics was not material since reasonable investor
would not find that fact material in "total mix" of information. Greenhouse v MCG Capital Corp. (2004, CA4 Va) 392 F3d 650, CCH Fed Secur L Rep P 93052.
Where plaintiff investor's complaint alleged that registration statement defendant officers and directors filed with Securities Exchange Commission included
statements emphasizing beneficial relationship between company and its affiliated nationwide cellular telephone network; and listed its access to marketing, national
network, handset availability, traveling services, and technology as some of benefits; and same filing was also alleged as noting that company was dependent on
network and had to maintain good relationship with it or its business might not succeed, allegations were pleaded with sufficient particularity under 15 USCS §
78u-4(b)(1) and were material because investor also alleged company was, at time of filing, already embroiled in bitter dispute with network and network had
demanded that company undertake certain actions company was certain would be disastrous. Lormand v US Unwired, Inc. (2009, CA5 La) 565 F3d 228, CCH Fed
Alleged misrepresentations regarding company's merger with other entities, such that merger could make company "dominant force in software," that company was
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creating "world's most complete financial portal solutions provider," and that merger positioned company for "executing its long-term global strategy," were too
general and vague to be actionable and were not material under 15 USCS § 78j(b). In re S1 Corp. Secs. Litig. (2001, ND Ga) 173 F Supp 2d 1334.
Defendant's alleged representation that he was "licensed investment advisor" was not actionable under Section 10(b) because there was insufficient proximity
between alleged misrepresentation and plaintiff's decision to invest. Louros v Kreicas (2005, SD NY) 367 F Supp 2d 572, CCH Fed Secur L Rep P 93233.
Complaint alleging violation of 15 USCS § 78j(b) was not dismissed for failure to state claim because it sufficiently pled elements of cause of action; materiality was
shown through overstatement of quarterly revenues, conversion of loss into profit, and misstatements concerning adequacy of corporation's disclosure controls. SEC
v Penthouse Int'l, Inc. (2005, SD NY) 390 F Supp 2d 344, CCH Fed Secur L Rep P 93565.
Investors' allegations under 15 USCS § 78j(b) failed because, inter alia, neither investors' confidential witnesses, nor circumstances of alleged actions established
that company employee's misconduct impacted company's financials such that misstated reports of financials were directly related to employee's actions; as
investors failed to plead primary security violation, they could not proceed with 15 USCS § 78t(a) claim. Davis v SPSS, Inc. (2006, ND Ill) 431 F Supp 2d 823, CCH
Stock purchasers' claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, which alleged that corporation's
financial results reflected revenues that were artificially enhanced through booking of fictitious sales, failed to satisfy pleading requirements of Fed. R. Civ. P. 9(b) and
Private Securities Litigation Reform Act of 1995, 109 Stat. 737, because complaint did not explain how alleged actions of officer and two individuals were relied upon
by purchasers of corporation's stock during relevant period, and complaint failed to particularize any material misstatements or omissions by officer and individuals.
Katz v Image Innovations Holdings, Inc. (2008, SD NY) 542 F Supp 2d 269.
On motion to dismiss securities fraud complaint brought in part under 15 USCS § 78j(b), some allegedly misleading statements regarding successful cost
containment efforts and solid growth were not material under 15 USCS § 78u-4(b)(1) because they were puffery. In re Huffy Corp. Secs. Litig. (2008, SD Ohio) 577
F Supp 2d 968.
Motion to deny securities fraud action was denied because with respect to financial results, investor adequately alleged false and misleading statements and reasons
those statements were false and misleading; investor adequately alleged false or misleading statements concerning demand for company's products and market
share. Backe v Novatel Wireless, Inc. (2009, SD Cal) 607 F Supp 2d 1145.
Statements made during quarterly meetings and in company's Form 8-K attributing company's success to "back to basics management discipline," "disciplined
business practice," and discipline and experience of company's management team did not violate 15 USCS § 78j(b), but instead was inactionable "puffery." United
States SEC v Kearns (2010, DC NJ) 691 F Supp 2d 601, CCH Fed Secur L Rep P 95618.
67.--Inside information
Under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10(b)-5 (17 CFR § 240.10b-5), in determining materiality in specific context of
preliminary merger negotiations, since merger in which small corporation is bought out is most important event that can occur in small corporation's life, inside
information regarding such merger can become material at earlier stage than would be case in lesser transactions. Basic Inc. v Levinson (1988) 485 US 224, 99 L Ed
2d 194, 108 S Ct 978, CCH Fed Secur L Rep P 93645, 24 Fed Rules Evid Serv 961, 10 FR Serv 3d 308.
Although trading and profit making by insiders can serve as indication of materiality under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC
Rule 10b-5 (17 CFR § 240.10b-5), there is no authority in § 10(b), its legislative history, or previous decisions of United States Supreme Court, for varying standard
of materiality depending on who brings action or whether insiders are alleged to have profited, for it would effectively collapse materiality requirement into analysis
of defendant's disclosure duties to devise 2 different standards of materiality. Basic Inc. v Levinson (1988) 485 US 224, 99 L Ed 2d 194, 108 S Ct 978, CCH Fed
Secur L Rep P 93645, 24 Fed Rules Evid Serv 961, 10 FR Serv 3d 308.
In cases of disclosure of inside information to favored few, determination of materiality has different aspect than when issue is, for example, inaccuracy in publicly
disseminated press statement; information takes on added charge merely because it is inside information. SEC v Geon Industries, Inc. (1976, CA2 NY) 531 F2d 39,
Sufficient evidence supported defendant's convictions for insider trading pursuant to 15 USCS §§ 78j, 78ff, and 17 C.F.R. §§ 240.10b-5, 240.10b5-1 where, inter alia,
reasonable jury could have concluded that undisclosed evidence was material; neither reasonable basis rule concerning forward-looking statements nor bespeaks
caution rule applied, and jury instructions that defendant received were legally accurate; moreover, under circumstances of case, information regarding 4.2 percent
revenue shortfall was not immaterial and, though defendant pointed out that company's stock price did not fall during time when he released pertinent information,
reasonable jury could have believed that such was result of information being "trickled out." United States v Nacchio (2008, CA10 Colo) 519 F3d 1140, CCH Fed
District Court should not have dismissed action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) where action had been brought by
homebuilders who were members of mutual corporation which offered program whereby homebuilders could enroll homes they built in program for "capital and
contribution" per home in return for which purchasers of homes would be offered limited warranty through program, since it was impossible to tell at dismissal stage
whether "capital contribution" qualified as "ownership interest" within meaning of Products Liability Risk Retention Act of 1981 (15 USCS §§ 3901 et seq.), in which
event contributions would be treated as securities for purposes of action under § 10(b) of 1934 Act, and if contributions were treated as securities, nondisclosure of
fact of disparity in price to various shareholders might be argued to be materially misleading, and fact that pamphlet distributed by corporation to members included
statement that required contributions would not exceed $ 25 would not reasonably put investor on notice that disparate prices would be charged to members of
mutual, so that factual issues remained for determination upon remand to District Court. Fleisher Dev. Corp. v Home Owners Warranty Corp. (1988, App DC) 272 US
App DC 367, 856 F2d 1529.
Basic test of materiality is whether reasonable person would attach importance to information given in determining his choice of action in transaction in question;
under this test, information given by director of corporation to be sold, who was also chairman of proposed buyer of corporation, concerning corporation's liquidation,
was clearly material. SEC v Platt (1983, WD Okla) 565 F Supp 1244, CCH Fed Secur L Rep P 99497.
Alleged fraud of defendant arising from stock transfer transaction which induced plaintiffs not to exercise right of first refusal does not give rise to viable securities
fraud claim, even though right of first refusal may be security, where it is not in hands of general partner, because there is also no evidence of sale or purchase since
right of first refusal simply expired. Union Pac. Resources Group v Rhone-Poulenc, Inc. (1999, ND Tex) 45 F Supp 2d 544, CCH Fed Secur L Rep P 90445, affd in part
and revd in part, remanded (2001, CA5 Tex) 247 F3d 574.
Stock price movement of stock from time of defendant's trade until closing of market on October 9th, when experts agreed that information about private investment
in public equity (PIPE) was fully impounded into price, was evidence that reasonable investors did not devalue stock following defendant's trade; contrary to
Securities and Exchange Commission's (SEC) allegation that information concerning PIPE was materially negative, market did not devalue stock after trade at issue;
because efficient market of reasonable investors did not devalue stock after trade at issue and because SEC failed to otherwise raise genuine issue of fact as to
materiality, summary judgment in favor of defendant was appropriate. SEC v Mangan (2008, WD NC) 598 F Supp 2d 731, CCH Fed Secur L Rep P 94813.
In context of allegation of securities fraud and insider trading, under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), Securities and Exchange
Commission (SEC) met its burden of establishing that information in question was both material and nonpublic because industry in general viewed information about
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Private Investments in Public Equities (PIPE) offering as likely to significantly effect issuer's stock price and therefore as material, and SEC adduced evidence from
each of four issuers that information regarding its PIPE offering was not generally known and had not been disseminated to investing public generally. SEC v Lyon
(2009, SD NY) 605 F Supp 2d 531, CCH Fed Secur L Rep P 95099.
Under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5), in context of preliminary corporate merger
discussions, information which would otherwise be considered significant to trading decisions of reasonable investor is not excluded from definition of materiality
merely because agreement in principle as to price and structure has not yet been reached; information does not become material merely by virtue of public
statement denying information, since under Rule 10b-5 it is not enough that statement is false or incomplete if misrepresented fact is otherwise insignificant;
materiality of fact will depend upon balancing of both indicated probability that event will occur and anticipated magnitude of event in light of totality of company
activity, so that whether merger discussions in any particular case are material depends on facts, generally requiring look at indicia of interest in transaction at
highest corporate levels. Basic Inc. v Levinson (1988) 485 US 224, 99 L Ed 2d 194, 108 S Ct 978, CCH Fed Secur L Rep P 93645, 24 Fed Rules Evid Serv 961, 10 FR
Serv 3d 308.
Company's statement that no merger negotiations were underway, company knew of no reason for stock's activity, and management was unaware of present or
pending corporate development that would result in abnormally heavy trading activity rendered omission of fact that there were ongoing merger negotiations
material by virtue of statement denying existence of such discussions, because disclosure of omitted fact would have been viewed by reasonable investor as having
significantly altered total mix of information made available. Levinson v Basic, Inc. (1986, CA6 Ohio) 786 F2d 741, CCH Fed Secur L Rep P 92529, 5 FR Serv 3d 118,
vacated on other grounds, remanded (1988) 485 US 224, 99 L Ed 2d 194, 108 S Ct 978, CCH Fed Secur L Rep P 93645, 24 Fed Rules Evid Serv 961, 10 FR Serv 3d
308.
Where insider, who was chairman and CEO of company, met with officers of two other companies to discuss possible acquisition and merger and where, after these
meetings, insider placed calls to family members who purchased stock in these companies, district court erroneously granted insider's motion for judgment as matter
of law in suit by Securities and Exchange Commission (SEC) alleging violations of § 10(b) and § 14e of Securities and Exchange Act, 15 USCS §§ 78j(b), 78n(e) and
Rules 10b-5 and 14e-3, 17 C.F.R. §§ 240.10b, 240.14e-3; there was sufficient evidence that tipped information was material and nonpublic, as required by Rule
10b-5, where (1) preliminary merger talks could be material well before any agreement was reached, (2) reasonable investor would view meetings about possible
acquisition at specific price as altering total mix of available information, and (3) material was nonpublic because parties involved in possible acquisition testified that
these talks were confidential and meetings about possible merger involved confidentiality agreement. United States SEC v Ginsburg (2004, CA11 Fla) 362 F3d 1292,
CCH Fed Secur L Rep P 92710, 17 FLW Fed C 311.
Duty to disclose merger plan arises only when there is agreement in principle to merge, and fact that defendants controlled both acquiring company and target
company is not sufficient to show agreement in principle; plaintiffs must do more than merely allege that defendants had plan to merge to meet materiality
requirement. Nutis v Penn Merchandising Corp. (1985, ED Pa) 615 F Supp 486, CCH Fed Secur L Rep P 92508.
Corporate officers' public statements were not materially misleading under 15 USCS § 78j(b), and S.E.C. Rule 10b-5 because officers had no duty disclose possibility
that corporation would merge with another corporation, and statements they made occurred prior to when factual and legal predicates for merger were in place.
Levie v Sears Roebuck & Co. (2009, ND Ill) 676 F Supp 2d 680.
69.--New products
Securities fraud complaint against computer manufacturer is dismissed where manufacturer allegedly misrepresented that buyers of new computer were making
larger orders than expected, because it was generally known in industry that computer orders were not firm, and thus this statement was not materially misleading,
and no showing of scienter was made as to this statement. In re Apple Computer Sec. Litigation (1987, ND Cal) 690 F Supp 872, CCH Fed Secur L Rep P 93678, affd
in part and revd in part, remanded (1989, CA9 Cal) 886 F2d 1109, CCH Fed Secur L Rep P 94714, cert den (1990) 496 US 943, 110 L Ed 2d 676, 110 S Ct 3229.
70.--Sale of corporation
For publicly traded stock, shareholders' right to know outweighs need to protect them from potentially misleading disclosures of pending negotiations only when
negotiating parties have reached agreement on price and structure; "price and structure" threshold, however, does not preclude finding of materiality where
corporation is closely held because reasons for that standard of materiality disappear when there is no public market for shareholder's stock; therefore, minority
shareholders have right to know of developments in negotiations for sale of corporation and there is no offsetting need to protect other shareholders from potentially
misleading disclosures. Michaels v Michaels (1985, CA7 Ill) 767 F2d 1185, 19 Fed Rules Evid Serv 176, amd (1985, CA7 Ill) 767 F2d 1185, CCH Fed Secur L Rep P
92203, 19 Fed Rules Evid Serv 176 and cert den (1986) 474 US 1057, 88 L Ed 2d 774, 106 S Ct 797.
71.--Tender offers
Under 15 USCS §§ 78j, 78n(e), appraisals of assets of corporation that is target of tender offer are not immaterial as matter of law; courts should ascertain duty to
disclose asset valuations and other soft information on case by case basis, by weighing potential aid information will give shareholder against potential harm, such as
undue reliance, if information is released with proper cautionary note; factors court must consider in making this determination are facts upon which information is
based, qualifications of those who prepared or compiled it, purpose for which information was originally compiled, relevance of information to stockholders'
impending decision, degree of subjectivity or bias reflected in preparation of information, degree to which information is unique, and availability to investor of other
more reliable sources of information. Flynn v Bass Bros. Enters. (1984, CA3 Pa) 744 F2d 978, CCH Fed Secur L Rep P 91674.
District court properly dismissed under Fed. R. Civ. P. 12(b)(6) investor's action alleging violations of §§ 10(b) and 20(a) of Securities Exchange Act of 1934, 15
USCS §§ 78j(b), 78t(a) by appellees, officers and directors of bankrupt telecommunications corporation, which arose from corporation's failure to complete tender
offer to repurchase certain previously issued notes; there was no liability under 15 USCS § 78j(b) because there was no actionable misstatement with respect to
corporation's Securities and Exchange Commission filings and no strong inference of scienter; because there was no underlying violation of § 78j(b), there was also
no liability under 15 USCS § 78t(a). R2 Invs. LDC v Phillips (2005, CA5 Tex) 401 F3d 638, CCH Fed Secur L Rep P 93127.
Minority shareholders' claims concerning tender offer for minority shares under 15 USCS § 77k and 15 USCS §§ 78j(b) and 78n(e) failed, where they failed to meet
pleading requirements of 15 USCS § 78u-4 and Fed. R. Civ. P. 9(b), and in particular, failed to allege scienter with particularity, or show why already public
information had to be disclosed. Rubke v Capitol Bancorp, Ltd. (2009, CA9 Cal) 551 F3d 1156, CCH Fed Secur L Rep P 95042.
Misrepresentation or omission with respect to tender offer is proscribed by § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 where it is
such that reasonable man would consider it important to his decision to tender or not to tender his shares, or where it might have been considered important to that
determination. Kaufmann v Lawrence (1974, SD NY) 386 F Supp 12, CCH Fed Secur L Rep P 94908, affd (1975, CA2 NY) 514 F2d 283.
72. Question of fact
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Statement or omission is material if there is substantial likelihood that reasonable shareholder would consider it important in determining his or her course of
conduct; materiality presents mixed question of fact and law which requires determination of inferences of reasonable shareholder. McGrath v Zenith Radio Corp.
(1981, CA7 Ill) 651 F2d 458, CCH Fed Secur L Rep P 97841, cert den (1981) 454 US 835, 70 L Ed 2d 114, 102 S Ct 136.
Question of materiality of omitted information, although generally more factual question, is to be resolved as matter of law when information is so obviously
important (or unimportant) to investor, that reasonable minds cannot differ on question of materiality. Connett v Justus Enters. (1995, CA10 Kan) 68 F3d 382, CCH
Fed Secur L Rep P 98919, cert den (1996) 516 US 1147, 134 L Ed 2d 98, 116 S Ct 1018.
Materiality of omission is fact-specific determination that should ordinarily be assessed by jury; only if materiality of statement is so obvious that reasonable minds
could not differ, is this issue appropriately resolved as matter of law. Anderson v Clow (In re Stac Elecs. Sec. Litig.) (1996, CA9 Cal) 89 F3d 1399, 96 CDOS 5268, 96
Daily Journal DAR 8535, CCH Fed Secur L Rep P 99272, 35 FR Serv 3d 604, cert den (1997) 520 US 1103, 137 L Ed 2d 308, 117 S Ct 1105 and (criticized in Hockey
v Medhekar (1998, ND Cal) 30 F Supp 2d 1209, CCH Fed Secur L Rep P 90290) and (criticized in Morse v McWhorter (2000, MD Tenn) 200 F Supp 2d 853) and
(criticized in In re Royal Ahold N.V. Sec. & ERISA Litig. (2004, DC Md) 351 F Supp 2d 334, CCH Fed Secur L Rep P 93061).
In civil action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), based on material omissions, finder of fact must determine whether prospectus, or other
written material, fairly represented facts claimed to be omitted and if not, whether omitted facts were material. Ingenito v Bermec Corp. (1974, SD NY) 376 F Supp
Materiality is mixed question of fact and law which can be decided as matter of law only if reasonable minds cannot differ as to whether omitted or misrepresented
facts are significant to reasonable purchaser of securities. Walsh v Butcher & Sherrerd (1978, ED Pa) 452 F Supp 80, CCH Fed Secur L Rep P 96495.
Compromise between competing state banking groups allowing groups to finally support 18th General Assembly attempt to pass cross-county banking legislation is
"material fact" under 15 USCS § 78j(b) in offer and sale of state bank stock. Powell v American Bank & Trust Co. (1986, ND Ind) 640 F Supp 1568, CCH Fed Secur L
Rep P 92916.
Shareholders have created question of fact as to materiality of information they say was omitted from prospectus concerning merger in violation of 15 USCS §
78j(b), where information cited related to (1) selection of "independent" special committee to select investment banker and law firm to assist with merger, (2)
selection of "independent" investment banker and law firm, (3) prices of stock of 5 subsidiaries to be taken over, (4) nature of "cap" placed on value of all target
companies, and (5) $ 90 million tax benefit corporate controllers would receive by way of merger, because reasonable shareholder might well have considered this
information significant. TBK Partners v Shaw (1988, WD Ky) 689 F Supp 693, CCH Fed Secur L Rep P 93641.
When stock is traded in efficient market, materiality of disclosed information may be measured post hoc by looking to movement of company's stock price in period
immediately following disclosure, and, if company's disclosure of information has no effect on stock prices, it follows that information disclosed was immaterial as
matter of law for purposes of antitrust action under 15 USCS § 78j(b). Grimes v Navigant Consulting, Inc. (2002, ND Ill) 185 F Supp 2d 906.
Materiality is generally mixed question of law and fact and only if no reasonable juror could determine that statement or omission would have assumed actual
significance in deliberations of reasonable investor should materiality be determined as matter of law; allegation of $ 20 million overstatement of revenue hardly fell
into that category, especially coupled with allegation that entire body of company's financial reports, both audited and unaudited, were also inflated and, therefore,
plaintiffs had sufficiently alleged that outside auditor made material misstatements regarding swaps in company's audited financial statements. In re Global Crossing,
Ltd. Sec. Litig. (2004, SD NY) 322 F Supp 2d 319, CCH Fed Secur L Rep P 92717.
Given factual disputes regarding information that was communicated at board meeting, court could not find that information board learned at that meeting would
have been so obviously important to investor, that reasonable minds could not differ on question of materiality; determination of issue on summary judgment was
therefore inappropriate, especially given U.S. Supreme Court's caution that assessing materiality under § 10(b) and SEC Rule 10b-5 is fact-intensive inquiry
peculiarly suited for trier of fact. United States SEC v Talbot (2006, CD Cal) 430 F Supp 2d 1029.
73. Effect of other party's knowledge
Sale to state official having authority to purchase notes from corporation who was fully aware of terms of sale did not constitute fraud under § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) even though such sale may have been unlawful under state law; there is no duty to disclose information to one who reasonably
should already be aware of it. SEC v Coffey (1974, CA6 Ohio) 493 F2d 1304, CCH Fed Secur L Rep P 94464, cert den (1975) 420 US 908, 42 L Ed 2d 837, 95 S Ct
826 and (criticized in SEC v First Jersey Sec., Inc. (1996, CA2 NY) 101 F3d 1450, CCH Fed Secur L Rep P 99367) and (criticized in SEC v Buntrock (2004, ND Ill) CCH
Fed Secur L Rep P 92833).
Cancellation of proposed public issue of corporation's securities might be material, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), but
where plaintiff was aware of cancellation substantially before entering into transaction, cancellation could not be material fact regarding decision to enter into
transaction. Vohs v Dickson (1974, CA5 Ga) 495 F2d 607, CCH Fed Secur L Rep P 94589.
Party to securities transaction who has reasonable belief that other party already has access to facts is excused from new disclosure which reasonably would appear
to be repetitive; purchasers of securities did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) in failing to disclose that they were already securities
holders of issuing corporation where that information was readily available to corporation and purchasers had right to assume that volume of their purchases were
known to corporation and its principal executives. Frigitemp Corp. v Financial Dynamics Fund, Inc. (1975, CA2 NY) 524 F2d 275, CCH Fed Secur L Rep P 95323.
If plaintiff has actual knowledge of material facts, defendant's failure to disclose that information will not create cause of action under § 10(b) of Securities Exchange
Act (15 USCS § 78j(b)) and SEC Rule 10b-5 since there would be lack of materiality. Straub v Vaisman & Co. (1976, CA3 NJ) 540 F2d 591, CCH Fed Secur L Rep P
95623.
There was no fraud where there was no improper influence or control over corporation's board of directors by broker-dealer which purchased debentures, and where
board had full knowledge of all material facts which plaintiffs alleged caused debentures to be worth more than purchase price. Lewis v Spiral Metal Co. (1970, SD
In order to recover in private action under antifraud provisions of Securities Exchange Act, it is necessary for plaintiff to show not only false representation or
omission of information, but that what was misrepresented or withheld was material, and where allegation of omission of information relates to price at which
corporation has agreed to sell securities to third person, which third person has in turn agreed to sell portion of such securities to plaintiff, such omission is not
material where plaintiff in fact was aware of price agreed upon between corporation and third person and was willing to pay higher price per share based upon his
own investment judgment as to worth of corporation, which judgment was based on full information untainted by any fraudulent misrepresentation or omission.
Branham v Material Systems Corp. (1973, SD Fla) 354 F Supp 1048, CCH Fed Secur L Rep P 93988.
It was not omission of material fact, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, for person offering to purchase
stock to fail to disclose to offerees that purpose of attempted purchases was to reduce number of potential class members and thereby defeat class action against
offeror where each offeree had been furnished with copy of plaintiffs' complaint and each was made aware of fact that action was class action and that he or she was
potential plaintiff. Nesenoff v Muten (1974, ED NY) 67 FRD 500, CCH Fed Secur L Rep P 94961, 19 FR Serv 2d 1099 (criticized in Fraley v Williams Ford Tractor &
Equip. Co. (1999) 339 Ark 322, 5 SW3d 423).
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In nondisclosure action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), damaging information, plainly material in ordinary circumstances, may well
become immaterial if person alleging fraud subsequently becomes aware of even more negative facts and yet goes ahead with transaction. Fischer v New York Stock
Exchange (1976, DC NY) 408 F Supp 745, CCH Fed Secur L Rep P 95416.
Duty to disclose inside information to purchaser of corporate stock, was not violated by former president and principal shareholder of corporation who sold
substantially all outstanding stock of corporation without disclosing to purchaser that corporation was in violation of certain marketing agreements where seller
refused to make representations concerning compliance with agreements, purchaser had actual knowledge of situation, purchaser accepted situation as business
risk, and information was thus not material to purchaser's investment decision. Rorer International Cosmetics, Ltd. v Halpern (1980, ED Pa) 502 F Supp 137, CCH
Stockholders' securities fraud claim is dismissed, where stockholders claimed that company's true statements about past success, combined with company's
optimistic statements about future prospects, combined to produce misleading impression of company's real financial position and prospects, because statements
made by company about past performance were true, and general predictions of optimism in connection with true statements about past performance are not
material, and did not alter the general mix of information available about company. Cione v Gorr (1994, ND Ohio) 843 F Supp 1199, CCH Fed Secur L Rep P 98056.
In group voting context involving securities fraud, where materiality of omission is at issue, individual reliance is irrelevant where plaintiff was damaged only if
significant numbers of shareholders might have acted differently if they had known truth; it was reasonable to assume that plaintiff policyholders and proposed class
members may have voted "no" on issue of demutualizing defendant insurance company had they known that as participating shareholders they would, for example,
only receive approximately 54 cents on dollar in exchange for their policies and would forgo future dividend rights; insurance company might then have been
motivated to offer more favorable terms in order to secure policyholders' votes in favor of demutualization. In re MetLife Demutualization Litig. (2005, ED NY) 229
FRD 369, 62 FR Serv 3d 462.
74. Effect of availability of information
There was no violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 where director of bank pledged bank stock for loan, and assignee
of pledgee sold stock some 14 months after maturity of loan, after advising borrower of intent to do so, or without specifically advising borrower that financial
position of bank had improved due to payment of large sum to bank by surety of bank officer who had caused bad loans to be made, where borrower had been sent
financial statement of bank which showed such payment. Molever v Levenson (1976, CA4 W Va) 539 F2d 996, CCH Fed Secur L Rep P 95538, 21 FR Serv 2d 1145,
Registered securities exchange had no obligation to disclose to principals of member firm which contemplated merger with another member firm that other member
firm had cured net capital deficiencies by liquidating certain "long" security count differences not traced to specific errors where principals had made extensive
investigation into position and status of other firm, and exchange was entitled to conclude that principals had fully informed themselves concerning all facts relating
to firm and had decided to go forward with merger, fully advised of those facts. Hirsch v Du Pont (1977, CA2 NY) 553 F2d 750, CCH Fed Secur L Rep P 96011.
Where securities analyst, employed by pension fund, was in best position to discover issuer's financial instability, in that issuer's customer contacts and regularly
prepared account control documents were available for his inspection, fund could not recover for alleged violations of fraud provisions of § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) based upon adviser's short conversation with bank official which reasonably could have been interpreted by bank official as mere
credit check and not request for investment information. United States Steel & Carnegie Pension Fund, Inc. v Orenstein (1977, CA2 NY) 557 F2d 343, CCH Fed Secur
L Rep P 96088.
Sophisticated purchasers of 2 percent interest in oil and gas well could not maintain action against sellers under § 10(b) of Securities Exchange Act of 1934 (15 USCS
§ 78j(b)) and SEC Rule 10b-5, based on alleged oral misrepresentations as to production which could be expected from well to extent that matters alleged to have
been orally misrepresented were accurately revealed in written materials given by sellers to purchasers, since only material misstatements permit recovery under
securities laws, and to be material statement must significantly affect total mix of information available to investor, and seller who fully discloses all material
information in writing should be secure in knowledge that it has done what law requires; neither could such action be based on failure to reveal state limitations on
production since securities laws require disclosure of information that is not otherwise in public domain and sellers need not disclose statutes at large of states in
which they operate; however, sellers' oral statement that well would produce for 30 years could be basis for claim where mistaken interpretation which reasonably
sophisticated investor could reasonably have put on statement might not have been corrected by written materials. Acme Propane, Inc. v Tenexco, Inc. (1988, CA7
Ill) 844 F2d 1317, CCH Fed Secur L Rep P 93713, 100 OGR 472.
One party to securities transaction cannot maintain action against other party for violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) on basis of other
party's failure to disclose material information where party bringing action had or had access to essentially same material information; other party's superior
expertise and understanding of field in which investment was made are not sufficient to create liability. McGraw v Matthaei (1972, ED Mich) 388 F Supp 84.
Information equally accessible to both parties, or which other party in fact knows or should have known, need not be disclosed under 15 USCS § 78j(b). Rochez
Bros., Inc. v Rhoades (1973, WD Pa) 353 F Supp 795, CCH Fed Secur L Rep P 93932, vacated on other grounds (1973, CA3 Pa) 491 F2d 402, CCH Fed Secur L Rep P
Defendant, who induced exchange of stock through misrepresentations as to value of stock owned by him and market therefor, violated antifraud provisions of 15
USCS § 78j(b) notwithstanding that other party to transaction had access to financial information relating to issuer of defendant's stock since, had misstatements not
been made, other party would not have entered into transaction. Marshall Associates, Inc. v Lite--Tronics, Inc. (1974, WD Pa) 372 F Supp 905.
Tender offeror did not violate fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by failing to include information in tender offer, and in
prospectus relating to securities proposed to be issued in exchange for securities sought, information which otherwise was available to offerees; it was not necessary
for offeror to point out potential cash flow problems when existence of those possible problems was brought to attention of offerees by management of target
corporation through its communications in opposition to offer; it was further unnecessary for offeror to point out potential obstacles to acquiring effective control of
corporation, even after obtaining majority stockholdings, since stockholders presumably were aware of their company's cumulative voting requirement and staggered
board of directors upon which such assertions of management limitation were based. Spielman v General Host Corp. (1975, SD NY) 402 F Supp 190, CCH Fed Secur
L Rep P 95267, affd (1976, CA2 NY) 538 F2d 39, CCH Fed Secur L Rep P 95656.
Civil claim for violation of SEC Rule 10b-5 cannot be based on failure to disclose facts which were publicly available or which plaintiff had access to from other
sources; however, retired shareholders and heirs of retired shareholders were not put on notice of fact that brokerage corporation was going public merely by having
been aware of general possibility of that eventuality and where they clearly did not know of viable nature of such offering. St. Louis Union Trust Co. v Merrill Lynch,
Pierce, Fenner & Smith, Inc. (1976, ED Mo) 412 F Supp 45, CCH Fed Secur L Rep P 95554, revd on other grounds (1977, CA8 Mo) 562 F2d 1040, CCH Fed Secur L
Fact that offering circular stated that money invested was to be used only for purposes of paying invoices, bills, and statements for expenses incurred in oil and gas
exploration program, where part of money so invested was in fact advanced to corporate operator of program, was not misstatement of material fact within meaning
of § 10(b) Rule 10b-5, where fact that such advances were made was adequately disclosed in financial statements. SEC v Geotek (1976, ND Cal) 426 F Supp 715,
CCH Fed Secur L Rep P 95756, affd (1979, CA9 Cal) 590 F2d 785, CCH Fed Secur L Rep P 96766.
Public disclosure of material information relieves duty to disclose under 15 USCS § 78j if party should reasonably have been aware of facts as result of disclosure;
out-of-state resident selling in-state bank stock would not reasonably have been aware of impending changes in state banking laws that could substantially change
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value of stock where changes were only announced once in in-state newspaper. Powell v American Bank & Trust Co. (1986, ND Ind) 640 F Supp 1568, CCH Fed Secur
L Rep P 92916.
Purchasers of working interests in oil and gas wells failed to state 10b-5 claim for material misrepresentation, where even if defendants made oral misrepresentations
with respect to actual historical production levels of 2 wells, documents attached to purchasers' complaint reveal that raw data reflecting actual production histories
was given to purchasers prior to transaction. Acme Propane, Inc. v Tenexco, Inc. (1987, ND Ill) 666 F Supp 143, CCH Fed Secur L Rep P 93398, 95 OGR 48, revd on
other grounds (1988, CA7 Ill) 844 F2d 1317, CCH Fed Secur L Rep P 93713, 100 OGR 472.
Investor's allegation of unauthorized trading in violation of Rule 10b-5 survives defendant broker's motion to dismiss where investor alleges material omission or
nondisclosure by stating that account he opened with broker was nondiscretionary and that defendant traded securities for account without first obtaining requisite
authority, since even if investor's receipt of regular account documentation were to cure prior unauthorized trade, investor claims that broker himself acknowledged
investor's inability to decipher account statements. Cruse v Equitable Sec. of New York, Inc. (1987, SD NY) 678 F Supp 1023, CCH Fed Secur L Rep P 93290.
Although statements in press releases misrepresented that corporation successfully integrated acquired companies, misrepresentations were not material in view of
corporation's series of statements that sufficiently alerted market that corporation might not be able to integrate entities that it had already acquired and that future
efforts at integration would pose challenges. Keeney v Larkin (2003, DC Md) 306 F Supp 2d 522, affd (2004, CA4 Md) 102 Fed Appx 787, CCH Fed Secur L Rep P
92868.
Even if letter of FDA approving publicly traded pharmaceutical company's medical device contradicted company's press release, FDA approval was public information;
to adequately plead scienter, contradictory information must be non-public. In re Geopharma, Inc. Sec. Litig. (2005, SD NY) 399 F Supp 2d 432, CCH Fed Secur L
Rep 93583.
75. Effect of investment sophistication of other party
Securities broker is not justified in making unwarranted, overly optimistic statements with respect to securities being sold merely because customer may be
sophisticated and knowledgeable in area of securities transactions. Hanly v Securities & Exchange Com. (1969, CA2) 415 F2d 589, CCH Fed Secur L Rep P 92453.
Withholding of material information by seller of securities from purchaser violates § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, even
though purchaser is sophisticated in securities matters; like all others, sophisticated investors are entitled to truth. Stier v Smith (1973, CA5 Tex) 473 F2d 1205, CCH
Fed Secur L Rep P 93768; Barthe v Rizzo (1974, SD NY) 384 F Supp 1063, CCH Fed Secur L Rep P 94741.
Fraudulent statement regarding prospective advances in price of security being sold violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), it being
immaterial that buyer was knowledgeable investor. SEC v Dolnick (1974, CA7 Ill) 501 F2d 1279, CCH Fed Secur L Rep P 94762.
In SEC Rule 10b-5 actions, materiality of omitted fact may be tested by determining whether reasonable investor might have considered it important in making his
investment decision; but whether reasonable investor might consider fact important to his investment decision may depend in part upon his business acumen,
reasonable investor of substantial business acumen presumably being more inclined diligently to test reliability and completeness of representations made concerning
proposed transaction before considering them important than would one of less acumen. Taylor v Smith, Barney & Co. (1973, DC Utah) 358 F Supp 892, CCH Fed
USCS § 78j(b) notwithstanding that other party to transaction was sophisticated investor since, had misstatements not been made, other party would not have
entered into transaction. Marshall Associates, Inc. v Lite--Tronics, Inc. (1974, WD Pa) 372 F Supp 905.
In determining whether plaintiff relied upon alleged misrepresentations or nondisclosures of defendant, so as to give rise to cause of action under SEC Rule 10b-5,
plaintiff's business sophistication, expertise and acumen must be considered; therefore, plaintiff's investment history is clearly relevant since recovery may be denied
to those investors who, because of their business sophistication or acumen, could reasonably be expected to exercise higher degree of care and investigation in their
dealings. Zucker v Sable (1975, SD NY) 72 FRD 1, 22 FR Serv 2d 712.
In civil action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, test of materiality requires that information be
objectively important to reasonable person, but in order to recover plaintiff must satisfy duty of due care which mandates that he assess information as would person
similarly possessed of his degree of business expertise; plaintiff's duty to investigate facts surrounding securities transaction which attaches to sophisticated investor
is greater than corresponding duty of novice; sophisticated investors who possess either special expertise or resources available to draw upon may be deemed to
have knowledge of certain investments and their attendant risks, whether in fact they do or do not and irrespective of whether material information was actually
disclosed; likewise, persons with vast business experience are similarly charged with high degree of knowledge. McLean v Alexander (1976, DC Del) 420 F Supp
Cause of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 cannot be created out of plaintiff's own cunning; where essence of
claim appears to be that because plaintiffs were sophisticated investors, they assumed that defendant's perfectly truthful statements were designed to convey
meaning diametrically opposite to their apparent meaning, cause of action is not stated. Credit & Finance Corp. v Warner & Swasey Co. (1980, SD NY) 486 F Supp
101, CCH Fed Secur L Rep P 97337, revd on other grounds (1981, CA2 NY) 638 F2d 563, CCH Fed Secur L Rep P 97826.
Test of materiality, whether reasonable man would attach importance to particular facts in controversy, is objective but there is interplay between materiality and
reliance which tends to blur distinction between them under some circumstances; there is necessity for clearly enunciated objective standard when suit affects large
number of shareholders who may have had no direct or continuing contact with corporation, but where single purchaser is involved who is well known to seller and
who actively conceals facts, distinction between objective materiality and subjective reliance becomes obscured. Thomas v Duralite Co. (1975, CA3 NJ) 524 F2d 577,
In action for violation of SEC Rule 10b-5, positive proof of reliance is not prerequisite to recovery, since all that is necessary is that facts withheld are material, in
sense that reasonable investor might have considered them important in making of this decision, but this presumption of reliance in nondisclosure cases is not
conclusive, and if defendant can prove that plaintiff did not rely, that is, that plaintiff's decision would not have been affected even if defendant had disclosed omitted
facts, then plaintiff's recovery is barred. Dwoskin v Rollins, Inc. (1981, CA5 Ga) 634 F2d 285, CCH Fed Secur L Rep P 97824.
Reliance was established when investors showed they were induced to act differently than they otherwise would have in making investment decision, and reliance
could be inferred from materiality where fact that prospectus did not accurately disclose corporation's right to call bonds was material because corporation would
have been forced to offer bonds at lower price or at higher yield had that information been disclosed in prospectus. Harris v Union Electric Co. (1986, CA8 Mo) 787
F2d 355, CCH Fed Secur L Rep P 92535, cert den (1986) 479 US 823, 93 L Ed 2d 45, 107 S Ct 94.
Failure by sellers of unregistered securities to disclose that money invested was not invested in corporations designated by investor and therefore not used by
corporations to develop new products was sufficient to raise rebuttable presumption of investor's reliance where omissions were material. Barnes v Resource
Royalties, Inc. (1986, CA8 Mo) 795 F2d 1359, CCH Fed Secur L Rep P 92808, cert den (1990) 493 US 1077, 107 L Ed 2d 1035, 110 S Ct 1129.
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Open-market purchasers claiming they were damaged by fraud on market may substitute for proof of "transaction causation", that is, direct reliance upon specific
misrepresentations or omissions in making purchase, proof that alleged nondisclosure was material. Koenig v Smith (1980, ED NY) 88 FRD 604, CCH Fed Secur L Rep
P 97965, 31 FR Serv 2d 80.
Conclusion that proxy statement sent to nonvoting stockholders of professional football team was no model of candor but was not fraudulent is affirmed upon
reconsideration, where statement omitted original issue price of voting stock, increased local media income achieved through negotiation, and fact that new
controlling stockholder planned to use corporate funds to support personal loans, because none of these omissions were legally "material" to informed judgment of
nonvoting stockholder regarding adequacy of $ 15 per share price proposed. Pavlidis v New England Patriots Football Club, Inc. (1986, DC Mass) 675 F Supp 688,
On company's and other defendants' motion to dismiss complaints, court could not conclude that written materials provided by company and other defendants
expressly contradicted the oral misrepresentations allegedly made to complaining corporations and class members such that written documents would be sufficient to
preclude corporations and class members from alleging reliance. Tracinda Corp. v DaimlerChrysler AG (In re DaimlerChrysler AG Sec. Litig.) (2002, DC Del) 197 F
information technology system made it impossible for company to be well positioned, because analysts covering bank repeatedly and expressly relied on bank's
reassurances to justify their continued positive outlook, bank's statements, or lack thereof, regarding its technology problems were material within meaning of §
10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5. S. Ferry LP # 2 v Killinger (2005, WD Wash) 399 F Supp 2d
1121.
77. Miscellaneous
Since leveraged buyout will normally have same effect as merger (death of target company's independent public form), standards for determining material fact in
merger cases are applicable to leveraged buyouts as well. Glazer v Formica Corp. (1992, CA2 NY) 964 F2d 149, CCH Fed Secur L Rep P 96804.
District court's judgment that underwriter's official statement regarding industrial development bonds did not contain any misrepresentations could be upheld on
appeal if there were no misrepresentations or if misrepresentations and omissions complained of were not material; even admitted misrepresentation is actionable
only if it is material. Shawmut Bank, N.A. v Kress Assocs. (1994, CA9 Cal) 33 F3d 1477, 94 CDOS 6903, 94 Daily Journal DAR 12687, CCH Fed Secur L Rep P 98433.
"Soft," forward-looking information can constitute material information within meaning of Rule 10b-5, and consequently, can give rise to insider trading liability.
United States v Smith (1998, CA9 Cal) 155 F3d 1051, 98 CDOS 6590, 98 Daily Journal DAR 9127, CCH Fed Secur L Rep P 90274, cert den (1999) 525 US 1071, 142
L Ed 2d 664, 119 S Ct 804 and (superseded by statute as stated in Konop v Hawaiian Airlines, Inc. (2001, CA9 Cal) 236 F3d 1035, 2001 CDOS 199, 2001 Daily
Journal DAR 311, 166 BNA LRRM 2195, 142 CCH LC P 10872).
Shareholders sufficiently pleaded materiality of corporation's misrepresentations regarding its maintenance issues, Federal Aviation Administration (FAA)
investigation, and FAA settlement agreement; reasonable investor would have found significant information regarding company's deferred maintenance costs, unsafe
maintenance practices, and possible sanction, and would have considered potential effects of each of these facts on overall economic health of company as
significantly altering "total mix" of information made available. No. 84 Employer-Teamster Joint Council Pension Trust Fund v Am. West Holding Corp. (2003, CA9
Ariz) 320 F3d 920, 2003 CDOS 1328, 2003 Daily Journal DAR 1721, CCH Fed Secur L Rep P 92278, reh den, reh, en banc, den, request den (2003, CA9 Ariz) 2003
US App LEXIS 10783 and (criticized in In re Seebeyond Techs. Corp. Secs. Litig. (2003, CD Cal) 266 F Supp 2d 1150, CCH Fed Secur L Rep P 92425) and cert den
(2003) 540 US 966, 157 L Ed 2d 311, 124 S Ct 433 and (criticized in In re Nextcard, Inc. Sec. Litig. (2005, ND Cal) 2005 US Dist LEXIS 9234).
District court erred in dismissing 15 USCS § 78j(b) and 17 CFR § 240.10b-5 claims brought by purchaser of stock in corporation where purchaser alleged that
offering memorandum misleadingly implied that corporation had received proceeds of private stock offering; purchaser sufficiently alleged materiality, as bespeaks
caution that doctrine did not apply to statements of historical fact. Livid Holdings Ltd. v Salomon Smith Barney, Inc. (2005, CA9 Wash) 416 F3d 940.
Banking company's failure to inform shareholders of information during negotiation of sale of stock regarding compromise between banking organizations which
would greatly improve passage of cross-county banking legislation constituted "material fact" under 15 USCS § 78j(b) sufficient to withstand motion to dismiss in
shareholders' action. Powell v American Bank & Trust Co. (1986, ND Ind) 640 F Supp 1568, CCH Fed Secur L Rep P 92916.
Alleged misstatements of broker are not "material" under 15 USCS § 78j(b), in action by investors, where broker allegedly told investors (1) "I'm the best in the
business," (2) "I'll make money for you," and (3) they were going to "make good money on new issues," because alleged material misstatements are better
characterized as "puffery." Newman v Rothschild (1986, SD NY) 651 F Supp 160, CCH Fed Secur L Rep P 93035.
Investors fail to state claim for securities fraud under 15 USCS § 78j(b), where complaint alleges failure to disclose company's future performance, because alleged
omissions are immaterial as matter of law; duty to disclose was limited to what was known at time documents were filed, not what was gleaned through hindsight. In
re Craftmatic Sec. Litigation (1989, ED Pa) 703 F Supp 1175, CCH Fed Secur L Rep P 94465, affd in part and revd in part, remanded (1989, CA3 Pa) 890 F2d 628,
For purposes of complaint under 15 USCS § 78j(b) and SEC Rule 10b-5, statements shareholders identified as false or misleading were not, as defendants argued,
type of statements that could have been categorized as statements of corporate optimism upon which reasonable investors would not rely or that would have been
unimportant to reasonable investor; thus, statements would have been material to reasonable investor. In re Sci. Atlanta, Inc. (2002, ND Ga) 239 F Supp 2d 1351,
affd (2004, CA11 Ga) 374 F3d 1015, CCH Fed Secur L Rep P 92846, 17 FLW Fed C 689.
In context of securities fraud action, alleged overstatement of earnings by 5 to 20 percent is not immaterial as matter of law. Klebanow v NUI Corp. (In re NUI Sec.
Litig.) (2004, DC NJ) 314 F Supp 2d 388.
Shareholders adequately pled that failure to make accounting adjustment at earlier date rendered financial statements filed with SEC materially misleading where
they alleged more than general, unspecified allegations of accounting irregularities; shareholders contended that SEC filings were materially misleading because they
failed to account for allegedly required accounting adjustments associated with change in production schedule and set forth in detail facts that they believed required
accounting adjustments, along with amount of revenue by which financial statements were in error. Rosen v Textron, Inc. (2004, DC RI) 321 F Supp 2d 308.
information technology system made it impossible for company to be well positioned, investors pled with sufficient particularity that (1) bank suffered technology
problems affecting its ability to timely process and monitor loans after customers had locked in rates, (2) one integration program was failure and was never
completely rolled out, and (3) bank's failure to integrate its different technology platforms created significant problems, including insufficient and inaccurate reporting
of data critical to its hedging operations. S. Ferry LP # 2 v Killinger (2005, WD Wash) 399 F Supp 2d 1121.
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Where defendant was convicted by jury of securities fraud in violation of Securities Exchange Act, 15 USCS §§ 78j(b) and 78ff, 17 CFR § 240.10b-5 , and 18 USCS §
2, he was entitled to judgment of acquittal because government failed establish that his interpositioning trades, whereby instead of matching pending buy and sell
orders, he repeatedly traded for his firm's proprietary account, buying stock from one customer and selling it to another, and making profit from price difference,
constituted deceptive act since government did not establish customer expectations, and very core of federal securities laws was that there was deception, and if
customers got what they expected, defendant's conduct was neither deceptive nor fraudulent. United States v Finnerty (2007, SD NY) 474 F Supp 2d 530.
Surely investors would consider involvement of officers of company in complex and wide-ranging schemes to inflate company's income to be material even if scheme
had not yielded substantial results. SEC v Collins & Aikman Corp. (2007, SD NY) 524 F Supp 2d 477, CCH Fed Secur L Rep P 94546.
Plaintiffs sufficiently pled materiality by raising substantial likelihood that reasonable investor would not have purchased stock in defendant company upon learning
that, contrary to statements made by defendant individuals in their subscription agreements, they, along with other defendants, had been issued approximately 80
percent of all free trading stock in company for little or no consideration, and this misrepresentation radically altered picture of market for company's stock; thus,
plaintiffs had successfully pled materiality of individuals' misrepresentations in their stock subscription agreements. Armstrong v Am. Pallet Leasing Inc. (2009, ND
Iowa) 678 F Supp 2d 827.
Unpublished: Promoter's anonymous Internet postings regarding company did not all constitute unactionable puffery; although some of postings were vague and
unverifiable, other postings extended beyond mere corporate optimism and suggested that promoter had personal knowledge about company and its plans; because
promoter appeared to be vouching for management, failure to disclose that promoter was being compensated was material omission. SEC v Curshen (2010, CA10
Colo) CCH Fed Secur L Rep P 95718.
D.Fraud in Connection With Purchase or Sale of Securities
1.In General
78. Generally
Provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 are not applicable exclusively to fraudulent acts or activities directed toward
inducing purchase or sale of securities, but they make unlawful any such act or activity performed "in connection with purchase or sale" of security. Superintendent
of Ins. v Bankers Life & Casualty Co. (1971) 404 US 6, 30 L Ed 2d 128, 92 S Ct 165, CCH Fed Secur L Rep P 93262.
Fraudulent use of confidential information falls within prohibition, under § 78j(b), of use of any deceptive device in connection with purchase or sale of securities, in
contravention of Securities and Exchange Commission rules. United States v O'Hagan (1997) 521 US 642, 138 L Ed 2d 724, 117 S Ct 2199, 97 CDOS 4931, 97 Daily
Journal DAR 7991, CCH Fed Secur L Rep P 99482, 1997 Colo J C A R 1354, 11 FLW Fed S 154, on remand, remanded (1998, CA8 Minn) 139 F3d 641, CCH Fed Secur
L Rep P 90178.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) prohibits all fraudulent schemes in connection with purchase or sale of securities, whether artifices
employed involve garden type variety of fraud, or present unique form of deception; novel or atypical methods should not provide immunity from securities laws. A.
T. Brod & Co. v Perlow (1967, CA2 NY) 375 F2d 393, 10 FR Serv 2d 101.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 require that acts complained of be in connection with purchase or sale of security,
and if complainant fails to show that there was purchase or sale of security involved and that such purchase or sale was made in connection with alleged act or acts
of misconduct, there can be no recovery. Raschio v Sinclair (1973, CA9 Or) 486 F2d 1029, CCH Fed Secur L Rep P 94211.
Intent to cause conversion of ownership interests at uncertain future time and through uncertain means did not state claim under federal securities law even though
that intent was held at time purchase or sale of securities occurred where steps planned to effectuate fraud were not integral to purchase and sale of securities in
question and were to occur only well after securities transaction had been completed. Pross v Katz (1986, CA2 NY) 784 F2d 455, CCH Fed Secur L Rep P 92497.
Alleged fraudulent press release was not in connection with purchase or sale of security even though press release allegedly resulted in company's involuntary
bankruptcy under which shares were converted into claim for cash, because alleged misrepresentations had no direct pertinence to securities transaction. Rand v
Anaconda-Ericsson, Inc. (1986, CA2 NY) 794 F2d 843, CCH Fed Secur L Rep P 92827, 1986-1 CCH Trade Cases P 67183, cert den (1986) 479 US 987, 93 L Ed 2d
582, 107 S Ct 579.
Client's nondiscretionary account with stock brokerage firm, in which client made ultimate investment decisions as to account, could not be considered security within
meaning of § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 promulgated thereunder, since it was not investment of money in
common venture premised on reasonable expectation of profits to be derived from entrepreneurial or managerial efforts of others; account was not converted to
"discretionary" one which would be covered by provisions merely because of two isolated and atypical trades without consent of client (who was away and could not
be reached) since fact that firm could and did execute trades on client's account in limited situations did not make account investment contract. Messer v E.F. Hutton
& Co. (1987, CA11 Fla) 833 F2d 909, CCH Fed Secur L Rep P 93545, amd, on reh (1988, CA11 Fla) 847 F2d 673, CCH Fed Secur L Rep P 93813.
Principal concern of 15 USCS § 78j(b) is protection of purchasers and sellers of securities. United States v Bryan (1995, CA4 W Va) 58 F3d 933, CCH Fed Secur L Rep
P 98787 (criticized in United States v Brumley (1996, CA5 Tex) 79 F3d 1430).
In order to make out claim under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), there must be, among other requirements, connection with purchase or
sale of securities. Barnett v Anaconda Co. (1965, SD NY) 238 F Supp 766.
Antifraud provisions of Securities Exchange Act afford protection to purchasers or sellers of securities, but only with respect to transactions relating to purchase or
sale of such securities. Studebaker Corp. v Allied Products Corp. (1966, WD Mich) 256 F Supp 173.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) requires connection with purchase or sale and not merely financial consequence of fraudulent
statement. Norsul Oil & Mining, Ltd. v Texaco, Inc. (1970, SD NY) 309 F Supp 1242, CCH Fed Secur L Rep P 92604.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 do not proscribe all fraudulent stock schemes but only those fraudulent schemes
that are employed in connection with purchase or sale of securities. King v Sharp (1974, ND Tex) 63 FRD 60, CCH Fed Secur L Rep P 94828.
In order for misconduct to be actionable as in violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and SEC Rule 10b-5, it must be in connection with
purchase or sale of security. Independent Investor Protective League v Saunders (1974, DC Pa) 64 FRD 564.
SEC Rule 10b-5 interdicts any act or practice which operates as fraud or deceit upon any person in connection with purchase or sale of security. Karvelas v Sellas
Negligence, breach of contract or breach of stock exchange rule do not establish fraud under 15 USCS § 78j(b). Blanes v Paine Webber Jackson & Curtis, Inc. (1983,
DC Puerto Rico) 593 F Supp 458, revd without op (1985, CA1 Puerto Rico) 767 F2d 904.
Investor failed to state claim against brokerage firm and its agent under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), where investor claims agent induced
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him to invest monies with brokerage firm with alleged unkept promises of conservative investments, since promises were made in connection with agent's efforts to
attract investor's business rather than with any trade in particular security, as required by 15 USCS § 78j(b). Siegel v Tucker, Anthony & R.L. Day, Inc. (1987, SD NY)
Foreign trader's federal securities fraud claims against financial services conglomerate arising out of negotiable certificate of deposit transactions (NCDs) may
proceed, even though claims relating to interest-rate swaps and foreign exchange transactions may not, because NCDs are "securities" for purposes of 15 USCS §
78j(b) while others are not. Lehman Bros. Commer. Corp. v Minmetals Int'l Non-Ferrous Metals Trading Co. (2001, SD NY) 179 F Supp 2d 159.
Purchaser-seller standing requirement (i.e. in connection with purchase or sale of any security requirement) does not apply to SEC-instituted cases. In re Martin
Herer Engelman, et al. (1995) 52 SEC 271.
79. Necessity of causal reliance
Phrase "in connection with the purchase or sale of any security" in § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) means that device employed must be of
sort that would cause reasonable investors to rely thereon and, in connection therewith, so relying, cause them to purchase or sell corporation's securities. SEC v
Texas Gulf Sulphur Co. (1968, CA2 NY) 401 F2d 833, CCH Fed Secur L Rep P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454; Heit
v Weitzen (1968, CA2 NY) 402 F2d 909, CCH Fed Secur L Rep P 92279, 3 ALR Fed 803, cert den (1969) 395 US 903, 23 L Ed 2d 217, 89 S Ct 1740; Gottlieb v
Sandia American Corp. (1971, CA3 Pa) 452 F2d 510, CCH Fed Secur L Rep P 92971, cert den (1971) 404 US 938, 30 L Ed 2d 250, 92 S Ct 274.
Delivery to plaintiffs in 1959 of misleading preliminary engineering report was not fraud as to their 1963 purchase of securities from their own company, evidence
having disclosed that defendant had no ownership in or connection with company nor with plaintiffs exchange of their leaseholds with company in return for stock.
Horwitz v Panhandle Eastern Pipe Line Co. (1971, CA10 Okla) 438 F2d 53, CCH Fed Secur L Rep P 92958, 38 OGR 612.
Misstatement or omission comes within purview of SEC Rule 10b-5, promulgated under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), only if made in
connection with purchase or sale of security; this requirement receives broad reading, and is satisfied by showing nexus between defendant's actions and plaintiff's
purchase or sale; requirement may be expressed in terms of causation, and court may look to whether plaintiff would have been influenced to act differently than he
did act if defendant had disclosed to him undisclosed fact. First Virginia Bankshares v Benson (1977, CA5 Ala) 559 F2d 1307, CCH Fed Secur L Rep P 96189, reh den
(1977, CA5 Ala) 564 F2d 416 and cert den (1978) 435 US 952, 55 L Ed 2d 802, 98 S Ct 1580.
Deception as alleged in claim did not cause loss incurred and therefore did not state violation of federal securities law where vice-presidents sold stocks because of
their frustration at being trapped as minority shareholders in corporation whose majority was systematically undervaluing its holdings, not because of deceptive
financial reports or alleged market freeze. Kademian v Ladish Co. (1986, CA7 Wis) 792 F2d 614, CCH Fed Secur L Rep P 92764.
Where price of stock fell 63 percent within two days after release of negative information, district court erred in concluding that this was not statistically significant
drop in price. Greenberg v Crossroads Sys. (2004, CA5 Tex) 364 F3d 657, CCH Fed Secur L Rep P 92738.
Where plaintiff shareholder did not sell or purchase shares during period of defendant's alleged misrepresentations, deception was not factual cause of plaintiff's
injury and in no way prevented him from selling his shares during period of alleged misrepresentations, and there was no causal connection between alleged
misrepresentations and injury to corporation and its shareholders, defendant's failure to disclose material information did not occur in connection with purchase or
sale of any security. Hirsh v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1970, SD NY) 311 F Supp 1283, CCH Fed Secur L Rep P 92616.
Phrase "in connection with" must be broadly and flexibly construed, and requirement is satisfied whenever device was employed of sort that would cause reasonable
investor to rely thereon and, in connection therewith, cause investor to purchase or sell corporation's securities. Collins v Rukin (1972, DC Mass) 342 F Supp 1282,
Broad antifraud strictures of 15 USCS § 78j(b) and SEC Rule 10b-5 impose liability only for proscribed acts committed in connection with sale or purchase of
security; to establish liability under section, plaintiff must demonstrate causal relationship between his sale or purchase and fraudulent practices of defendant. Du
Pont v Wyly (1973, DC Del) 61 FRD 615, CCH Fed Secur L Rep P 94381, 18 FR Serv 2d 488.
Actions under SEC Rule 10b-5 must be founded in fraud touching securities transaction and must exhibit direct and causal relationship between that fraud and
claimed injury. Young v Seaboard Corp. (1973, DC Utah) 360 F Supp 490, CCH Fed Secur L Rep P 94042.
Purchase or sale requirement of § 10(b) of Securities Exchange Act (15 USCS § 78j(d)) contemplates causal connection between alleged fraud and purchase or sale;
requisite connection allegedly existed in its most conventional form where plaintiff alleged that defendant made material misrepresentations and omissions which
defrauded purchasers and sales of securities of corporation; required nexus between fraudulent conduct and issuance of material misrepresentation to invest in
public under Rule 10b-5 is most precisely and properly defined with reference to concept of proximate cause; to extent that this formulation leads to broader
boundaries of liability than some other definitions of "causation" might, it is mandated by liberality with which requirements of § 10(b) must be construed in
enforcement action. SEC v Penn Cent. Co. (1978, ED Pa) 450 F Supp 908, CCH Fed Secur L Rep P 96461.
Reliance is necessary element of private cause of action under 15 USCS § 78j(b) in Rule 10b-5; element of reliance requires proof that misrepresentation actually
induced plaintiff to act differently than he would have acted in his investment decision. Schick v Steiger (1984, ED Mich) 583 F Supp 841.
Court will reject argument that, as matter of law, plaintiffs could not have relied on representation that transaction involved "no risk" because every transaction
involves some risk, where plaintiffs, as unsophisticated investors, could reasonably be unaware of details and risks of specialized investment transaction. Nick v
Shearson/American Express, Inc. (1984, DC Minn) 612 F Supp 15, CCH Fed Secur L Rep P 91926.
Investors do not properly plead reliance on alleged affirmative misrepresentations of broker under 15 USCS § 78j(b), where complaint contains no allegations that
investors believed or relied upon misrepresentations at issue. Newman v Rothschild (1986, SD NY) 651 F Supp 160, CCH Fed Secur L Rep P 93035.
In granting in part and denying in part motion to dismiss claims for securities violations pursuant to § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act filed by
defendant company, its former executive, and auditors, court held that plaintiffs had pled direct reliance adequately even if, as defendants had argued, plaintiffs had
not been entitled to fraud on market presumption of reliance; plaintiffs were not required by particularity requirements of Fed. R. Civ. P. 9 to link particular
misrepresentations with particular trades in their allegations of direct reliance because it would impose additional burdens without significantly improving qualify of
notice to defendants and without affording much added protection from reputation-endangering and extortionate frivolous suits. Argent Classic Convertible Arbitrage
Fund L.P. v Rite Aid Corp. (2004, ED Pa) 315 F Supp 2d 666, CCH Fed Secur L Rep P 92818.
Unpublished: Defendant individuals were entitled to summary judgment in securities fraud class action under §§ 11 and 12(a)(2) of Securities Act of 1933, § 10(b) of
Securities Exchange Act of 1934 and Rule 10b-5 because record contained inadequate evidence of loss causation; court held that loss causation required disclosure.
McKowan Lowe & Co. v Jasmine, Ltd. (2005, DC NJ) 2005 US Dist LEXIS 32164.
80.--In "market fraud" cases
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Class plaintiffs, purchasers of defendant's securities, have standing to sue under SEC Rule 10(b), charging defendants with disseminating misleading reports to
inflate price of securities, notwithstanding that purchasers showed no direct reliance on reports, where, under "fraud on the marketplace" theory, materiality of
misrepresentation and broad scale of fraud on open marketplace were such as to inflate stock prices in impersonal stock exchange context and to therefore
sufficiently link causal chain to purchasers and raise presumption of reliance. Lipton v Documation, Inc. (1984, CA11 Fla) 734 F2d 740, CCH Fed Secur L Rep P
91535, reh den (1984, CA11 Fla) 740 F2d 979 and cert den (1985) 469 US 1132, 83 L Ed 2d 807, 105 S Ct 814.
Where selective disclosure of information acts as fraud or deceit upon public when information is utilized in market for trading, personal proceeding based upon such
disclosure is not dependent upon proof of reliance, and only causal nexus required is statutory "connection with purchase or sale of security." SEC v Lum's, Inc.
Investors need not prove actual reliance on deceptive prospectus where they are alleging that prospectus misled market as whole and thereby deceived those
investors who merely relied upon market, and fact that investor did not rely directly on market, but relied on his broker, does not alter allegation that market played
substantial part in deceiving investor as to true value of stock. Klein v A.G. Becker Paribas, Inc. (1986, SD NY) 109 FRD 646, CCH Fed Secur L Rep P 92559.
When permitted, doctrine of "fraud created market," allowing for securities fraud suit under 15 USCS § 78j(b), when there would have been no market absent fraud,
is used by plaintiffs unable to allege fraud on market theory of reliance owing to novelty of security or undeveloped nature of market on which securities at issue are
traded. Arduini/Messina Pshp. v National Med. Fin. Servs. Corp. (1999, SD NY) 74 F Supp 2d 352, CCH Fed Secur L Rep P 90656.
Underwriters' renewed motion for judgment on pleadings on shareholders' 15 USCS § 78j(b) claim of market manipulation was denied where shareholders had
sufficiently alleged loss causation by asserting that underwriters manipulated initial public offering market to drive up price of securities, knowing that they were
causing securities to be overvalued and that stock prices would eventually recede to reflect actual value of securities, thereby injuring innocent investors. In re Initial
Pub. Offering Sec. Litig. (2003, SD NY) 297 F Supp 2d 668.
In market manipulation cases brought pursuant to 15 USCS § 78j(b), it is permissible to infer that artificial inflation of stock prices will inevitably dissipate because
manipulation is discrete act that influences stock price and once manipulation ceases, information available to market is same as before and stock price gradually
returns to its true value. In re Initial Pub. Offering Sec. Litig. (2003, SD NY) 297 F Supp 2d 668.
Record contained several strong indications that market in which defendant corporation's stock traded was efficient: (1) stock was traded on New York Stock
Exchange; (2) stock traded actively at volumes over 1,000,000 shares day throughout class period; and (3) stock was subject of numerous analyst reports and
extensive media coverage; these three facts were sufficient to meet plaintiffs' Fed. R. Civ. P. 23 burden to show that stocks that were in question traded on efficient
market and that plaintiffs were entitled to rely on fraud-on-the-market theory to show reliance; thus, Rule 23(b)(3)'s predominance requirement was met because
common questions of law and fact predominate over any questions affecting only individual members of class. Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust
v Dynegy, Inc. (In re Dynegy, Inc. Secs. Litig.) (2004, SD Tex) 226 FRD 263, CCH Fed Secur L Rep P 93090.
In granting in part and denying in part motion to dismiss claims for securities violations pursuant to §§ 10(b) (15 USCS §§ 78j(b)) of Securities Exchange Act filed by
company, its former executive, and auditors, court held that, for purposes of motion to dismiss, plaintiffs adequately pled that securities were traded in efficient
markets and that plaintiffs were entitled to fraud on market presumption of reliance; court declined to read Zlotnick v. Tie Communications as establishing per se rule
that short sellers--or even arbitrageurs--were not entitled to fraud on market presumption of reliance as matter of law. Argent Classic Convertible Arbitrage Fund L.P.
v Rite Aid Corp. (2004, ED Pa) 315 F Supp 2d 666, CCH Fed Secur L Rep P 92818.
Where plaintiff investors filed fraud on market claim under 15 USCS § 78j(b) against defendant investment bank underwriters and moved for class certification under
Fed. R. Civ. P. 23(b)(3), class certification was granted because sufficient evidence was presented that market for bonds was informationally efficient even if trading
volume was low on some days and nonexistent on others; it compared favorably with efficiency of market under Fixed Income Pricing System, and notes' price
reacted immediately to inventory problem disclosure, and thus, market efficiency was sufficiently shown to invoke rebuttable presumption of reliance under both
"fraud on market" and "fraud created market" theories. AAL High Yield Bond Fund v Ruttenberg (2005, ND Ala) 229 FRD 676.
Because plaintiff investors relied, in part, on non-actionable confirmatory statements, failed to show loss after positive increase, did not adequately show relation
between alleged fraud and alleged corrective disclosures, and did not show that any related disclosure was significant in precipitating stock price drops, and public
data rebutted fraud-on-the-market presumption, their motion to certify class under Fed. R. Civ. P. 23(b)(3) in securities fraud case against defendants, issuer, its
underwriters, its auditor, and its executive officers, under §§ 10(b), 20(a), of Securities Exchange Act of 1934, failed. Ryan v Flowserve Corp. (2007, ND Tex) 245
FRD 560.
Unpublished: Stockholders' 15 USCS § 78j(b) claim against accounting firm was dismissed pursuant to Fed. R. Civ. P. 9(b) and 15 USCS § 78u-4(b) where
stockholders made only general allegation that they relied on integrity of market and did not particularly allege any other fact to establish fraud on market reliance.
In re Van Wagoner Funds, Inc. Sec. Litig. (2004, ND Cal) 382 F Supp 2d 1173.
81.--Timing of fraud
"In connection with" purchase or sale requirement of § 10(b) of Securities Act (15 USCS § 78j(b)) requires using device of sort that would cause reasonable investors
to rely thereon, and thus cause them to purchase or sell corporation's securities; fraud practiced must have been prior to or contemporaneous with sale of securities.
Bosio v Norbay Secur., Inc. (1985, ED NY) 599 F Supp 1563, CCH Fed Secur L Rep P 91940 (criticized in Cosmos Import & Export v Merrill Lynch, Pierce Fenner &
Smith (1997, SD NY) CCH Fed Secur L Rep P 99514).
Investors' summary judgment motion on 15 USCS § 78j securities violations fails because investors cannot demonstrate causal connection between securities
purchase and misrepresentations where alleged misrepresentation occurred about one year after purchase. Hill v Equitable Bank (1987, DC Del) 655 F Supp 631,
CCH Fed Secur L Rep P 93229, affd (1988, CA3 Del) 851 F2d 691, CCH Fed Secur L Rep P 93919, cert den (1989) 488 US 1008, 102 L Ed 2d 782, 109 S Ct 791.
Dismissal of virtually all securities fraud claims against son of bankrupt corporation's founder is warranted, even though junior mortgage note holders complain that
he (1) arranged for loan from his domestic partner that was given priority over holders, and (2) failed to disclose that corporation's debt to holders had reached $ 5
million, because, with one exception, no holders purchased or sold their notes on or after dates upon which son allegedly committed fraud, which consequently could
not have been committed in connection with purchase or sale of notes. Meyer v Dygert (2001, DC Minn) 156 F Supp 2d 1081.
82.--Intervening causes
Alleged nondisclosures and misrepresentations were not in connection with purchase or sale of security, within meaning of § 10(b) of Securities Exchange Act (15
USCS § 78j(b)), where defendants, minority block of stockholders, allegedly deceived plaintiffs, who controlled majority of shares of corporation, in order to elect
board of directors which thereafter elected slate of officers which excluded plaintiffs, thereby requiring plaintiffs to sell their shares to corporation pursuant to
retirement agreement to which all shareholders were parties because even if supposed misrepresentations of defendants did set into motion chain of events which
culminated in securities transaction, retirement agreement operated as independent and intervening cause of transaction and disrupted connection between
challenged conduct on part of defendants and relinquishment of plaintiffs' shares. Ketchum v Green (1977, CA3 Pa) 557 F2d 1022, CCH Fed Secur L Rep P 96107,
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Employment agreement, which contained stock repurchase provisions, operated as independent and intervening cause of forced sale of plaintiff's stock, as result of
which, any alleged fraud or misrepresentations made by corporation when it terminated plaintiff's employment were not in connection with and did not cause sale of
stock by plaintiff and plaintiff did not have any remedy under Rule 10b-5. Hiduchenko v Minneapolis Medical & Diagnostic Center, Ltd. (1979, DC Minn) 467 F Supp
103, 19 BNA FEP Cas 460, 19 CCH EPD P 9192.
To satisfy purchase and sale requirement of 15 USCS § 78j, there must be causal connection between misstatements or omissions and plaintiff's purchases or sale,
and there can be no connection where misstatement occurs after purchase; thus, where bonds were cashed by brokerage firm in accordance with plaintiff's
instructions and proceeds from sale were deposited in her bank account, subsequent allegedly fraudulent activity of broker in convincing plaintiff to turn over
proceeds of prior, nonfraudulent sale, did not relate to specific securities and cannot meet in "in connection with" requirement of § 78j. Crummere v Smith Barney,
Harris Upham & Co. (1985, SD NY) 624 F Supp 751, CCH Fed Secur L Rep P 92361.
83.--Superseding causes
Nondisclosed information is not material to plaintiff in order to establish liability under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), where plaintiff trust
was contractually bound by enforceable stock option to sell shares of deceased shareholder to company at established price as of certain date long before
nondisclosed information existed. Toledo Trust Co. v Nye (1978, CA6 Ohio) 588 F2d 202, CCH Fed Secur L Rep P 96703.
84.--In particular cases
Implied cause of action for fraud in purchase or sale of security under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 does not
create cause of action against securities dealers on part of investor where investor has given full authority to make investment decisions to investment advisor who
in turn conducted securities transactions with dealers and where, although investor did retain authority to increase or decrease investment fund and ultimately to
dismiss advisor, this authority related to its relationship with advisor, not to any particular decision to purchase or sell security, and relationship between investor and
investment advisor was not governed by § 10(b) and Rule 10b-5. Congregation of the Passion, Holy Cross Province v Kidder Peabody & Co. (1986, CA7 Ill) 800 F2d
177, CCH Fed Secur L Rep P 92901 (criticized in In re Turkcell Iletisim Hizmetler, A.S. Sec. Litig. (2002, SD NY) 209 FRD 353).
Complaint alleging claims under §§ 10b and 20(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b) and 78t(a), and 17 CFR § 240.10b-5 (Rule 10b-5)
sufficiently alleged causal relationship between (1) increase in sales resulting from off-label marketing of defendants' drug, (2) Food and Drug Administration's
warning letter's effect on drug orders, and (3) warning letter's effect on stock price. St. Clare v Gilead Scis., Inc. (In re Gilead Scis. Sec. Litig.) (2008, CA9 Cal) 536
Plaintiffs fail to establish reliance in securities frauds case where they did not read documents claimed to be false. Lucas v Florida Power & Light Co. (1983, SD Fla)
575 F Supp 552, CCH Fed Secur L Rep P 91417, affd (1985, CA11 Fla) 765 F2d 1039, CCH Fed Secur L Rep P 92235.
15 USCS § 78j suit brought against bank and bank vice-president by customers of bank will not be dismissed, where, at vice-president's suggestion, customers
authorized bank to transfer their savings into higher yield interest accounts or certificates of deposit, but vice-president invested their money in short-term notes of
fly-by-night oil company of which he was director, since bank's claims that customers lack requisite "reliance" under Securities Act because customers were unaware
of investment until after it had taken place, and therefore they could not have relied on representations of bank, is entirely frivolous since reliance is evident on face
of complaint, and fraud alleged involves evil at which Act is aimed. Bachmeier v Bank of Ravenswood (1987, ND Ill) 663 F Supp 1207, CCH Fed Secur L Rep P 93744.
Investor's complaint, claiming that broker engaged in unauthorized trading in violation of Rule 10b-5, survives motion to dismiss for failure to assert reliance on
defendant's conduct because proof of reliance is not prerequisite to recovery and investor fulfilled requisite element of causation in fact by alleging specifically that
investor suffered net loss of over $ 260,000 due to defendant's unauthorized trading. Cruse v Equitable Sec. of New York, Inc. (1987, SD NY) 678 F Supp 1023, CCH
Company's motion for summary judgment is denied, where company argued that investors in securities fraud action failed to establish necessary element of market
efficiency in fraud on market theory, but evidence shows that average weekly trading volume of company's shares was .75 percent, 3 securities analysts reported on
stock, 6 firms acted as market makers for stock, and company was not entitled to file S-3 registration statement; because jury could find that market in company's
stock was efficient. Simpson v Specialty Retail Concepts, Inc. (1993, MD NC) 823 F Supp 353.
Investors, claiming federal securities law violations against company and its officials, failed to link each alleged purchase or sale to misrepresentation; furthermore,
investors failed to show how market relied on alleged misrepresentations. Glaser v Enzo Biochem, Inc. (2003, ED Va) 303 F Supp 2d 724 (criticized in Argent Classic
Convertible Arbitrage Fund L.P. v Rite Aid Corp. (2004, ED Pa) 315 F Supp 2d 666, CCH Fed Secur L Rep P 92818) and (criticized in Swack v Credit Suisse First
Boston (2004, DC Mass) CCH Fed Secur L Rep P 92924) and affd in part and revd in part, remanded (2005, CA4 Va) CCH Fed Secur L Rep P 93134.
Investors, claiming federal securities law violations against company and its officials, failed to set forth in their amended complaint any facts showing that each
defendant's act or omission proximately caused loss for which investors sought to recover damages. Glaser v Enzo Biochem, Inc. (2003, ED Va) 303 F Supp 2d 724
(criticized in Argent Classic Convertible Arbitrage Fund L.P. v Rite Aid Corp. (2004, ED Pa) 315 F Supp 2d 666, CCH Fed Secur L Rep P 92818) and (criticized in Swack
v Credit Suisse First Boston (2004, DC Mass) CCH Fed Secur L Rep P 92924) and affd in part and revd in part, remanded (2005, CA4 Va) CCH Fed Secur L Rep P
93134.
Where shareholder alleged that corporate officer overvalued stock of acquired subsidiary in order to receive greater amount of corporation's stock in acquisition
transaction, shareholder failed to show that allegedly fraudulent conduct of officer in failing to timely disclose overvaluation was proximate cause of subsequent drop
in price of corporation's stock. Keeney v Larkin (2003, DC Md) 306 F Supp 2d 522, affd (2004, CA4 Md) 102 Fed Appx 787, CCH Fed Secur L Rep P 92868.
Plaintiffs' reliance on statements that were made before signing of merger agreement was unreasonable as matter of law because integration clause that was within
merger agreement was not waiver of claims that were precluded under 15 USCS § 77cc, but rather limited waver of reliance on certain representations. Dresner v
Utility.com, Inc. (2005, SD NY) 371 F Supp 2d 476.
Investors who sued corporation that operated funeral homes and cemeteries, alleging that two of its officers violated §§ 10(b) and 20(a) of Securities Exchange Act
of 1934, 15 USCS §§ 78j(b) and 78t(a), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, when they failed to properly account for
imputed interest on zero interest finance plans they offered, adequately pled loss causation by alleging that they purchased corporation's stock at inflated price and
lost money when price fell, and district court denied corporation and individuals' motion for partial summary judgment on investors' claim. In re Loewen Group Inc.
Secs. Litig. (2005, ED Pa) 395 F Supp 2d 211.
Where investors' suit against company and others under §§ 10(b) of Exchange Act, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, based on disclosures in
company's registration statement for secondary offering with respect to "swap" of company's brokerage unit for another entity's asset management division, failed to
plead alleged fraud with required particularity, investors also failed to allege that any of these alleged omissions caused their losses as disclosures attributing share
price drop to failure to meet earnings estimates were insufficient to show loss causation, which provided independent basis for dismissal of complaint. Garber v Legg
Mason, Inc. (2008, SD NY) 537 F Supp 2d 597.
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In class action securities fraud suit brought by institutional investors (investors) against various corporate entities with regard to losses involving allegedly
fraudulently represented value of structured investment vehicle (SIV), district court denied motion to dismiss filed by two rating agencies because investors
adequately pled that misleading ratings and eventual corrective disclosure proximately caused their losses; facts alleged in complaint indicated: that Top Ratings
conveyed to investors that senior notes were as safe and secure as United States Treasury' Bills, that those ratings concealed risk that SIV was comprised of billions
of dollars of toxic assets and thus likely to default, and that risk materialized when rating agencies abruptly downgraded senior notes to junk status; district court
rejected rating agencies' assertion that other factors, such as credit crisis, were sole cause of losses complained of and held that no case law imposed on investors
heavy burden of pleading facts sufficient to exclude other non-fraud explanations in securities fraud case. King County v IKB Deutsche Industriebank AG (2010, SD
NY) 708 F Supp 2d 334.
85. Acts incidentally inducing sale or purchase
Complaint based on fact that corporation allegedly failed to disclose that substantial amount of its income for particular fiscal year was derived from overcharges on
government contracts was sufficient to meet requirements of "in connection with the purchase or sale of any security" clause of SEC Rule 10b-5, even though
purpose of not disclosing malfeasance was to further defraud government, since false information was circulated to large segment of investing public. Heit v Weitzen
(1968, CA2 NY) 402 F2d 909, CCH Fed Secur L Rep P 92279, 3 ALR Fed 803, cert den (1969) 395 US 903, 23 L Ed 2d 217, 89 S Ct 1740.
Violation of SEC Rule 10b-5 cannot occur unless proscribed activities are present in connection with purchase or sale of securities; fact that bank became insolvent as
result of president's misuse of its funds did not give rise to civil liability, under Rule, as to broker who handled securities transactions engaged in by president with
misappropriated money, notwithstanding stockholders' assertion that their trading in bank's securities was influenced by failure of broker to provide that information;
broker's acts were not committed in connection with purchase of bank shares, particularly since broker did not know stockholders were purchasing those shares at
time of alleged scheme. Landy v Federal Deposit Ins. Corp. (1973, CA3 NJ) 486 F2d 139, CCH Fed Secur L Rep P 94094, 17 FR Serv 2d 769, cert den (1974) 416 US
960, 40 L Ed 2d 312, 94 S Ct 1979.
There was genuine issue of material fact as to whether defendant insurer's issuance of surety bond as collateral for loan to partnership was "in connection with sale"
of securities, so that summary judgment should not have been entered against investor in his action against insurer under SEC Rule 10b-5, promulgated under §
10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)), where investor alleged that he had paid for limited partnership with note in connection with which he
had executed indemnification and pledge agreement in favor of insurer which was to issue surety bond as collateral for loan to partnership, but unknown to investor,
bond contained waiver of defenses, and investor had presented evidence that he would not have invested had he known of waiver, that he understood that in event
of misrepresentation or fraud inducing investment his only loss would be his partnership interest, that bond arrangement was not common, and that disclosure of
waiver would have negative effect on sale of securities. Jett v Sunderman (1988, CA9 Cal) 840 F2d 1487, CCH Fed Secur L Rep P 93653.
It makes no difference what dominant motive of defendant actually is, and he violates § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) if in fact his
misrepresentations cause plaintiff to purchase security of corporation; where defendant induced plaintiff to leave previous employer and to join defendant's
corporation offering him, in addition to salary, opportunity to purchase shares of defendant's corporation's stock, defendant making stock option attractive through
material omissions and misrepresentations, fraud was in connection with sale and purchase of securities and plaintiff had action against defendant notwithstanding
that direct object of alleged misrepresentations and omissions was to obtain plaintiff's employment with corporation and that sale of security was ancillary to object
of employing plaintiff. Collins v Rukin (1972, DC Mass) 342 F Supp 1282, CCH Fed Secur L Rep P 93527, 16 FR Serv 2d 6.
Securities fraud action fails under 15 USCS § 78j(b) because alleged fraud did not affect investors' decision, since investors were already contractually committed to
investment when alleged fraud took place. Handelsman v Gilford Secur., Inc. (1989, ND Ill) 720 F Supp 1319.
Factual allegations of complaint, taken as true, established that defendants violated § 17(a) of Securities Act of 1933, 15 USCS § 77q(a)(1), § 10(b) of Securities
Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, where defendants falsely represented that sale of certain securities would be 100 percent insured
by U.S. Treasury obligations (which certainly misled investors about relative safety of securities), and made misrepresentations about expected rates of return. SEC v
Marker (2006, MD NC) 427 F Supp 2d 583, judgment entered (2006, MD NC) 427 F Supp 2d 583.
Court granted corporation and its officers and directors' motion to dismiss pursuant to Fed. R. Civ. P. 12(b(6) claim of securities fraud raised under 15 USCS § 78j(b)
and 17 CFR § 240.10b-5 by shareholders because they had not pleaded facts establishing necessary direct link between particular omissions by defendants and
decrease in stock price. Glenbrook Capital L.P. v Kuo (2007, ND Cal) 525 F Supp 2d 1130, CCH Fed Secur L Rep P 94470.
86.--Non-stock connected to stock exchanges
Government National Mortgage Association forward contract constitutes purchase and sale of underlying GNMA security and is therefore regulated by antifraud
provisions of securities laws, notwithstanding that GNMA forward contract is not itself security as defined by securities laws. Abrams v Oppenheimer Government
Secur., Inc. (1984, CA7 Ill) 737 F2d 582, CCH Fed Secur L Rep P 91512.
When negotiations between 2 corporate parties result in two contracts, one calling for delivery of corporate stock in return for patent rights; and other calling for
cash payment in return for certain equipment and rights, SEC Rule 10b-5 may apply to both contracts if it can be shown that corporation which issued stock would
not have entered into contract had it not been for misrepresentations made with respect to facts underlying consummation of contract not involving transfer of stock
since rule specifically proscribes any person from engaging in any act practice or course of business which operates or would operate as fraud or deceit upon any
person "in connection with the purchase or sale of a security", that requirement being construed liberally to further purpose of Securities Exchange Act, and
cumulative effect of transaction should be considered as whole for purpose of action under Rule. Allen Organ Co. v North American Rockwell Corp. (1973, ED Pa) 363
F Supp 1117, CCH Fed Secur L Rep P 94156, 1973-2 CCH Trade Cases P 74713, 17 FR Serv 2d 1114.
2."In Connection With"

87. Generally
In civil action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, "in connection with" requirement is broadly
interpreted and requires only that plaintiff shall have suffered injury as result of deceptive practices touching on sale of securities. Competitive Associates, Inc. v
Laventhol, Krekstein, Horwath & Horwath (1975, CA2 NY) 516 F2d 811, CCH Fed Secur L Rep P 95090.
"In connection with" requirement of SEC Rule 10b-5 is flexibly applied to require that there be nexus between defendant's fraud and plaintiff's sale of securities;
plaintiff need not establish close relationship between fraud and sale, but only that transaction involving sale "touched" transaction involving fraud, and "in
connection with" test is satisfied when proscribed conduct and sale are part of same fraudulent scheme. Alley v Miramon (1980, CA5 La) 614 F2d 1372, CCH Fed
Secur L Rep P 97346 (criticized in Miller v Asensio (2000, DC SC) 101 F Supp 2d 395, CCH Fed Secur L Rep P 91002).
Because 15 USCS § 78j contains "in connection with" language, all rules stemming from it must also contain this limitation, and holding by District Court that
misrepresentation regarding margin credit terms does not meet "in connection with" requirement would appear to invalidate SEC Rule 10b-16 determinations
regarding securities regulations and is therefore in error. Angelastro v Prudential-Bache Secur., Inc. (1985, CA3 NJ) 764 F2d 939, CCH Fed Secur L Rep P 92076, cert
den (1985) 474 US 935, 88 L Ed 2d 274, 106 S Ct 267 and (criticized in Miller v Asensio (2000, DC SC) 101 F Supp 2d 395, CCH Fed Secur L Rep P 91002).
Meaning of "in connection with" under Securities Litigation Uniform Standards Act of 1998, specifically 15 USCS § 78bb(f), is coterminous with meaning of nearly
identical language of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and its corresponding Rule 10b-5, 17 C.F.R. § 240.10b-5. Dabit v Merrill Lynch,
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Pierce, Fenner & Smith, Inc. (2005, CA2 NY) 395 F3d 25, CCH Fed Secur L Rep P 93068.
Words "in connection with" in § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) need not be limited to misrepresentations relating to subject matter of
purchase. Glickman v Schweickart & Co. (1965, SD NY) 242 F Supp 670.
Term "in connection with" in SEC Rule 10b-5 should be construed broadly to include device that would cause investor to purchase or sell corporation's securities.
Zucker v Sable (1976, SD NY) 426 F Supp 658, CCH Fed Secur L Rep P 95625.
To establish fraud by broker-dealer under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) it is necessary that defendant implement deceptive or manipulative
practice in connection with purchase or sale of security. M & B Contracting Corp. v Dale (1984, ED Mich) 601 F Supp 1106, CCH Fed Secur L Rep P 91893, affd (1986,
CA6 Mich) 795 F2d 531, CCH Fed Secur L Rep P 92846.
Key factor distinguishing manipulation and deception "in connection with" purchase or sale of securities, which give rise to securities fraud causes of action under 15
USCS § 78j(b), from mere breaches of contract is whether misrepresentations were intended to induce sale or purchase of security at time of sale or purchase.
Gigliotti v Mathys (2001, DC VI) 129 F Supp 2d 817, CCH Fed Secur L Rep P 91358.
"In connection with" requirement is satisfied if device employed be of sort that would cause reasonable investors to rely thereon and, in so relying, cause them to
purchase or sell corporation's securities; "in connection with" language should be given its natural meaning and impose liability on all those whose false assertions
are reasonably calculated to influence investing public and misrepresentation need not be made with respect to particular sales transaction but should be applied
generally. SEC v C. Jones & Co. (2004, DC Colo) 312 F Supp 2d 1375.
Actions of employee of broker-dealer are not "in connection with" purchase or sale of security merely because employee defrauded his employer. In re Orlando
Joseph Jett (1998) 1998 SEC LEXIS 1501.
88. Agreements to sell or purchase
The refusal by company (seller) to honor its oral promise to sell stock option to another company (buyer) in return for the buyer's promise to perform certain
services violates § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b), which prohibits the use of any manipulative or deceptive device in connection with
the sale of any security--where the buyer performs the promised services, and the seller is found to have secretly intended never to honor the agreement. Wharf
(Holdings) Ltd. v United Int'l Holdings, Inc. (2001) 532 US 588, 149 L Ed 2d 845, 121 S Ct 1776, 2001 CDOS 4046, 2001 Daily Journal DAR 4983, CCH Fed Secur L
Rep P 91425, 2001 Colo J C A R 2505, 44 UCCRS2d 569, 14 FLW Fed S 245.
District court erred in concluding that plaintiff failed to state claim under federal securities laws where alleged fraud was in connection with inducement of plaintiff, as
minority shareholder and employee of corporation, to sign agreement whereby defendants, as majority shareholders, were assured of obtaining plaintiff's stock at
book value upon his connection with corporation being terminated, which defendants had power to do at any time, since misstatements and omissions by which
plaintiff was induced to sign agreement were in connection with sale of security. Brown v Ivie (1981, CA5 Ga) 661 F2d 62, CCH Fed Secur L Rep P 98349, cert den
(1982) 455 US 990, 71 L Ed 2d 850, 102 S Ct 1614.
In suit under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 involving alleged misrepresentations in connection with repurchase
agreements for government securities, proper jury instruction would have been that repurchase agreements may or may not themselves constitute securities, but
that, in either event, fraud in connection with repurchase agreements satisfies language in § 10(b) and Rule 10b-5 relating to fraud in connection with purchase or
sale of securities, but jury instruction containing additional comment that repurchase agreements themselves are securities, even if inaccurate, amounts to mere
harmless error. Manufacturers Hanover Trust Co. v Drysdale Sec. Corp. (1986, CA2 NY) 801 F2d 13, CCH Fed Secur L Rep P 92902, cert den (1987) 479 US 1066, 93
L Ed 2d 1001, 107 S Ct 952.
Damages suffered by investment company resulting from mismanagement or looting of proceeds of sales of securities by principal officers, as controlling directors
and stockholders, cannot be basis of federal securities laws claim against accounting firm which audited company's books and certified its financial statements, as
damages were not incurred in connection with purchase or sale of security. In re Investors Funding Corp. Sec. Litig. (1980, SD NY) 523 F Supp 533, CCH Fed Secur L
Rep P 97696.
Master agreement between British and Irish economic development agencies and DeLorean motor car entities whereby agencies supplied financing for automobile
production may have been investment contract "security" and thus summary judgment is precluded, where parties to agreement had horizontal and narrow vertical
commonality, money was invested and loss was risked by agencies, because material issues of fact exist with respect to agencies' expectations of profits and
promoters' sole control over efforts to make profits. Department of Economic Dev. v Arthur Andersen & Co. (1988, SD NY) 683 F Supp 1463, CCH Fed Secur L Rep P
93692.
Former operating officer's 15 USCS § 78j(b) claim against data processing corporation survives summary judgment, where officer was induced to forego competing
offer of employment largely by stock option promise and overstatement of corporation's value and future prospects, because by accepting enforceable employment
contract officer "purchased" securities, within meaning of § 78j(b) and has standing to bring this claim. Rudinger v Insurance Data Processing, Inc. (1991, ED Pa)
To satisfy "in connection with" requirement for claim under 15 USCS § 78j(b), alleged misrepresentation must have direct pertinence to purchase or sale of securities
at issue. AUSA Life Ins. Co. v Dwyer (1996, SD NY) 928 F Supp 1239.
89.--Uncompleted agreements
Cause of action existed under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where it was alleged that defendant had entered into stock exchange
agreement with only limited intention of performing, and that agreement was not completed. Walling v Beverly Enterprises (1973, CA9 Cal) 476 F2d 393, CCH Fed
Secur L Rep P 93947, 17 FR Serv 2d 219.
Allegation of scheme consisting of refusal to honor contracts to purchase plaintiff's shares of securities at contract price, and cutting plaintiff off from financial
resources in order to force him to sell his shares to defendants for grossly inadequate consideration, states cause of action for injunctive relief against violation of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5; even though alleged scheme did not arise until after contracts to sell had been entered, it
was still "in connection with sale" since payment was not made pursuant to contracts and purpose of scheme was to reduce amount of payment. Davis v Davis
(1976, CA5 Tex) 526 F2d 1286, CCH Fed Secur L Rep P 95440.
Agreement under which individual invested $ 1,000 for purchase of shares in corporation was "security" so as to be proper basis of action for alleged fraud in
transaction under SEC Rule 10b-5 promulgated under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)), notwithstanding that stock was never in fact
issued, where agreement referred to "stock shares" to be issued, indicated that corporation was for-profit corporation, and indicated that investor's stock had
proportional voting rights, rights to dividends, and capacity to appreciate, and fact that agreement envisioned some limitations on stock's negotiability and
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pledgeability was insufficient to negate character of stock as security. Sulkow v Crosstown Apparel, Inc. (1986, CA2 NY) 807 F2d 33, CCH Fed Secur L Rep P 93009.
No cause of action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) or SEC Rule 10b-5 promulgated thereunder, was stated where plaintiff
alleged that he had entered into employment contract whereby he was to receive 22 percent of stock in proposed company when company was formed and stock
was issued, in return for which he agreed to accept employment, since even if this contract could be considered to constitute "sale" of securities, gravamen of
complaint was that defendants had fraudulently refused to convey or tender stock to plaintiff, so that alleged fraud lay, not in actual sale of stock, but rather in
defendants' refusal to tender shares as required by terms of contract, so that causal connection between alleged fraud and purchase or sale of stock required to state
federal cause of action under § 10(b) was lacking. Hunt v Robinson (1988, CA4 SC) 852 F2d 786, CCH Fed Secur L Rep P 94030.
Violation of SEC Rule 10b-5 is properly alleged where it is asserted that fraud has been perpetrated in connection with contract to purchase or sell securities as well
as when it is in connection with actual sale. M. L. Lee & Co. v American Cardboard & Packaging Corp. (1964, ED Pa) 36 FRD 27, 8 FR Serv 2d 12C.24, Case 1.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) prohibits fraud "in connection with purchase or sale" of securities, not merely in purchase or sale of
securities; proscriptions are not applicable only where fraud is involved in completed purchase or sale of securities, but also apply where there is purported attempt
to sell nonexistent securities. Goodman v H. Hentz & Co. (1967, ND Ill) 265 F Supp 440, 10 FR Serv 2d 669.
Words "in connection with" of section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) indicate that Congress intended to protect against fraud in agreements to
buy and sell, as well as with respect to completed sales, provided damages could be shown. Commerce Reporting Co. v Puretec, Inc. (1968, SD NY) 290 F Supp 715,
Sales transaction need not always be consummated in order for fraud to be in connection therewith so as to constitute violation of § 10(b) of Securities Exchange Act
(15 USCS § 78j(b)). Feldberg v O'Connell (1972, DC Mass) 338 F Supp 744, CCH Fed Secur L Rep P 93483.
Plaintiff's allegation that he was induced to sell stock well below market value states claim of fraud in connection with sale of securities in violation of 15 USCS §
78j(b) and SEC Rule 10b-5, where plaintiff alleges that prior to signing sale agreement, plaintiff informed defendants that he would sell his stock to defendants at
agreed price, and defendants promised to use their best efforts to persuade independent directors of another corporation to sell other stock to him, plaintiff
subsequently sold his stock to defendants, and defendants contend that they are not bound to perform because there is no connection between 2 promises. Fishman
v Estrin (1980, DC Dist Col) 501 F Supp 208, CCH Fed Secur L Rep P 97679.
Satisfaction of "in connection with" requirement depends not upon when agreement is executed, but rather upon whether investment decision remains to be made by
party from whom disclosure has been withheld. Issen v GSC Enterprises, Inc. (1981, ND Ill) 508 F Supp 1278, CCH Fed Secur L Rep P 97941.
Investor states valid securities fraud claim against issuer, broker and brokerage firm, even though $ 408,000 in preferred stock investor allegedly paid for was never
issued, because pleading indicates that broker and investor reached agreement on "sale" of stock, that money was deposited in issuer's account, and that alleged
misrepresentations made by broker were "in connection with" transaction. Cook v Goldman, Sachs & Co. (1989, SD Tex) 726 F Supp 151, CCH Fed Secur L Rep P
94916.
Disabled employee's 15 USCS § 78j(b) claim against former employer is not cognizable, where employee complains of loss of stock option due to employer's
misrepresentations in advising him to accept short-term disability status, because result of misrepresentations was that employee did not receive promised
compensation, and mere fact that intended compensation was security does not bring fraud within realm of § 78j(b). Gurwara v Lyphomed, Inc. (1990, ND Ill) 739 F
Accounting firm's amended third-party complaint against chief accountant of target company states claim under 15 USCS § 78j(b), where accounting firm was
originally sued by acquiring company for inaccuracies in audit of target and now blames false information provided by chief, even though chief argues that alleged
falsehoods were in annual financial statement not prepared in connection with sale of company and not to be relied upon in connection with sale, because there is no
merit to claim that chief accountant would not expect auditor and potential buyer of company to rely on its "routine annual financials." Axel Johnson, Inc. v Arthur
Anderson & Co. (1994, SD NY) 847 F Supp 317, CCH Fed Secur L Rep P 98158.
Allegation that certain defendants falsely promised to purchase securities when they never intended to do so, and misrepresented partnerships' value because they
knew that many of oil sites were dry and could not produce oil revenues, was sufficient in pleading fraud "in connection with" purchase of securities. Nathel v Siegal
(2008, SD NY) 592 F Supp 2d 452.
90.----"Aborted" sales or purchases
Purchaser of securities, who fraudulently induced sellers to refrain from selling their shares during effective period of tender offer made by purchaser to class of
shareholders which excluded sellers, upon false promise that, upon expiration of tender offer, second tender offer on terms equally favorable to sellers would be
made to sellers, and who through such tender offer gained ownership of over 90 percent of shares of issuer and thereby controlled market for securities, and who
thereupon effectively forced sellers to sell their securities to purchaser upon terms substantially less favorable to sellers than those received by those who had
previously sold to purchaser pursuant to tender offer and at price substantially lower than sellers could have received had they sold during period in which they had
been induced not to sell by purchaser, had perpetrated fraud "in connection with the purchase or sale of a security" within meaning of § 10(b) of Securities Exchange
Act (15 USCS § 78j(b)) and SEC Rule 10b-5 thereunder, notwithstanding that at time of sale sellers were aware of all facts including purchaser's misrepresentations.
Travis v Anthes Imperial, Ltd. (1973, CA8 Mo) 473 F2d 515, CCH Fed Secur L Rep P 93718.
Where, after plaintiff entered into agreement with corporation's stockholders to purchase their stock, president of corporation made misrepresentations to sellers to
attempt to prevent consummation of transaction, misrepresentations were in connection with purchase and sale of securities and plaintiff had valid cause of action
against president under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Lanning v Serwold (1973, CA9 Wash) 474 F2d 716, CCH Fed
Shareholders who made stock exchange agreement with defendant, and who alleged that defendant entered into agreement with only limited intention of
performing, asserted fraud in connection with purchase or sale of security under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) under rationale of "aborted
purchaser-seller" theory. Walling v Beverly Enterprises (1973, CA9 Cal) 476 F2d 393, CCH Fed Secur L Rep P 93947, 17 FR Serv 2d 219.
Shareholders of corporation operating apparel stores could not recover under § 78j(b) and Rule 10b-5 against another corporation which had allegedly agreed to
acquire plaintiffs' stock in apparel corporation, thereby acquiring such corporation, but had indicated that it wished corporation expanded, leading apparel corporation
to acquire another shop, but defendant corporation had then refused to go through with purchase of stock, leading to bankruptcy of apparel corporation. Kagan v
Edison Bros. Stores, Inc. (1990, CA7 Ill) 907 F2d 690, CCH Fed Secur L Rep P 95368, 13 UCCRS2d 1245.
Fraudulent acts or devices which abort sales or purchases of securities are in connection with purchase or sale and are unlawful under § 10(b) of Securities Exchange
Act (15 USCS § 78j(b)) and SEC Rule 10b-5; broker was liable under Rule where he represented to customers that purchases and sales were being made on their
behalf when no transactions had in fact taken place. Goodman v H. Hentz & Co. (1967, ND Ill) 265 F Supp 440, 10 FR Serv 2d 669.
Defendant who agreed to sell securities to plaintiff, but who had secretly agreed to sell same securities to another party, allegedly pursuant to fraudulent scheme to
promote highest price possible for sale of shares by inducing plaintiffs to enter into agreement without any intention of consummating it if defendant could find other
purchasers who would pay more for stock than agreed to under contract with plaintiffs, perpetrated fraud in connection with purchase and sale of securities within
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meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Commerce Reporting Co. v Puretec, Inc. (1968, SD NY) 290 F Supp 715, CCH Fed Secur L Rep P
92252.
Scheme whereunder owner of securities agreed to sell stock to plaintiff but conspired to find purchaser at better price and thereafter informed plaintiff that it would
not complete transaction was fraud in connection with purchase or sale of securities under SEC Rule 10b-5 since fraud was committed after contract was entered
into. Pepsico, Inc. v W.R. Grace & Co. (1969, SD NY) 307 F Supp 713, CCH Fed Secur L Rep P 92549.
Where broker delayed in selling plaintiff securities solely for reason that broker was dealing in same stock for his own account and it was in broker's self-interest not
to lower market price of stock by placing sale orders, fraud occurred in connection with sale of security under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)).
Silverman v Bear, Stearns & Co. (1971, ED Pa) 331 F Supp 1334, CCH Fed Secur L Rep P 93065.
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), actions require nexus with purchase or sale of securities; broker's promise, in order to induce
customer to maintain long position in commodities futures, to make good any losses sustained by making new issues of common stock available to her so that she
might realize immediate appreciation, broker promising to give options to customer to purchase common shares at issuance price, exercisable day following initial
offering when securities might have appreciated, was not fraud connected with purchase or sale of securities. Golding v Merrill Lynch, Pierce, Fenner & Smith, Inc.
Corporation and shareholders properly alleged fraud in connection with sale or purchase of security where they claimed company fraudulently entered into agreement
to purchase corporation's stock with no intention of closing transaction, but rather with intent to examine corporation's financial records for purpose of forcing
decrease in price of corporation's stock under agreement. Metropolitan International, Inc. v Alco Standard Corp. (1986, MD Pa) 657 F Supp 627, CCH Fed Secur L
Rep P 93725.
Securities fraud claim of potential purchaser of corporation, allegedly used by seller as "stalking horse" to obtain higher offers for corporation, must fail, where
seller's fraud did not pertain to value, nature, or investment characteristics of securities at issue, because alleged misrepresentations were not "in connection with"
purchase or sale of securities. Production Resource Group, L.L.C. v Stonebridge Partners Equity Fund, L.P. (1998, SD NY) 6 F Supp 2d 236, CCH Fed Secur L Rep P
90220.
91. Accountant's opinions and advise
Requirement, in civil action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, that alleged fraud be "in connection
with" purchase or sale of securities was met where it was alleged that public accountant's fraudulent misrepresentations and concealment of material facts with
respect to financial status of investment advisor caused investor to hire advisor and that investor subsequently lost money as a result of advisor's handling of
account. Competitive Associates, Inc. v Laventhol, Krekstein, Horwath & Horwath (1975, CA2 NY) 516 F2d 811, CCH Fed Secur L Rep P 95090.
Accountant's false and misleading financial statements for company which engaged in sale and repurchase agreements (repos) for government securities were in
connection with purchase or sale of security where company was insolvent from inception, since repos differ from collateralized loans in that secured lender in repo
can trade, sell, or pledge collateral, magnifying importance of financial position of company, and directly affecting transaction in securities. SEC v Drysdale Sec. Corp.
(1986, CA2 NY) 785 F2d 38, CCH Fed Secur L Rep P 92487, cert den (1986) 476 US 1171, 90 L Ed 2d 981, 106 S Ct 2894.
Accountant's allegedly fraudulent advice concerning accounting treatment of Government National Mortgage certificates was not fraud that touched or was in
connection with purchase or sale of security where accountant rendered advice on manner in which corporation could account for its repurchase agreements after
purchasing and selling certificates, which advice had nothing to do with intrinsic nature of certificates or with risk related to method of their purchase. In re Financial
Corp. of America Shareholder Litigation (1986, CA9 Cal) 796 F2d 1126.
In suit under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and corresponding SEC Rule 10b-5, accounting firm for limited partnership could not be
held liable for fraudulent failure to disclose based on acts of creator of limited partnership in withdrawal or "take down" of funds invested in partnership after
investments were made since fraudulent scheme which takes place entirely after securities transaction is complete is not "in connection with" that transaction, even
if scheme could not have been carried out but for transaction, although such posttransaction behavior might be relevant to any ultimate recovery if liability is
established on basis of fraud taking place before sale. Rudolph v Arthur Andersen & Co. (1986, CA11 Fla) 800 F2d 1040, CCH Fed Secur L Rep P 92934, reh den, en
banc (1986, CA11 Fla) 806 F2d 1070 and cert den (1987) 480 US 946, 94 L Ed 2d 790, 107 S Ct 1604.
Accounting firm could not be held liable under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 promulgated thereunder based on
alleged fraud in reports prepared by firm concerning partnerships since element of such action that fraud be in connection with purchase or sale of securities was not
met where alleged fraud occurred after investors made their subscription agreements with partnerships, notwithstanding that their payments on promissory notes
which they had given for part of purchase price of partnership interests were made after accounting reports in question had been prepared and had been read by
investors, since subsequent payments did not constitute separate purchases of securities, and investors' injury was thus not connected with purchase or sale of
security under § 10(b). Roberts v Peat, Marwick, Mitchell & Co. (1988, CA9 Cal) 857 F2d 646, CCH Fed Secur L Rep P 94028, 12 FR Serv 3d 810, cert den (1989)
493 US 1002, 107 L Ed 2d 556, 110 S Ct 561.
Presumption of reliance is generally available to plaintiffs alleging violations of 15 USCS § 78j(b) based on omissions of material fact. Binder v Gillespie (1999, CA9
Idaho) 184 F3d 1059, 99 CDOS 5879, CCH Fed Secur L Rep P 90603, cert den (2000) 528 US 1154, 145 L Ed 2d 1070, 120 S Ct 1158.
Accountant's opinion letter was used "in connection with" purchase of partnership interest in limited partnership within meaning of SEC Rule 10b-5, where, as matter
of law, accountant foresaw and reasonably could foresee that opinion letter would be shown to potential investors in limited partnership. Sharp v Coopers & Lybrand
(1978, ED Pa) 457 F Supp 879, CCH Fed Secur L Rep P 96612.
Accounting firm, hired by purchaser in owner-to-owner sale of corporate entity to review third party's audit of corporation, is not liable to purchaser for fraud under
Securities Exchange Act of 1934 (15 USCS § 78j) for its failure to report overstatement of inventory on corporation's financial statement, resulting in inaccurate
assessment of corporation's net worth, because accounting firm, serving here in advisory capacity, does not act "in connection with" purchase or sale of securities;
framework and remedies available under state contract law are adequate to resolve purchaser's dispute with accounting firm. DMI Furniture, Inc. v Brown, Kraft &
Co. (1986, CD Cal) 644 F Supp 1517, CCH Fed Secur L Rep P 92968.
Investor failed to state claim for fraud under 15 USCS § 78j, where he alleged broker fraudulently promised to limit speculative trading to $ 10,000 as part of effort
to get investor to open account, because, since brokerage account is not security, investor did not allege fraud "in connection with" sale of securities. Bischoff v G.K.
Scott & Co. (1986, ED NY) 687 F Supp 746, CCH Fed Secur L Rep P 94069.
Investors' complaint is insufficient to allege primary liability of accounting firm under 15 USCS § 78j(b), where investors allege only that accountant omitted and
failed to disclose fraudulent activity of securities salesman in certifying various financial statements of salesman's corporation without qualification, because investors
fail to allege accountant's activity was "in connection with" sale of security. Farlow v Peat Marwick Mitchell & Co. (1987, WD Okla) 666 F Supp 1500, CCH Fed Secur L
Rep P 93546, affd (1992, CA10 Okla) 956 F2d 982, CCH Fed Secur L Rep P 96536, 22 FR Serv 3d 101 (criticized in Seolas v Bilzerian (1997, DC Utah) 951 F Supp
978, CCH Fed Secur L Rep P 99432).
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Unpublished: In action in which former officers and/or principal shareholders of privately owned company filed suit against accounting firm et al., alleging claims for
violation of SEC Rule 10b-5, and violation of § 10(b) of Securities Exchange Act of 1934, firm was granted summary judgment where there was no evidence to create
genuine issue that acquirer's failure to register officers' shares caused officers' loss; officers' expert did not offer testimony to prove that officers would have received
$ 5.7 million if shares had been registered on time. McCabe v Ernst & Young, LLP (2006, DC NJ) CCH Fed Secur L Rep P 93649.
92. Audit reports
Individual could not bring action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 promulgated thereunder against auditor
of corporation and individuals connected with auditor where "purchase or sale" of securities which was basis of action involved merger of 2 companies other than that
as to which misrepresentations were allegedly made since, although merger can constitute purchase or sale of securities under federal securities laws, alleged
misrepresentations were not "in connection with" purchase or sale of securities as to which individual arguably had standing to sue, that is, stock of 2 corporations
involved in merger. Warner v Alexander Grant & Co. (1987, CA11 Fla) 828 F2d 1528, CCH Fed Secur L Rep P 93509, 9 FR Serv 3d 596.
Where corporation alleged only that it experienced loss as result of exposure of misrepresentations contained in accounting firm's client's 1998 and 1999 financial
statements which were issued after asset sale agreement between corporation and client was signed, these allegations were not sufficient to state claim under 15
USCS § 78j(b) and implementing Rule 10b-5, 17 C.F.R. § 240.10b-5, for losses suffered as result of alleged misrepresentations in previous audited 1997 financial
statement. Tricontinental Indus., Ltd. v PricewaterhouseCoopers, LLP (2007, CA7 Ill) 475 F3d 824, CCH Fed Secur L Rep P 94144.
Public accounting firm can not be held civilly liable under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 for allegedly misrepresenting
financial status of brokerage firm in its audit of firm's financial condition, thereby causing plaintiffs to purchase securities through brokerage and to permit brokerage
to retain securities on plaintiff's behalf, thereby incurring losses when brokerage was liquidated under Securities Investor Protection Act; alleged acts of accounting
firm were not in connection with purchase and sale of securities, but rather were in connection merely with bailment of plaintiff's securities subsequent to purchase.
Rich v Touche Ross & Co. (1976, SD NY) 415 F Supp 95.
Audit reports used for attachment to annual Form 10K reports filed with Securities and Exchange Commission were issued "in connection with" sale of securities,
within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, even though there was no evidence to show that reports were ever
sent, either by management or auditor, to investors. SEC v Geotek (1976, ND Cal) 426 F Supp 715, CCH Fed Secur L Rep P 95756, affd (1979, CA9 Cal) 590 F2d
Corporation's fraudulent prebilling scheme, conducted in attempt to obtain additional credit from corporation's factor rather than to influence investors, and
discovered during outside audit prior to appearance of fraudulent information in any financial documents, was too attenuated from any possible securities transaction
to be actionable under 15 USCS § 78j, even though fraud could ultimately have reached financial statements relied on by investors. SEC v Adoni (1999, DC NJ) 60 F
93. Broker's activities, generally
Where Securities and Exchange Commission (SEC) alleged that stockbroker violated both § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and Rule
10b-5 (17 CFR 240.10b-5) by selling his customer's securities and using proceeds for his own benefit without customer's knowledge or consent, SEC's complaint
survived dismissal because breaches of fiduciary duty were "in connection with" securities sales, since securities transactions and breaches of fiduciary duty
coincided. SEC v Zandford (2002) 535 US 813, 153 L Ed 2d 1, 122 S Ct 1899, 2002 Daily Journal DAR 6078, CCH Fed Secur L Rep P 91795, 15 FLW Fed S 328.
Alleged misrepresentations by brokerage firms concerning interest rates and charges on margin accounts are not in connection with purchase or sale of securities
and hence not actionable under Rule 10b-5. Angelastro v Prudential-Bache Secur., Inc. (1985, CA3 NJ) 764 F2d 939, CCH Fed Secur L Rep P 92076, cert den (1985)
474 US 935, 88 L Ed 2d 274, 106 S Ct 267 and (criticized in Miller v Asensio (2000, DC SC) 101 F Supp 2d 395, CCH Fed Secur L Rep P 91002).
Since securities broker is person who actually trades securities for investing public, his very employment is "in connection with purchase and sale of securities" within
meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Rolf v Blyth Eastman Dillon & Co. (1977, SD NY) 424 F Supp 1021, CCH Fed
Secur L Rep P 95843, affd, in part, remanded (1978, CA2 NY) 570 F2d 38, CCH Fed Secur L Rep P 96275, cert den (1978) 439 US 1039, 58 L Ed 2d 698, 99 S Ct 642
and amd (1978, CA2) CCH Fed Secur L Rep P 96525.
"In connection with" requirement is not met where alleged fraud occurred in connection with broker's commissions and had no causal connection with any purchase
by plaintiffs. Williamsport Firemen Pension Bds. I & II v E.F. Hutton & Co. (1983, MD Pa) 567 F Supp 140, CCH Fed Secur L Rep P 99268.
Purchaser and sales by broker-dealer satisfied "in connection with" requirement as to investors who gave him "full" discretion but intended to retain independent,
concurrent right to make investment decision. Margaret Hall Foundation, Inc. v Atlantic Financial Management, Inc. (1983, DC Mass) 572 F Supp 1475, CCH Fed
Broker's alleged misrepresentation of its intent to manage investor's account for investor's best interest and within investor's strict investing guidelines, broker's
alleged misrepresentation of individual investment advisor's experience and skill with respect to various investment devices, broker's alleged misrepresentation that
investor's account was profitable, broker's alleged misrepresentation that it was willing to abide by investor's restrictions on broker's investment decisions during
periods of investor's unavailability for consultation, and broker's alleged misrepresentation that financial position of suggested issuer was soon to be bolstered are in
connection with purchase or sale of securities within meaning of 15 USCS § 78j(b) and SCCN Rule 10b-5; "in connection with" requirement is satisfied by initial
misrepresentations inducing investor to entrust funds with broker and by broker's later misrepresentations amounting to new decision by investor to invest; however,
broker's alleged misrepresentations inducing investor's mere retention of funds already in discretionary fund cannot be basis of Rule 10b-5 action. Rush v
Oppenheimer & Co. (1984, SD NY) 592 F Supp 1108, CCH Fed Secur L Rep P 91639, vacated on other grounds, on reh (1984, SD NY) 596 F Supp 1529 and revd on
other grounds (1985, CA2 NY) 779 F2d 885, CCH Fed Secur L Rep P 92406 (criticized in Southern Sys. v Torrid Oven, Ltd. (2000, WD Tenn) 105 F Supp 2d 848) and
(criticized in Uwaydah v Van Wert County Hosp. (2002, ND Ohio) 246 F Supp 2d 808) and (criticized in Raymond James Fin. Servs. v Saldukas (2003, Fla App D2)
851 So 2d 853, 28 FLW D 1863).
Stockbroker was not liable under 15 USCS § 78j for fraudulent transactions of investor's friend where account was nondiscretionary, all withdrawals were made
payable, and sent directly to plaintiff investor. Candelora v Clouser (1985, DC Del) 621 F Supp 335, affd without op (1986, CA3 Del) 802 F2d 446.
Investor who entered into margin agreement with securities dealer in order to engage in short sales of securities has no viable claim under 15 USCS § 78j(b), where
complaint alleges that dealer uses its customers' assets, in form of cash and stock collateral and proceeds of short sales, to earn interest and to obtain other financial
benefits without notifying customers of this practice or sharing proceeds with them, because alleged nondisclosure pertains not to sale of securities or value of
securities themselves but rather to terms of relationship between broker and customer, and thus alleged fraud is not "in connection with purchase or sale of
securities." Levitin v PaineWebber, Inc. (1996, SD NY) 933 F Supp 325, CCH Fed Secur L Rep P 99270, affd (1998, CA2 NY) 159 F3d 698, CCH Fed Secur L Rep P
90286, 44 UCCRS2d 859, cert den (1999) 525 US 1144, 143 L Ed 2d 47, 119 S Ct 1039.
Federal securities fraud claim on behalf of putative class must fail, where assertion is that stock brokerage house uses its customers' assets, in form of cash and
stock collateral and proceeds of short sales, to earn interest and to obtain other financial benefits without notifying customers of this practice or sharing proceeds
with them, because such surreptitious use of interest is not "in connection with" purchase or sale of securities, which is required element of 15 USCS § 78j(b) claim.
Bissell v Merrill Lynch & Co. (1996, SD NY) 937 F Supp 237, CCH Fed Secur L Rep P 99298, 31 UCCRS2d 889, affd (1998, CA2 NY) 157 F3d 138.
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Inheritor of Individual Retirement Account (IRA) established by her late cousin with securities brokerage firm did not state cause of action for securities fraud under
15 USCS § 78j(b) in stating that firm had fraudulently misrepresented tax consequences of immediate transfer of IRA into inheritor's name, where inheritor did not
allege fraudulent conduct "in connection" with purchase or sale of any securities. Bacon v Smith Barney Shearson (1996, DC NH) 938 F Supp 98, CCH Blue Sky L Rep
P 74105, CCH Fed Secur L Rep P 99259.
SEC's request for asset freeze is granted, where it demonstrated likelihood that defendants took large fees, essentially brokerage commissions, for setting up deals
for nonexistent securities known as "prime bank instruments" or PBIs, because PBIs, if they exist, are "securities" and defendants' behavior clearly satisfies "in
connection with" requirement. SEC v Bremont (1997, SD NY) 954 F Supp 726, CCH Fed Secur L Rep P 99430.
Investors' federal securities fraud claims are dismissed, where they allege Internet broker executed their trades after company had previously confirmed orders to
cancel those trades, because alleged misrepresentations are not "in connection with" purchase or sale of any securities since they do not concern value of securities
purchased or sold, or consideration received in return. Hoffman v TD Waterhouse Investor Servs. (2001, SD NY) 148 F Supp 2d 289.
94.--Brokerage fees
Agreement for payment of broker's or finder's fee for purchase or sale of security is "in connection with" purchase under § 10(b) of Securities Exchange Act (15
USCS § 78j(b)) and SEC Rule 10b-5. Hoff v Sprayregen (1971, SD NY) 339 F Supp 369, CCH Fed Secur L Rep P 93269.
Interpositioning (practice whereby investment company, at direction of investment advisor, uses broker to effect transaction as its agent, instead of dealing directly
with market maker on principal basis, to purchase or sell security) violates anti-fraud provisions of securities laws when it results in investment company incurring
unnecessary brokerage charges. In re Edgemont Asset Mgmt. Corp. and Bowling Green Securities, Inc. (1991) 50 SEC 592.
95. Contributions to capital
So long as investment decision remains to be made upon any possible state of facts, nondisclosure is in connection with purchase of securities; in case involving
limited partnership shares, when investment decision remained to be made at time of call for capital contribution by limited partners, contributions by each limited
partner in response to call constituted separate purchase of security and, therefore, any material misrepresentations or omissions at that time were in connection
with purchase or sale of security as required by § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and Rule 10b-5. Goodman v Epstein (1978, CA7 Ill) 582 F2d
388, CCH Fed Secur L Rep P 96500, cert den (1979) 440 US 939, 59 L Ed 2d 499, 99 S Ct 1289.
Class action complaint based on farm marketing cooperative's alleged failure to properly retire capital credits held by cooperative members states claim under 15
USCS § 78j(b), where timeliness of action will be assumed at this stage based on class representative's assertion that fraudulent scheme was not accomplished until
1992, because capital credits involved in this case fall within broad definition of "security" as defined in 15 USCS § 77b(1), and representative may be able to prove
existence of executory contract sufficient to satisfy "purchase or sale" element of securities fraud action. Consumers Gas & Oil v Farmland Indus. (1992, DC Colo)
815 F Supp 1403, RICO Bus Disp Guide (CCH) P 8223, judgment entered (1993, DC Colo) 840 F Supp 794, CCH Fed Secur L Rep P 98160, revd on other grounds
(1996, CA10 Colo) 84 F3d 367, 34 FR Serv 3d 1550 (criticized in Prairie Twp. Bd. of Trs. v Hay (2002, Ohio App, Franklin Co) 2002 Ohio 4765) and (criticized in
Landmark Legal Found. v EPA (2003, DC Dist Col) 272 F Supp 2d 70).
96. Financing of securities purchases
Activities constituted fraud in connection with purchase or sale of securities where agent for purchaser arranged financing for purchaser's acquisition of securities,
and payments on loan were thereafter made by agent in order to conceal actual identity of real owner of securities, agent eventually converting securities to his own
use on ground that purchaser had not paid off note to lender. Richardson v MacArthur (1971, CA10 Utah) 451 F2d 35, CCH Fed Secur L Rep P 93260.
To construe loan negotiations for purpose of purchasing stock to be "in connection with the purchase or sale or of any security" would be overly broad extension of
that term. Clark v United Bank of Denver Nat'l Asso. (1973, CA10 Colo) 480 F2d 235, 1973-1 CCH Trade Cases P 74514, cert den (1973) 414 US 1004, 38 L Ed 2d
240, 94 S Ct 360.
Misrepresentation as to risk of financing stock investment through margin account which results in scheme to induce plaintiff to borrow money from broker to engage
in commission-producing securities purchases through broker constitutes fraud in connection with sale of securities. Arrington v Merrill Lynch, Pierce, Fenner & Smith,
Inc. (1981, CA9 Cal) 651 F2d 615, CCH Fed Secur L Rep P 98237.
Sufficient connection existed between broker's fraud and sale of securities where broker engaged in fraudulent scheme of making unauthorized commodity trades,
occasionally liquidating portions of investor's securities accounts to finance unauthorized trades and using telephone lines and facilities of national securities
exchange to execute its scheme. Smoky Greenhaw Cotton Co. v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1986, CA5 Tex) 785 F2d 1274, CCH Fed Secur L Rep P
92528, amd, reh den, en banc (1986, CA5) CCH Fed Secur L Rep P 92767.
Activity outlawed by § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 is not limited to portion of transaction involving exchange of
consideration by purchaser for stock, but also covers entire transaction aimed at extracting money from purchaser through loan to finance stock purchase with
ultimate intent of converting stock so purchased. Cooper v North Jersey Trust Co. (1964, SD NY) 226 F Supp 972, 8 FR Serv 2d 4F.22, Case 3.
Broker's persuading customer to borrow money to purchase stock, and to pledge other stock with lender as security for loan was in connection with purchase of
security so as to justify application of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Glickman v Schweickart & Co. (1965, SD NY) 242 F Supp 670.
"In connection with" requirement of SEC Rule 10b-5 is satisfied by showing nexus between defendant's actions and plaintiff's purchase or sale, and requirement was
met where buyer who had bought stock in one bank by assuming seller's existing loan with second bank, through which seller had refinanced original loan for
purchase of stock, sued second bank for allegedly failing to disclose fact that buyer's assumed loan was secured by third party's time deposit, and where it was
alleged that if second bank had disclosed third party's deposit, buyer would not have purchased stock from seller. Marrero v Banco di Roma (Chicago) (1980, ED La)
Former employee's securities fraud claim against corporation is dismissed, where plaintiff relocated from California to Maryland, loaned money and personally
guaranteed loans to corporation from his father and sister and others-in exchange for allegedly unkept promises of 25 percent of outstanding equity stock in
corporation, employment as "number 2" manager at corporation for at least 2 years, and reimbursement of relocation costs--because (1) plaintiff neither
"purchased" nor "sold" promissory notes issued to his father and sister, and (2) in gauging likelihood of plaintiff's anticipated profits, plaintiff's efforts were at least as
significant and essential as efforts of others and thus plaintiff's undocumented promissory "note" lacked investment indicia of "security" necessary to support 15
USCS § 78j(b) claim. Johnson v Computer Technology Services, Inc. (1987, DC Dist Col) 670 F Supp 1036, CCH Fed Secur L Rep P 93350.
Securities violations counterclaims of defendants, who signed notes to purchase limited partnership interests in oil and gas tax shelter, must be dismissed where sale
of securities occurred prior to date of bank's activities regarding loans alleged to be violations of 15 USCS § 78j(b), since liability under § 78j(b) may be premised
only upon misconduct that occurs "in connection with" purchase or sale of securities. Seattle-First Nat'l Bank v Carlstedt (1987, WD Okla) 678 F Supp 1543, CCH Fed
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Lender's federal securities fraud action against stock seller must fail, where lender complains that seller misrepresented manner in which stock purchase transaction
occurred by accepting $ 7 million promissory note from buyer/borrower in place of cash, because alleged misrepresentation did not relate to nature or value of stock
and thus was not made "in connection with" purchase or sale of securities. Citibank, N.A. v K-H Corp. (1990, SD NY) 745 F Supp 899, CCH Fed Secur L Rep P 95432.
Stock exchange specialist firm states no claim under 15 USCS § 78j(b), where firm seeks "rebates" or interest payments owed it by stock "finders" to which it
provides cash collateral in exchange for their obtaining stocks to fulfill firm's commitments to its clients, because it is clear that fraud alleged pertains to money lent
for finding of stocks which is not "in connection with" purchase or sale of any security. Vigilant Ins. Co. v C. & F. Brokerage Servs. (1990, SD NY) 751 F Supp 436,
SEC action against viatical settlement company will not be revived, where company purchases life insurance policies from terminally ill and markets fractional
interests in policies to investors, even though SEC now asserts that company also advances and collects additional premium payments from investors to maintain in
force policies on individuals who live longer than expected, because such post-transaction services are still merely ministerial, and do not constitute "efforts of
others" or transform interests in policies into "securities." SEC v Life Partners (1997, DC Dist Col) 986 F Supp 644, CCH Fed Secur L Rep P 90104.
97. Fraud noncoterminous with sale or purchase
Fraud which occurs after sale of stock is not in connection with sale within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5;
however, if contract is still executory when fraudulent activities occur, it may fall within proscriptions of section and rule; where contract calling for exchanges of
securities presupposed that plaintiff would not receive full benefit of his bargain until transfer restrictions were lifted, and lifting of those restrictions was delayed by
defendant, whether claim under § 10(b) and Rule 10b-5 could be maintained depended upon whether defendant's action was failure to perform contractual covenant
thereby preventing completion of contract. Ohashi v Verit Industries (1976, CA9 Cal) 536 F2d 849, CCH Fed Secur L Rep P 95605, cert den (1976) 429 US 1004, 50
L Ed 2d 616, 97 S Ct 538.
Omissions of fact occurred "in connection with" purchase or sale of security as required by SEC Rule 10b-5 where transaction was complete before disclosure of
material information even though communications between investor and employee of defendant who handled investor's account by purchasing securities without his
knowledge took place after employee had sent confirmation slips to investor. Lewelling v First California Co. (1977, CA9 Or) 564 F2d 1277, CCH Fed Secur L Rep P
96264.
Securities purchases, with respect to which violation of SEC Rule 10b-5 was alleged, made prior to issuance of statements which allegedly omitted material
information relating to corporation's business could not be "in connection with" purchase or sale of securities within meaning of rule. Joseph v Farnsworth Radio &
Television Corp. (1951, DC NY) 99 F Supp 701, affd (1952, CA2 NY) 198 F2d 883.
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), recovery can be had only for fraudulent conduct committed before date of purchase of stock. Du Pont
v Wyly (1973, DC Del) 61 FRD 615, CCH Fed Secur L Rep P 94381, 18 FR Serv 2d 488.
In order to be in connection with purchase or sale of security, within meaning of SEC Rule 10b-5, alleged fraud practiced must have been prior to or
contemporaneous with sale of securities; frauds occurring subsequent to sale are not actionable under Rule 10b-5. Kogan v National Bank of North America (1975,
ED NY) 402 F Supp 359.
Civil action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 cannot be based on allegation that developments made after buyer of
stock made commitment to purchase that stock imposed duty of disclosure; for purposes of Rule 10b-5 claim, events occurring after commitment to purchase stock
has been made are irrelevant and issues of nondisclosure, misrepresentation, materiality and reliance are to be determined by situation and knowledge of parties at
time they committed themselves, and not on basis of subsequent events, even though they occur prior to formal closing date when delivery and payment are
formally completed and cleared. Pittsburgh Coke & Chemical Co. v Bollo (1976, ED NY) 421 F Supp 908, CCH Fed Secur L Rep P 95746, affd (1977, CA2 NY) 560 F2d
"In connection with" requirement was not satisfied where alleged misrepresentation or omission occurred after last purchase of stock by plaintiff. Shamrock
Associates v Moraga Corp. (1983, DC Del) 557 F Supp 198, CCH Fed Secur L Rep P 99116.
Claim against broker for alleged misrepresentations and material omissions with respect to management of investor's stocks will not be dismissed, where broker's
alleged misrepresentations prior to investor's decision to hire broker to invest money satisfy "in connection" requirement of 15 USCS § 78j(b). Gaudette v Panos
(1986, DC Mass) 644 F Supp 826, CCH Fed Secur L Rep P 92947, mod, on reconsideration (1987, DC Mass) 650 F Supp 912, revd on other grounds, remanded
(1988, CA1 Mass) 852 F2d 30, 11 FR Serv 3d 942.
Shareholders' 15 USCS § 78j securities fraud action is dismissed where shareholders failed to allege any deceptive statements which resulted in corporate
defendants' decision to repurchase stock from individual defendant above stock market price, since all alleged wrongful conduct occurred after repurchase. Feinberg
Testamentary Trust v Carter (1987, SD NY) 652 F Supp 1066, reh den (1987, SD NY) 664 F Supp 140, CCH Fed Secur L Rep P 93939.
Investor's claim under 15 USCS § 78j(b) that precious metal marketer's associates' false and misleading statements induced him to take part in "Buy Back,
Redelivery, Rebate Program" survives motion to dismiss, where plaintiff alleges (1) that he relied on insurance coverage representations made prior to any
participation in program, and (2) that he relied on fraudulent vault receipt and insurance certificate prior to second participation, because these claims adequately
allege that marketer's fraudulent statements occurred prior to or contemporaneous with or "in connection with" purchase or sale of security as required. Connors v
Lexington Ins. Co. (1987, ED NY) 666 F Supp 434, CCH Fed Secur L Rep P 93384.
98.--Fraud in connection with other event
Trustee in securities fraud case may not recover for payments of obligations arising from substitution of coal lease lands, where original agreement provided for
substitution, trustee's risk was not increased, and only misrepresentation "in connection with" sale or purchase of security occurred at time of original agreement.
Freschi v Grand Coal Venture (1982, SD NY) 551 F Supp 1220, CCH Fed Secur L Rep P 98819.
Forced sale of interest in limited partnership does not meet "in connection with" requirement under 15 USCS § 78j(b) where fraud was in connection with sale of
partnership's assets rather than its stock. Natowitz v Mehlman (1983, SD NY) 567 F Supp 942, CCH Fed Secur L Rep P 99430.
Amino acid supplier fails to state claim against aspartame manufacturer under 15 USCS § 78j(b), where supplier claims it lost money on capital investment for plant
to produce more amino acid for manufacturer due to manufacturer's fraudulent representation of long-term supply relationship which was made to induce execution
of 1-year supply contract and issuance of warrants allowing manufacturer to acquire 9.9 percent of supplier's stock, because manufacturer's alleged fraud was not "in
connection with" securities transaction and damages claimed by supplier are not of kind which § 78j is intended to compensate. Genex Corp. v G.D. Searle & Co.
(1987, DC Md) 666 F Supp 755, CCH Fed Secur L Rep P 93401, 1987-2 CCH Trade Cases P 67714.
Securities fraud complaint of widow who allegedly suffered substantial losses on her investment of life insurance proceeds is insufficient, where widow points to
defendant's representations that his firm was experienced in financial planning and offered personal attention and investment program tailored to her needs which
would provide complete safety of principal and reasonable rate of return, because defendants correctly maintain that such representations of conservative
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management and general investment advisory services were not "in connection with" any specific securities purchased by plaintiff. McCoy v Goldberg (1990, SD NY)
Hospital's operator fails to state claim for securities fraud against health officials who allegedly induced it to take over financially troubled hospital with funds
generated by amendment to contract for provision of services at other hospital, then claimed breach of amendment and cut off funding in attempt to take over both
hospitals for themselves, because fraud alleged relates to intent to breach amendment to service contract and was not "in connection with" operator's purchase of
shares of troubled hospital for purposes of 15 USCS § 78j(b). HMCA (Carolina), Inc. v Soler-Zapata (1991, DC Puerto Rico) 778 F Supp 1234, CCH Fed Secur L Rep P
96546.
Securities fraud claim of trustee for bankrupt automobile manufacturer against manufacturer's former auditors is denied summarily, where injury suffered was due to
misappropriation of funds of limited partnership interests, but where manufacturer received all proceeds from sale of interests, because losses were not incurred "in
connection with" sale, but rather in connection to later misappropriation which had nothing to do with sale. Allard v Arthur Andersen & Co. (U.S.A.) (1996, SD NY)
Investor's 15 USCS § 78j(b) claim against bogus advisor must fail, even though advisor completely lied about his credentials, and investor lost almost $ 30 million
after seeking his advice, because alleged fraud here was not "in connection with" intrinsic investment characteristic or investment quality of purchased securities but
only related to advisor's background, so that state fraud action may be warranted but federal securities fraud cause of action is not warranted. Laub v Faessel (1997,
SD NY) 981 F Supp 870, CCH Fed Secur L Rep P 90122.
99.--Purchase prior to disclosure of material information
Partner's estate's actual purchase of half of additional partnership shares did not satisfy § 10(b) of Security and Exchange Act of 1934's, 15 USCS § 78j(b), "in
connection with" requirement because estate's claim was not that they purchased half of limited partner's interest in reliance on another partner's alleged
misrepresentations about partnership's future prospects, but rather that it was fraudulently induced to forgo purchasing other half; other partner's alleged
misrepresentations then did not affect or touch actual purchase made by estate. Lawrence v Cohn (2003, CA2 NY) 325 F3d 141, CCH Fed Secur L Rep P 92301.
Real estate investors' claims that defendants failed to inform them of corporate activities occurring after investment are not viable claims under 15 USCS § 78j(b)
since such acts could not have led plaintiffs to invest in corporation, and § 78j(b) does not cover breach of fiduciary duty. Zaro v Mason (1987, SD NY) 658 F Supp
Investors' 15 USCS § 78j(b) claim against parent company that failed to disclose its subsidiary's illegal proprietary trading was adequately stated, as was SEC Rule
10b-5, 17 C.F.R. § 240.10b-5, claim against subsidiary, to which certain misstatements were attributed and which knew or should have known investing public would
rely upon them. In re Van Der Moolen Holding N.V. Sec. Litig. (2005, SD NY) 405 F Supp 2d 388.
100.--Purchase prior to issuance of prospectus
Stockholder's purchase of stock prior to issuance of prospectus alleged to be in violation of 15 USCS § 78j(b) was not in connection with alleged violation and
recovery could not be had. Raschio v Sinclair (1973, CA9 Or) 486 F2d 1029, CCH Fed Secur L Rep P 94211.
Former director of corporation fails to state claim against accounting firm for securities fraud under 15 USCS §§ 78j(b) and 78n(e), where those sections proscribe
only fraudulent or manipulative acts or practices "in connection with" purchase or sale of security or tender offer, because director's only allegation of
misrepresentation or omission involves firm's role in preparing "Preliminary Prospectus" published more than 2 years after sale of his stock in corporation. Cahill v
Arthur Andersen & Co. (1986, SD NY) 659 F Supp 1115, CCH Fed Secur L Rep P 93110, affd (1987, CA2 NY) 822 F2d 14, CCH Fed Secur L Rep P 93298 and
(superseded by statute as stated in United States Fire Ins. Co. v United Limousine Serv. (2004, SD NY) 328 F Supp 2d 450).
101.--Purchase prior to misrepresentation
Since recovery under SEC Rule 10b-5 is predicated upon successful showing that misrepresentations occurred in connection with purchase or sale of security,
complaint did not state cause of action under Rule where only allegations directly involving defendant occurred more than 1 year after purchases forming basis of
complaint. Wolford v Equity Resources Corp. (1976, SD Ohio) 424 F Supp 670, CCH Fed Secur L Rep P 96009.
Plaintiffs who purchased stock prior to issuance of allegedly misleading financial statements certified by defendant accounting firm have no claim under 15 USCS §
78j(b) against accounting firm, since damages plaintiffs may have sustained can have no causal relationship to activities of accounting firm. In re Investors Funding
Misrepresentations by corporation concerning tender offeror were not in connection with purchase or sale of securities where such misrepresentations concern
matters postdating all of offeror's purchases of corporation's stock. Gulf Corp. v Mesa Petroleum Co. (1984, DC Del) 582 F Supp 1110, CCH Fed Secur L Rep P 91450.
Plaintiff in action under § 10(b) must demonstrate that he purchased or sold stock because he was misinformed or uninformed, and that, properly informed, he
would have succeeded in preventing loss he in fact suffered; since plaintiff in § 10(b) action failed to show precisely that he purchased stock after defendant's alleged
misrepresentations, and, since his other purchases took place considerably after defendants' alleged misstatement, plaintiff failed to establish that his purchase of
stock was "in connection with" defendants' alleged misstatements. Zuckerman v Harnischfeger Corp. (1984, SD NY) 591 F Supp 112, CCH Fed Secur L Rep P 91470.
To satisfy purchase and sale requirement of 15 USCS § 78j, there must be causal connection between misstatements or omissions and plaintiff's purchases or sale,
and there can be no connection where misstatement occurs after purchase; thus, where bonds were cashed by brokerage firm in accordance with plaintiff's
instructions and proceeds from sale were deposited in her bank account, subsequent allegedly fraudulent activity of broker in convincing plaintiff to turn over
proceeds of prior, nonfraudulent sale, did not relate to specific securities and cannot meet in "in connection with" requirement of § 78j. Crummere v Smith Barney,
Harris Upham & Co. (1985, SD NY) 624 F Supp 751, CCH Fed Secur L Rep P 92361.
Class actions charging inflation of stock price through false and misleading statements brought against waste treatment plant and third-party defendant Secretary of
Louisiana Department of Environmental Quality are dismissed against Secretary where no sale of stock occurred prior to date of alleged misrepresentations by
Secretary, and therefore such statements were not made "in connection with" the purchase or sale of any security. Citron v Rollins Environmental Services, Inc.
(1986, DC Del) 644 F Supp 733, CCH Fed Secur L Rep P 93115.
Investor's claim of fraudulent misrepresentation cannot serve as basis for Rule 10b-5 violation where claim arises from representations allegedly made by defendant
broker to induce investor initially to open account with defendant, since such misrepresentations will be deemed to have been made "in connection with the purchase
or sale of a security "only if they precede establishment of "investment contract"; agreement entered into between investor and defendant did not constitute
"investment contract" because investor agreed to open account on nondiscretionary basis only, so that only investor would be authorized to purchase or sell
securities. Cruse v Equitable Sec. of New York, Inc. (1987, SD NY) 678 F Supp 1023, CCH Fed Secur L Rep P 93290.
Securities fraud claim of bank stockholder must be dismissed for failure to meet "in connection with" requirement, where complaint alleges bank's public statements
and periodic reports to shareholders and FDIC contained material misrepresentations and failed to disclose numerous bad lending practices and poor quality loans,
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because stockholder alleges purchase of shares at various unspecified dates between June and December 1987, but fails to specify statements purchases were made
in connection with while mentioning only statements made in September and October of 1987 and throughout 1988. Konstantinakos v Federal Deposit Ins. Corp.
(1989, DC Mass) 719 F Supp 35, CCH Fed Secur L Rep P 94748.
Financial corporation's June 8, 1989 public statements dismissing concern about heavy emphasis on commercial real estate could not give rise to actionable
securities fraud, even if subsequent events and admissions revealed that real estate slowdown was already causing problems with commercial real estate loans when
statements were made, because named plaintiff purchased corporation's stock on March 27, 1989, and allegedly fraudulent statements made 3 months later could
not be connected with that purchase. Haft v Eastland Financial Corp. (1991, DC RI) 772 F Supp 1315, CCH Fed Secur L Rep P 96832.
Cause of action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 was stated by allegations that family members agreed to
sell all stock in family business to purchaser on installment basis, and that purchaser subsequently misrepresented that it was on verge of going out of business, that
it could not sell assets to raise cash, and that it could stay in business only through lowering of price of stock, to which sellers agreed, since alleged fraud was "in
connection with" purchase or sale of security as required for § 10(b) claim since original stock purchase agreement was clearly securities purchase, any fraud in
bringing it about would be "in connection with" purchase or sale of securities, and new agreement dealing expressly with terms and price of stock transaction was
also stock purchase agreement "in connection with" purchase or sale of securities. Smith v Cooper/T. Smith Corp. (1988, CA5 La) 846 F2d 325, CCH Fed Secur L Rep
P 93794, remanded (1989, CA5) 883 F2d 357 and reinstated, in part (1989, CA5 La) 886 F2d 755, mod (1989, CA5) 1989 US App LEXIS 19530.
Buyer of shares in jointly owned company created to develop new biomedical product did not violate its disclose-or-abstain duty under § 10(b) of Securities
Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 204.10B-5, because buyer's failure to disclose its plans to sell stock to another company for
substantially more than it paid seller, did not become material until after parties entered into their sales agreement. Vacold LLC v Cerami (2008, CA2) 545 F3d 114.
Scheme by which, as alleged by soft-drink manufacturer, corporation which owned 53 percent of stock in beer-brewing company agreed to sell stock to soft-drink
manufacturer, whereas company conspired to find purchaser at better price and thereafter informed soft-drink manufacturer it would not accept offer, eventually
selling stock to cigarette company, was not fraud "in connection with" purchase or sale of securities, since fraud, if any, was committed after contract was entered
into, and because under SEC Rule 10b-5, manipulative devices in sale of stock must relate to fraud on plaintiff. Pepsico, Inc. v W.R. Grace & Co. (1969, SD NY) 307 F
Failure of transferor of stock to affix legend to certificate, showing that stock was restricted and could not be alienated by transferee, was not act which was in
connection with alleged fraudulent act of transferee in providing such stock to lender as security for loan. Rich v Touche Ross & Co. (1976, SD NY) 415 F Supp 95.
Turnkey drilling contract between investors and drilling company was "in connection with" "offer or sale" for purposes of 15 USCS §§ 77q(a) and 78j(b),
notwithstanding that it was entered into subsequent to sale of leaseholds involved. Johnsen v Rogers (1982, CD Cal) 551 F Supp 281, CCH Fed Secur L Rep P 99072,
36 FR Serv 2d 262, 75 OGR 20.
Bank holding company investor's securities fraud complaint is dismissed, where complaint ambiguously implies that investor acquired his stock during 1987 trade-in
of bank stock, because alleged misrepresentations took place in 1988 and 1989 so that fraud could not have taken place "in connection with" investor's purchase of
company stock as required under 15 USCS § 78j(b). Boyle v Merrimack Bancorp, Inc. (1991, DC Mass) 756 F Supp 55, CCH Fed Secur L Rep P 95792.
Shareholders' claim against "junk bond chief" for primary violation of 15 USCS § 78j(b) fails, where all representations or misleading omissions upon which
shareholders allegedly relied were contained in statements issued by holding corporation, because chief's role as mastermind of "Daisy Chain" by which he would
both arrange financing for various entities with high- risk, high-yield junk bonds and cause some entities to invest in junk bonds of his other clients, creating
artificially inflated market for his financial products, lacks sufficient "connection with" shareholders' purchase of stock. Morse v Weingarten (1991, SD NY) 777 F Supp
312, CCH Fed Secur L Rep P 96294 (criticized in In re Fine Host Corp. Sec. Litig. (1998, DC Conn) 25 F Supp 2d 61, CCH Fed Secur L Rep P 90334).
Securities fraud action by buyers of securities against bank that was seller's paying agent is dismissed, where buyers claimed that agent engaged in scheme to
defraud by issuing affirmations that funds were, or would be, available to consummate seller's trades when in fact bank knew that funds were not available, because
affirmations do not implicate "characteristics" or "attributes" of any particular security, and therefore no claim under 15 USCS § 78j has been stated. Ernst & Co. v
Marine Midland Bank, N.A. (1996, SD NY) 920 F Supp 58, CCH Fed Secur L Rep P 99235.
Investor's 15 USCS § 78j(b) claim based on delivery of proceeds must fail, where exact availability date of proceeds was not "integral" to purchase or sale of
Treasury bill, because defendants' omission of information regarding precise date on which investor could obtain his proceeds did not occur "in connection with" his
purchase of security. Press v Chemical Inv. Servs. Corp. (1997, SD NY) 988 F Supp 375, CCH Fed Secur L Rep P 90150.
False allegations that enable stock to be publicly traded are reasonably calculated to influence investing public and, hence, are made "in connection with" purchase or
sale of security; where company owner hid fact that he controlled company in connection with having company stock publicly traded, SEC adequately pled connection
between misrepresentations and purchase or sale of security because false allegations enabling stock to be publicly traded were reasonably calculated to influence
investing public and were, therefore, made in connection with purchase or sale of security. SEC v C. Jones & Co. (2004, DC Colo) 312 F Supp 2d 1375.
Promoter's actions to defraud investors were in connection with offer and sale of securities where his clients invested money or securities with financial company he
represented in order to obtain promised tax advantages, asset protection, or profits, investors' assets were commingled in common enterprise, promoter's clients
had reasonable expectation of profits to be derived solely from efforts of others, promoter's device was promotional and sales literature, and there was direct and
intended link between that literature and purchase and sale of securities. SEC v Merrill Scott & Assocs., Ltd. (2007, DC Utah) 505 F Supp 2d 1193, CCH Fed Secur L
Rep P 94336.
103. Misappropriation of information
Misappropriation by financial printing firm's employee of information regarding targets of unannounced tender offers, which employee employs to his advantage by
purchasing and reselling at substantial profit stock in targets, is "in connection with" employee's subsequent purchase of stock within meaning of 15 USCS § 78j(b).
SEC v Materia (1984, CA2 NY) 745 F2d 197, CCH Fed Secur L Rep P 91681, cert den (1985) 471 US 1053, 85 L Ed 2d 477, 105 S Ct 2112 and (criticized in United
States v Bryan (1995, CA4 W Va) 58 F3d 933, CCH Fed Secur L Rep P 98787).
Misappropriation of confidential information regarding timing and content of certain newspaper columns was in connection with purchase or sale of securities where
use of misappropriated information was for financial benefit of individuals who misappropriated information and to financial detriment of those investors with whom
misappropriators traded since those who purchased or sold securities without misappropriated information would not have purchased or sold had they had the benefit
of that information. United States v Carpenter (1986, CA2 NY) 791 F2d 1024, 12 Media L R 2169, CCH Fed Secur L Rep P 92742, affd (1987) 484 US 19, 98 L Ed 2d
275, 108 S Ct 316, 14 Media L R 1853, 5 USPQ2d 1059, CCH Fed Secur L Rep P 93423 (superseded by statute as stated in United States v Brumley (1997, CA5 Tex)
116 F3d 728).
Where wife obtained inside information from wife's husband regarding publicly-traded company and informed brother, wife's deceptive acquisition of material inside
information was "in connection with" securities transaction since wife deceptively obtained information as part of preexisting scheme to assist brother in sale of
securities. SEC v Rocklage (2006, CA1 Mass) 470 F3d 1.
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"In connection with" requirement may be satisfied even when act of misappropriation in breach of duty and act of trading do not coincide. SEC v Rocklage (2006,
CA1 Mass) 470 F3d 1.
Grant of summary judgment in favor of board member in Securities and Exchange Commission's action alleging misappropriation in violation of § 10b of Securities
Exchange Act of 1934, 15 USCS § 78j(b) and 17 CFR § 240.10b-5 (Rule 10b-5) was reversed even though as matter of law board member misappropriated
confidential information for securities trading purposes, in breach of duty he owed to source of information, because genuine issue of fact existed as to materiality of
information on which board member traded. SEC v Talbot (2008, CA9 Cal) 530 F3d 1085, CCH Fed Secur L Rep P 94765.
Life insurance company, buyer of corporate debt securities, did not violate 15 USCS § 78j(b) by deceiving seller as to value of securities for which it paid $ 52 million,
because (1) corporation does not owe duty with respect to debt securities, and (2) buyer did not owe duty to seller under misappropriation theory since seller was
not source of information regarding securities and there was no fiduciary relationship. Salovaara v Jackson Nat'l Life Ins. Co. (1999, DC NJ) 66 F Supp 2d 593.
Where corporate officer learned of confidential information at "roundtable" of other corporate officers, and quickly sold some stock based on that information, his
disclosure of nonpublic information under express confidentiality constraints called for application of "misappropriation theory;" hus, corporate officer was liable for
violating Securities Act § 17(a), 15 USCS § 77q(a) and Securities Exchange Act § 10(b), 15 USCS § 78j(b). United States SEC v Kirch (2003, ND Ill) 263 F Supp 2d
1144.
Where purchasers of stock in corporation alleged that controlling stockholder of corporation misappropriated corporation's proprietary technology for Internet access
through cable television lines in order to provide its own service, alleged misappropriation did not involve trading of corporation's stock and thus did not support
purchasers' securities fraud claims. Leykin v AT&T Corp. (2006, SD NY) 423 F Supp 2d 229.
104. Misrepresentations of SEC actions
"In connection with" requirement was met where commodities broker misrepresented available funds at time customers invested in options, and subsequently, in
connection with offer to issue notes in partial repayment of deposited funds in return for customers' agreement to withhold legal action, fraudulently represented that
SEC had frozen large portion of its assets and had approved remuneration plan. SEC v Continental Commodities Corp. (1974, CA5 Tex) 497 F2d 516, CCH Fed Secur
L Rep P 94724.
105. Payment for securities ordered
Complaint by stockbroker against investors alleging fraudulent failure to pay for securities they had ordered stated cause of action under § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, as constituting fraudulent scheme in connection with purchase or sale of securities. A. T. Brod & Co. v Perlow
(1967, CA2 NY) 375 F2d 393, 10 FR Serv 2d 101.
Although brokerage firm's transfer of options into account executive's personal account was not purchase or sale to or from customer, brokerage firm's execution of
trades on executive's behalf was integral facet of purchase of options and "in connection" with purchase or sale of security, where options were ordered by executive
without necessary funds to cover purchase. E. F. Hutton & Co. v Penham (1982, SD NY) 547 F Supp 1286, CCH Fed Secur L Rep P 98811, 11 Fed Rules Evid Serv
1345.
106. Publicly disseminated information
Where fraud alleged involves public dissemination in document such as press release, annual report, investment prospectus or other such document on which
investor would presumably rely, "in connection with" requirement is generally met by proof of means of dissemination and materiality of misrepresentation or
omission. SEC v Rana Research (1993, CA9 Cal) 8 F3d 1358, 93 CDOS 8171, 93 Daily Journal DAR 13903, CCH Fed Secur L Rep P 97815.
Where fraud alleged involved public dissemination in document such as press release, annual report, investment prospectus or other such document on which
investor would presumably rely, "in connection with" requirement of § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 is generally met by proof of
means of dissemination and materiality of misrepresentation or omission; Securities and Exchange Commission need only show that documents were reasonably
calculated to influence investors, and that misrepresentations were material to investor's decision to buy or sell security. SEC v Wolfson (2008, CA10 Utah) 539 F3d
Alleged misrepresentations and omissions contained within annual commission filing and quarterly filing filed by company were statements made "in connection with"
purchase or sale of securities under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 since those documents, like all periodic financial reports filed with
Securities and Exchange Commission, were plainly designed to reach investors. Moreover, misstatements and omissions were also material to reasonable investor's
decision to purchase stock, as they concerned manner in which funds provided would be distributed, and thus, it could have fairly been said that misstatements or
omissions in case occurred "in offer or sale" of securities, and that that element of § 17(a) (15 USCS § 77q(a)) of Securities Act of 1933 was satisfied. SEC v Wolfson
(2008, CA10 Utah) 539 F3d 1249, CCH Fed Secur L Rep P 94825.
Conduct of publisher of monthly magazine offering investment advice, in including in magazine masthead that is materially misleading in incorrectly stating that
feature articles are based on magazine's own research and first-hand interviews with experts, occurs "in connection with" purchase or sale of security within meaning
of 15 USCS § 78j(b), since thrust of magazine is to encourage readers to buy securities; conduct violates "in connection with" requirement if conduct touches
purchase or sale of securities, or if it may reasonably be expected that publicly disseminated document will cause reasonable investors to buy or sell securities in
reliance thereon. SEC v Wall Street Pub. Institute, Inc. (1984, DC Dist Col) 591 F Supp 1070, 10 Media L R 2145, CCH Fed Secur L Rep P 91575.
SEC sufficiently states claim for fraud under 15 USCS § 78j, but not under 15 USCS § 77q, where complaint alleges savings and loan association's fraudulent failure
to disclose material facts and issuance of material statements regarding its dealings with third party affected trading of association's stock on open market, because
§ 78j's requirement that fraud be "in connection with" purchase or sale of security is satisfied since it may reasonably be expected that publicly disseminated
document will cause reasonable investors to buy or sell securities in reliance thereon, but § 77q's narrower requirement that fraud be in offer or sale of any securities
is not met by SEC's allegations. SEC v Warner (1987, SD Fla) 652 F Supp 647, CCH Fed Secur L Rep P 93169.
Where trust claimed that company and its officers and directors made false or misleading statements or omissions in conjunction with manipulation of their financial
statements by various means in order to make company's earnings appear larger than they actually were, trust adequately alleged fraud under Private Securities
Litigation Reform Act, 15 USCS § 78u-4(b)(1), (2), 15 USCS § 78j(b), and Fed. R. Civ. P. 9(b). Takara Trust v Molex Inc. (2006, ND Ill) 429 F Supp 2d 960, CCH Fed
Unpublished: Though oral or written statement was not precondition to liability under 15 USCS § 78j(b), parking transactions did not form basis for liability because
investors did not have knowledge of deceptive acts; press releases did not reference them and thus did not trigger presumption of reliance. Loran Group v Peregrine
Sys. (In re Peregrine Sys.) (2009, CA9 Cal) 2009 US App LEXIS 1660.
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107. Refusal to deal in stock matters
Newspaper's refusal to publish tombstone advertisements relating to contemplated public offering of securities is not fraud, upon issuer, in connection with purchase
or sale of securities so as to have refusal fall within scope of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Person v New York Post
Corp. (1977, ED NY) 427 F Supp 1297, 2 Media L R 1666, CCH Fed Secur L Rep P 95907, 1977-1 CCH Trade Cases P 61318, affd without op (1977, CA2 NY) 573 F2d
1294, 3 Media L R 1784.
Refusal of employee of broker-dealer to sell plaintiffs' shares of stock upon their direction is not fraud in connection with purchase or sale of security which would be
actionable under 15 USCS § 78j(b). Haynes v Anderson & Strudwick, Inc. (1981, ED Va) 508 F Supp 1303, CCH Fed Secur L Rep P 97905.
Securities fraud complaint of major investor in developer of line of health products for women is dismissed, even if oral representations made during tour of facility
were misleading and unrealistically positive, where warnings and cautionary statements in several corporate documents served to negate any potentially misleading
aspect of alleged misrepresentations, because corporation clearly and precisely cautioned that it represented exceptionally risky, indeed speculative, investment. EP
Medsystems, Inc. v Echocath, Inc. (1998, DC NJ) 30 F Supp 2d 726, revd, remanded (2000, CA3 NJ) 235 F3d 865, 48 FR Serv 3d 540.
Shareholders state viable securities fraud class-action claim against semiconductor corporation, where they have properly pleaded that statements relating to 1 Mbit
SRAM production were false and misleading when made, because, throughout 1995, corporation represented to public that it became aware of problems in its
foundries, as soon as or soon after problems occurred, via on-line information system, and later told analysts and others that it was not encountering any production
problems, but revealed at year's end that revenue decline and earnings shortfall were due to wafer contamination of 1 Mbit chips. Hockey v Medhekar (1998, ND Cal)
108. Retention or non-purchase of securities due to fraud
Considering purposes underlying § 10(b) Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, which are to protect investors from fraud, it follows that
seller is injured as much when he suffers loss on sale of securities which he has been fraudulently induced to retain as when he is fraudulently induced to sell them.
Travis v Anthes Imperial, Ltd. (1973, CA8 Mo) 473 F2d 515, CCH Fed Secur L Rep P 93718.
Allegation that plaintiffs retained stock in corporation because of fraud of defendants did not satisfy requirement, for action under § 10(b) of Securities Exchange Act
(15 USCS § 78j(b)), that fraud be in connection with sale or purchase of securities. Smallwood v Pearl Brewing Co. (1974, CA5 Tex) 489 F2d 579, CCH Fed Secur L
Fraudulently inducing investor, through false or misleading representations, not to sell securities, with result that when he finally sells, he does so at loss, is conduct
in connection with purchase or sale of security under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); cause of action under section was stated where it was
alleged that stockbroker, also director of corporation, persuaded shareholders of corporation not to dispose of shares of corporation's stock through representations
that corporation's earning would soon materially increase and prices of shares would rise and where corporation subsequently became insolvent. Stockwell v
Reynolds & Co. (1965, SD NY) 252 F Supp 215.
Violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 was not stated where it was alleged that plaintiffs held securities in reliance
upon misrepresentations, plaintiffs not having purchased or sold securities by reason of alleged fraud. Feldman v Hanley (1973, SD NY) 59 FRD 299, CCH Fed Secur
L Rep P 93913.
In order to constitute violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), acts complained of must be in connection with purchase or sale of securities
rather than their mere holding or retention. Ingenito v Bermec Corp. (1974, SD NY) 376 F Supp 1154, CCH Fed Secur L Rep P 94548.
Limited partners of investment partnership who alleged that general partners defrauded them through entering into unlawful transactions on behalf of partnership
bringing about insolvency and dissolution of partnership, general partners having allegedly persuaded limited partners, through misrepresentations, not to dispose of
their partnership interests at earlier dates, did not state cause of action based on general partners' alleged violation of § 10(b) of Securities Exchange Act (15 USCS
§ 78j(b)) because although disposition of partnership assets were sales of securities under Act, alleged fraud was not in connection with such sales; mere retention
of securities and deferred sales so not satisfy requirement that fraud be in connection with sale or purchase of securities in order to be actionable under § 10(b).
Bolger v Laventhol, Krekstein, Horwath & Horwath (1974, SD NY) 381 F Supp 260, CCH Fed Secur L Rep P 94739.
To fall within scope of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, fraud alleged must be in connection with purchase or sale of
security; cause of action was not stated where officers of corporation alleged that they retained stock of corporation in reliance on banks' misrepresentations that
they would not call loans and that they would lend additional money to corporation. Stirling v Chemical Bank (1974, SD NY) 382 F Supp 1146, CCH Fed Secur L Rep
P 94810, app dismd (1975, CA2 NY) 511 F2d 1030, 19 FR Serv 2d 1450 (superseded by statute as stated in Wyzik v Employee Ben. Plan of Crane Co. (1981, CA1
Mass) 663 F2d 348, 3 EBC 1142, 32 FR Serv 2d 1266) and (superseded by statute as stated in Labuguen v Carlin (1986, CA7 Ill) 792 F2d 708, 5 FR Serv 3d 174)
and (ovrld in part by Campos v Le Fevre (1987, CA2 NY) 825 F2d 671, 8 FR Serv 3d 642) and (superseded by statute as stated in Sellitti v R.H. Macy & Co. (In re
R.H. Macy & Co.) (1994, SD NY) 173 BR 301) and (superseded by statute as stated in In re Paine Webber Short Term United States Gov't Income Fund Sec. Litig.
(1995, SD NY) 1995 US Dist LEXIS 12029) and affd (1975, CA2 NY) 516 F2d 1396 and (criticized in Dreiling v Am. Express Travel Related Servs. Co. (2004, WD
Wash) 351 F Supp 2d 1077).
Purchase or sale requirement for civil action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) was not met where defendant, in selling securities to
plaintiff, agreed that, upon plaintiff's timely request, defendant would include those securities in any registration subsequently filed by defendant for securities of
same class, but where defendant failed to honor request to include plaintiff's securities in registration "for the shelf" (to be publicly sold at some indefinite future
time) with result that plaintiff later sold at price below that at which securities could have been sold had they been registered; even if recovery can be had by
"frustrated seller" who is fraudulently induced to retain securities and later sells at loss, plaintiff did not qualify as seller under that theory because at time he
requested registration he had decided only to sell at some undetermined future time, and fixed intention to sell is critical to recovery under that theory. Madison
Fund, Inc. v Charter Co. (1975, SD NY) 406 F Supp 749, CCH Fed Secur L Rep P 95295.
Allegations that corporation could have purchased stock at earlier date than that of actual purchase, and thereby could have obtained stock for less money, but was
prevented from doing so by reason of conflict of interest on part of board of directors, is not actionable under § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
and SEC Rule 10b-5; not engaging in securities transaction due to deceptive conduct does not satisfy statutory requirement that deception occur "in connection with
purchase or sale of any security". Ruskay v Levin (1977, SD NY) 425 F Supp 1264, CCH Fed Secur L Rep P 95842.
Misrepresentation or omission that induces "mere retention" of discretionary brokerage account cannot form basis of claim under SEC Rule 10b-5, since
misrepresentation or omission does not induce purchase or sale of security, but misrepresentations and omissions which induce investment of additional funds in
accounts does constitute purchase of security to extent of amount of funds invested. Savino v E. F. Hutton & Co. (1981, SD NY) 507 F Supp 1225, CCH Fed Secur L
Rep P 97850 (criticized in Rieger v Drabinsky (In re Livent, Inc. Noteholders Sec. Litig.) (2001, SD NY) 151 F Supp 2d 371, CCH Fed Secur L Rep P 91495).
Transfers of government securities that were merely deposited with dealer did not establish purchase or sale by investors for purposes of standing to bring securities
fraud action against dealer's accountant, and were no more than bailments, and retention of securities by dealer did not constitute purchase or sale, because only
exception to rule that mere retention does not amount to purchase or sale is where plaintiff signifies to defendant present intention to sell shares and is specifically
induced by defendant's fraudulent scheme to retain shares. First Federal Sav. & Loan Asso. v Oppenheim, Appel, Dixon & Co. (1986, SD NY) 629 F Supp 427, CCH
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Investors state valid 15 USCS § 78j(b) claim against numerous participants in securities fraud scheme, where Filipino investors gave hundreds of thousands of dollars
to "off-shore" companies through which tax-free investments in American securities would allegedly be made on their behalf, because alleged fraud occurred "in
connection with" purchase or sale of security since setting up of securities trading account was at heart of scheme. Perez-Rubio v Wyckoff (1989, SD NY) 718 F Supp
Federal claims for fraudulent inducement to retain shares shall be dismissed, where major shareholders allege they were affirmatively misled as to future prospects
of surgical supply corporation, because plaintiffs are merely holders of shares, not purchasers or sellers, and are not entitled to private cause of action under 15
USCS § 78j(b). Chanoff v United States Surgical Corp. (1994, DC Conn) 857 F Supp 1011, CCH Fed Secur L Rep P 98435, affd without op (1994, CA2 Conn) 33 F3d
50, reported in full (1994, CA2 Conn) 31 F3d 66 and cert den (1994) 513 US 1058, 130 L Ed 2d 601, 115 S Ct 667 and (criticized in Greenfield v Fritz Companies,
Inc. (2000, 1st Dist) 82 Cal App 4th 741, 98 Cal Rptr 2d 530, 2000 CDOS 6342, 2000 Daily Journal DAR 8353) and (criticized in Shirvanian v Defrates (2004, Tex
App Houston (14th Dist)) 2004 Tex App LEXIS 182).
SEC failed to meet burden of proof in establishing, by preponderance of evidence that investment firm violated § 17(a) (15 USCS § 77q(a)) of Securities Act of 1933,
§ 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934, and Rule 10b-5, 17 C.F.R. § 240.19b-5, by "cherry picking" profitable securities for itself that were
originally intended for clients; SEC produced no direct evidence of cherry picking and failed to establish that trends or "patterns" in firm's trading established
inference of cherry picking. SEC v Slocum, Gordon, & Co. (2004, DC RI) 334 F Supp 2d 144.
109. Schemes to increase value of stock
Individual who allegedly provided misleading information regarding corporation to credit agency whose report was basis of purchase of securities from corporation by
state agency is potentially liable under antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 since alleged deceptive
practice was in connection with securities sale. SEC v Coffey (1974, CA6 Ohio) 493 F2d 1304, CCH Fed Secur L Rep P 94464, cert den (1975) 420 US 908, 42 L Ed 2d
837, 95 S Ct 826 and (criticized in SEC v First Jersey Sec., Inc. (1996, CA2 NY) 101 F3d 1450, CCH Fed Secur L Rep P 99367) and (criticized in SEC v Buntrock
(2004, ND Ill) CCH Fed Secur L Rep P 92833).
False and misleading statements issued by corporate officers and directors, who were essential participants in distribution of corporation's stock, which were
motivated by intent to effectuate successful distribution, and, in connection therewith, to increase market price of shares, were "in connection with" sale of security.
Securities & Exchange Com. v North American Research & Development Corp. (1968, SD NY) 280 F Supp 106, CCH Fed Secur L Rep P 92149, affd in part and
vacated in part on other grounds (1970, CA2) 424 F2d 63, CCH Fed Secur L Rep P 92620.
Misleading statement related to corporation's earnings released to public through press release for purpose of inflating market price of corporate stock so as to
enable corporation successfully to consummate acquisition of another corporation by exchange of stock was fraudulent manipulative device with purpose of causing
investors to purchase corporation's securities and therefore was in connection with purchase and sale of securities under § 10(b) of Securities Exchange Act (15
USCS § 78j(b)). Butler Aviation International, Inc. v Comprehensive Designers, Inc. (1969, SD NY) 307 F Supp 910, CCH Fed Secur L Rep P 92543, affd (1970, CA2
"In connection with" requirement was satisfied where defendant computer corporation provided issuer with proposal, allegedly containing misrepresentations and
omissions of material fact, relating to software program essential to business contemplated to be conducted by issuer, and where computer corporation knew that
compensation for its services would come from money generated by public offering of customer's stock which public offering necessarily would be made in reliance
on false information supplied by computer corporation. Crofoot v Sperry Rand Corp. (1976, ED Cal) 408 F Supp 1154, CCH Fed Secur L Rep P 95611.
Claims against trustees of profit sharing trust that trustees violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 by failing to disclose
scheme to support and maintain price of corporate stock at artificially high level fails to state nondisclosure claim where board of trustees had full power and
authority to invest in any stock subject to right of holders of 51 percent of outstanding shares to object in writing and where failure to disclose material information
was simply not "in connection with" any purchase or sale of security. Blackmar v Lichtenstein (1977, ED Mo) 438 F Supp 803, CCH Fed Secur L Rep P 96232, revd on
other grounds (1978, CA8 Mo) 578 F2d 1273.
Investors' claims that foreign bank was liable for losses they suffered because bank foreign bank acquired, and securities company that was owned by bank that was
acquired, issued "buy" recommendation on stock issued by company that was in financial difficulty to inflate price of stock while they were dealing in stock related
back to claims investors made in earlier complaints, and they were not barred by five-year statute of limitations contained in 28 USCS § 1658(a)(2); court also found
that investors alleged violations of 15 USCS §§ 78j(b), 78t(a), and 78t-1(a), and SEC Rule 10b-5, 17 CFR § 240.10b-5, with enough specificity to survive motion to
dismiss. Quaak v Dexia, S.A. (2006, DC Mass) 445 F Supp 2d 130.
Unpublished: Stockholders' complaint alleging violations of Securities and Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a), 17 C.F.R. § 240.10b-5, and Securities
Act of 1933, 15 USCS §§ 77k, 771(a)(2), was properly dismissed for failure to state claim under heightened pleadings requirements of Private Securities Litigation
Reform Act of 1995, 15 USCS § 78u-4(b)(3)(A), where they did not show that alleged concealed "Repayment Agreement" existed and public disclosures, including
particular press release, which was vaguely optimistic, were not misleading; moreover, Securities and Exchange Commission filings made significant disclosures, in
light of which stockholders' complaint failed to demonstrate how or why contents of executed GSA would have significantly altered "total mix" of information that was
made available to reasonable investors. Young v Dreisbach (2006, CA9 Cal) 2006 US App LEXIS 13345.
110. Transfer of custodial control
Any purchase and sale which took place incident to transfer of control over stock portfolio from investor to investment adviser was too remote to satisfy "in
connection with the purchase and sale" requirement of SEC Rule 10b-5. Wilson v First Houston Inv. Corp. (1978, CA5 Tex) 566 F2d 1235, CCH Fed Secur L Rep P
96311, 24 FR Serv 2d 1026, reh den (1978, CA5 Tex) 569 F2d 1155 and vacated on other grounds (1979) 444 US 959, 62 L Ed 2d 371, 100 S Ct 442 and (criticized
in Bennett v Pippin (1996, CA5 Tex) 74 F3d 578, 34 FR Serv 3d 296).
111. Miscellaneous
Link between sale of securities and opening of commodities account was too tenuous to satisfy "in connection with" requirement of Rule 10b-5 where investor alleged
broker fraudulently induced him to liquidate stock portfolio in order to invest funds in commodities discretionary account. Saxe v E.F. Hutton & Co. (1986, CA2 NY)
Alleged fraud in purchase of stock of issuing corporation from former officer and director of corporation and his wife following his termination from corporation could
not be considered "in connection with purchase or sale of stock" as required for cause of action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b))
and SEC Rule 10b-5 promulgated thereunder where alleged fraud included nondisclosure that issuing corporation had entered into agreement with another
corporation that they would merge if their merger was eventually made legal by change in law, that issuing corporation lied to officer-director about purpose of
meeting at which company sought his resignation, that issuing corporation threatened to terminate officer-director's benefits unless he agreed to sell his stock, that
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other corporation's broker misrepresented identity of his principal until officer-director committed to particular sales price, and that issuing corporation knew but did
not disclose that member of its board had expressed interest in purchasing stock, since these matters either did not relate to purchase and sale of stock, or were
matters that law did not require disclosed, or concerned matters of which officer-director, who was sophisticated investor, had become aware prior to sale. Taylor v
First Union Corp. (1988, CA4 SC) 857 F2d 240, CCH Fed Secur L Rep P 94021, cert den (1989) 489 US 1080, 103 L Ed 2d 837, 109 S Ct 1532.
In action brought against employer to remedy company's wrongful refusal to sell plaintiff employee its stock as guaranteed by his employment benefits package,
claim is not stated under § 78j and Rule 10b-5, since misrepresentation in case, unrelated to value of involved security or consideration offered for it, did not occur
"in connection with" purchase of security. Gurwara v LyphoMed, Inc. (1991, CA7 Ill) 937 F2d 380, CCH Fed Secur L Rep P 96169.
Order dismissing plaintiffs' claims Securities Exchange Act of 1934 and S.E.C. Rule 10b-5 claims was reversed and remanded because limited partnership units they
sold were securities within meaning of Act; defendant real estate developers did not exercise sufficient control of limited partnership to disqualify their units as
securities. Liberty Prop. Trust v Republic Props. Corp. (2009, App DC) 577 F3d 335, CCH Fed Secur L Rep P 95328.
Protection of Rule 10b-5 could not be invoked, because party was not defrauded as result of deceptive practices touching sale of securities, where company charged
with securities violations allegedly made misrepresentations in sale of computer equipment, but there was no direct connection between alleged misrepresentations
and purchase of stock in company to which misrepresentations were made, and any alleged misrepresentations were not reasonably calculated to influence investing
public. Jabend, Inc. v Four-Phase Systems, Inc. (1986, WD Wash) 631 F Supp 1339, CCH Fed Secur L Rep P 92735.
Membership interest in limited liability company was not "investment contract" and thus was not "security" for purposes of securities fraud action under 15 USCS §
78j(b) and Rule 10b-5, where member had more than investment interest in company, as he claimed role in everyday management. Keith v Black Diamond Advisors,
Inc. (1999, SD NY) 48 F Supp 2d 326, CCH Fed Secur L Rep P 90458.
Plaintiff shareholders' allegations sufficiently demonstrated that defendant company's conduct within U.S. was more than "merely preparatory" to alleged securities
fraud associated with overseas purchase of company's shares by foreign plaintiffs; moreover, documented accounting fraud related to overstatement of vendor
allowances by company's U.S. based subsidiaries substantially contributed to and was material to company's success in attracting shareholders both in U.S. and
abroad and according to shareholders, company was able to maintain artificially inflated share prices and fund ambitious acquisition campaign in part by improperly
recognizing income from vendor allowances in its U.S. operations; when company made its first restatement of $ 500 million because of U.S. based vendor allowance
accounting fraud, company share price trading on foreign exchanges lost 63 percent of its value, directly causing financial injury to foreign plaintiffs; therefore,
shareholders adequately demonstrated sufficient U.S. based conduct by company defendants to justify asserting subject matter jurisdiction over securities fraud
claims of foreign purchasers. In re Royal Ahold N.V. Sec. & ERISA Litig. (2004, DC Md) 351 F Supp 2d 334, CCH Fed Secur L Rep P 93061.
Where investors alleged that sellers of annuities failed to inform them of usefulness of tax shelter aspect of annuities within qualified plan, it clearly concerned value
of security and statements were made "in connection" with sale of variable annuity; consequently, sellers could be liable under 15 USCS § 78j(b) for failure to make
adequate tax shelter disclosure within prospectus. Cooper v Pac. Life Ins. Co. (2005, SD Ga) 229 FRD 245, request den (2005, SD Ga) 2005 US Dist LEXIS 16465.
Variable annuity issuer's failure to undertake suitability reviews, or engage in suitability oversight could constitute securities fraud under 15 USCS § 78j(b); thus,
where purchasers of annuities presented evidence that issuer had superior knowledge regarding economic value of death benefit for annuities and where they
presented some evidence that issuers actually increased difficulty of suitability determination by issuing misleading prospectus, court could not say that issuer had no
responsibility for suitability determinations as matter of law. Cooper v Pac. Life Ins. Co. (2005, SD Ga) 229 FRD 245, request den (2005, SD Ga) 2005 US Dist LEXIS
16465.
In rejecting defendant's challenge to motion for class certification in securities case involving allegedly misleading statements, and in particular to adequacy and
typicality of proposed class representative that it alleged had suffered no economic loss because net effect of representative's convertible arbitrage was that it earned
gain on its class period transactions in defendant's securities, court disagreed with defendant's suggested cumulative methodology, which included offsetting gains in
loss calculation; to contrary, court found transaction-based methodology, which allowed claims for unprofitable transactions without offsetting that recoverable loss
with gains from profitable transactions, to be more consistent with provisions of 15 USCS § 78j(b) and SEC Rule 10b-5. In re Sepracor Inc. (2005, DC Mass) 233 FRD
52, CCH Fed Secur L Rep 93550.
Defendants' motion for reconsideration was granted because intervening U.S. Supreme Court decision in Dura Pharmaceuticals required investors to specifically plead
that alleged misrepresentations made by defendants directly caused reduced value in stock, in order to state claim under 15 USCS §§ 78j(b) and 78t(a) and Rule
10b-5, 17 CFR § 240.10b-5. In re Avista Corp. Secs. Litig. (2005, ED Wash) 415 F Supp 2d 1214.
Former officer's cause of action under 15 USCS §§ 78j and 78t and Rule 10b-5, 17 CFR § 240.10b-5, was dismissed when officer alleged that she had decided to
postpone exercise of her stock options while predecessor company was merging with successor company, based upon statements made by defendants, and that
value of stock options declined dramatically, because former officer had never actually purchased or sold securities as required for action under Securities Exchange
Act. McKissick v Gemstar-TV Guide Int'l (2005, ND Okla) 415 F Supp 2d 1240, affd, reconsideration den (2005, ND Okla) 2005 US Dist LEXIS 38754.
Where complaint against them alleged facts that, if proven, could show that defendants provided false or misleading information to their auto-trading subscribers
upon which reasonable investors would have relied in purchase or sale of securities, complaint alleged facts that would support "in connection with" element of §
10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and defendants were not entitled to dismissal of claim. SEC v Terry's Tips, Inc. (2006, DC Vt) 409 F
Supp 2d 526.
Plaintiff limited partnership's (LP) sale of limited partnership units to defendant corporation was not sale of securities under federal securities laws; corporation's
investment in LP would have succeeded or failed based not just on entrepreneurial or managerial efforts of others, but also on those of its owners, so LP's claim
under § 10(b) of Securities and Exchange Act, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5, failed. Republic Prop. Trust v Republic Props. Corp.
(2008, DC Dist Col) 540 F Supp 2d 144.
Unpublished: Attorney and telephone solicitor were properly granted summary judgment on buyer's Racketeer Influenced and Corrupt Organizations Act claims
because they were based on conduct that was alleged to have occurred in connection with purchase or sale of any security, that is, misrepresentations that were
made to induce buyer to invest in corporation or to delay his claim for return of his investment. Lowery v Blue Steel Releasing, Inc. (2007, CA9 Cal) 2007 US App
LEXIS 29896.
Unpublished: Investors penalized by IRS for participating in abusive tax shelter failed to plead claim under 15 USCS § 78j(b) against limited liability company for
telling them they were not required to report their participation because after-the-fact representations were not made "in connection with purchase or sale of
securities." Affco Invs., LLC v KPMG, LLP (2009, SD Tex) CCH Fed Secur L Rep P 95510.
3."Purchase or Sale"
112. Generally
In view of fact that 15 USCS § 78c(a) prefaces lists of general definitions with phrase "unless context otherwise requires", court must address itself to meaning of
words "purchase or sale" in context of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); while statutory definitions indicate breadth of terms "purchase" and
"sale" by using definitional word "include" in 15 USCS § 78c(a)(13) and (14) and by including within definitions contracts "to buy, purchase or otherwise acquire" and
"to sell or otherwise dispose of" securities, such general definitions are for most part unhelpful and court must ask whether conduct in question is type of fraudulent
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behavior which was meant to be forbidden by § 10(b) and SEC Rule 10b-5. SEC v National Sec., Inc. (1969) 393 US 453, 21 L Ed 2d 668, 89 S Ct 564, CCH Fed
In action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), it is irrelevant that fraud involves misappropriation of proceeds of sale, rather
than type of fraud that is usually associated with sale or purchase of securities; § 10(b) bars use of deceptive devices and contrivances by stockholder with regard to
purchase or sale of securities by corporation, and fact that creditors of corporate buyer or seller of securities may be ultimate victims, does not warrant disregard of
corporate entity. Superintendent of Ins. v Bankers Life & Casualty Co. (1971) 404 US 6, 30 L Ed 2d 128, 92 S Ct 165, CCH Fed Secur L Rep P 93262.
Term "sale" as used in antifraud provisions of 15 USCS § 78j(b) is not to be so narrowly construed as to ascribe to it merely such meaning as term "sale" has always
had in contracts since verb "include" rather than verb "means" is used in 15 USCS § 78c(a)(13) and (14), emphasizing breadth of definition; phrases "or otherwise
acquire" and "or otherwise dispose of" are not limiting. Vine v Beneficial Finance Co. (1967, CA2 NY) 374 F2d 627, 10 FR Serv 2d 1549, cert den (1967) 389 US 970,
19 L Ed 2d 460, 88 S Ct 463 and (ovrld as stated in United States v Weissman (1997, SD NY) 1997 US Dist LEXIS 12975) and (criticized in Isquith v Caremark Int'l
(1998, CA7 Ill) 136 F3d 531, CCH Fed Secur L Rep P 90141) and (criticized in Koppel v 4987 Corp. (1999, SD NY) CCH Fed Secur L Rep P 90640) and (criticized in
Howe v Bank for Int'l Settlements (2002, DC Mass) 194 F Supp 2d 6, CCH Fed Secur L Rep P 91764, 2002-1 CCH Trade Cases P 73625).
In determining whether certain transactions involved purchase or sale within meaning of antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS §
78j(b)) and SEC Rule 10b-5, broad language of statutory definitions in 15 USCS § 78c(a)(13) and (14) indicates congressional intention that words "purchase" and
"sale" are not limited to transactions ordinarily governed by commercial law of sales, but purpose is evidently to make control of securities transactions reasonably
complete and effective to accomplish purposes of such legislation. Dasho v Susquehanna Corp. (1967, CA7 Ill) 380 F2d 262, cert den (1967) 389 US 977, 19 L Ed 2d
470, 88 S Ct 480, dismd (1970, ND Ill) CCH Fed Secur L Rep P 92575.
In determining whether certain transaction constitutes sale within meaning of antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)),
definitions of terms "purchase" and "sale" are not limited to transactions ordinarily governed by commercial law of sales. Mader v Armel (1968, CA6 Ohio) 402 F2d
158, 19 Ohio Misc 97, 46 Ohio Ops 2d 392, CCH Fed Secur L Rep P 92294, 12 FR Serv 2d 542, 4 ALR Fed 1037, cert den (1969) 394 US 930, 22 L Ed 2d 459, 89 S
Ct 1188.
Purchase-sale requirement under 15 USCS § 78j(b) is construed "broadly and flexibly" and is not limited to traditional face to face commercial transaction. Coffee v
Permian Corp. (1970, CA5 Tex) 434 F2d 383, CCH Fed Secur L Rep P 92871.
Purchaser-seller requirement under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 does not demand sale in strict common-law
traditional sense since definitions in 15 USCS § 78c(a)(13) and (14) encourage liberal construction. Dudley v Southeastern Factor & Finance Corp. (1971, CA5 Ga)
Test for determining whether fraud was in connection with sale is whether transaction involving fraud may be said to touch transaction involving purchase. McGrath v
Zenith Radio Corp. (1981, CA7 Ill) 651 F2d 458, CCH Fed Secur L Rep P 97841, cert den (1981) 454 US 835, 70 L Ed 2d 114, 102 S Ct 136.
Plaintiffs cannot rely on breach of implied contract to sell stock to give them status as "purchasers" of securities under 15 USCS § 78j(b) where they never entered
contract. Reprosystem, B.V. v SCM Corp. (1984, CA2 NY) 727 F2d 257, CCH Fed Secur L Rep P 99667, cert den (1984) 469 US 828, 83 L Ed 2d 54, 105 S Ct 110.
One bringing action under § 10(b) and SEC Rule 10b-5 must show that fraudulent conduct touched purchase or sale of securities, and one could not maintain action
for fraudulent refusal to perform contract for sale of securities where there existed no enforceable contract for sale because of failure to comply with state statute of
frauds provision requiring writing. Pelletier v Stuart-James Co. (1989, CA11 Ga) 863 F2d 1550, CCH Fed Secur L Rep P 94180, 7 UCCRS2d 1607.
Exchange of shares during merger transaction constitutes purchase or sale of securities for purposes of § 78j(b). Davidson v Belcor, Inc. (1991, CA7 Ill) 933 F2d 603,
While in some circumstances passbooks may be securities within meaning of § 3(a)(10) of Securities Exchange Act (15 USCS § 78c(a)(10)), plaintiff has not alleged
recognizable "purchase" or "sale" of securities so as to invoke Rule 10b-5 jurisdiction where "forced seller" theory is nowhere alleged. Hendrickson v Westland
Mineral Corp. (1978, SD Fla) 463 F Supp 826.
Purchase under SEC Rule 10b-5 can occur whenever purchaser takes action that "represents a new decision by him to invest," and allegation of making deposit of
funds to open discretionary securities accounts constitutes sufficient allegation of purchase of investment contract, as does each allegation of subsequent deposit of
new funds. Troyer v Karcagi (1979, SD NY) 476 F Supp 1142, CCH Fed Secur L Rep P 96929.
Bonds were not "purchased" where received by inheritance, any right to securities fraud being personal to decedent. Rose v Arkansas Valley Environmental & Utility
Authority (1983, WD Mo) 562 F Supp 1180, CCH Fed Secur L Rep P 99224.
Purchase, within meaning of 15 USCS § 78j(b) and Rule 10b-5, can occur whenever investor takes action that represents new decision by him to invest. Rush v
Oppenheimer & Co. (1984, SD NY) 592 F Supp 1108, CCH Fed Secur L Rep P 91639, vacated on other grounds, on reh (1984, SD NY) 596 F Supp 1529 and revd on
other grounds (1985, CA2 NY) 779 F2d 885, CCH Fed Secur L Rep P 92406 (criticized in Southern Sys. v Torrid Oven, Ltd. (2000, WD Tenn) 105 F Supp 2d 848) and
(criticized in Uwaydah v Van Wert County Hosp. (2002, ND Ohio) 246 F Supp 2d 808) and (criticized in Raymond James Fin. Servs. v Saldukas (2003, Fla App D2)
851 So 2d 853, 28 FLW D 1863).
Transfer of nonsecurity asset did not constitute purchase or sale of security, and therefore corporate mismanagement and deception failed to state claim under Rule
10b-5 because alleged deceptive corporate mismanagement did not involve purchase or sale of security. Batchelder v Northern Fire Lites, Inc. (1986, DC NH) 630 F
Stock issuers' summary judgment motion is denied, because standing for securities fraud requiring purchaser or seller may be met if there is a contract to buy or
sell, even if there is no performance: there is genuine issue of material fact as to whether alleged oral agreement to purchase stock falls within Statute of Frauds,
and there is sufficient evidence by which reasonable jury could return verdict for "purchaser" on issue of existence of enforceable oral contract not within applicable
Statute of Frauds. Geeting v Prizant (1987, ND Ill) 664 F Supp 343, CCH Fed Secur L Rep P 93936.
Securities fraud claim is dismissed, because misrepresentations were not "in connection with purchase or sale of securities," where fraudulent statements were to
induce investment in nonexistent "house account" and show attempt rather than actual purchase and sale of securities when no securities were actually purchased or
sold. John v Blackstock (1987, MD Fla) 664 F Supp 1426, CCH Fed Secur L Rep P 93414.
Airline employees whose unions negotiated wage concessions in return for participation in employee stock ownership plans (ESOPs) have no federal securities fraud
cause of action against airline and its management for "promoting the out of" certain benefits derivable from ESOPs, because "purchase or sale" of "securities" is
essential element of cause of action and plaintiffs' participation in ESOPs at issue does not meet either of those requirements. Childers v Northwest Airlines, Inc.
(1988, DC Minn) 688 F Supp 1357, 9 EBC 2430, CCH Fed Secur L Rep P 93961.
Corporation is denied summary dismissal of shareholder's 15 USCS § 78j(b) claim, where shareholder made gift of his shares to irrevocable trust after CEO
misrepresented that corporation had no plans to go public, even though there is no precedent for donor qualifying for protection under § 78j(b), because
misrepresentations could be of kind that § 78j(b) was designed to prevent, and misrepresentations induced shareholder to part with his stock and impaired his ability
to reach informed judgment on value of stock transaction. Berk v Maryland Publick Banks (1998, DC Md) 6 F Supp 2d 472.
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Generally, forced seller doctrine may be applied to permit securities fraud claim under 15 USCS § 78j(b) even in absence of actual sale or purchase of security, only
in those situations where fundamental nature of plaintiff's investment has been changed without actual sale through circumstances beyond plaintiff's control. Gunter
v Ridgewood Energy Corp. (1998, DC NJ) 32 F Supp 2d 166.
In suit by investors against asset management firm that launched certain fund and wholly owned subsidiary that managed fund, alleging violations of § 10(b) of
Securities Exchange Act of 1934, Rule 10b-5, 17 CFR § 240.10b-5, and § 20(a) of Act, investors failed to state misrepresentation claim against investment adviser
because there were no allegations showing that alleged fraud occurred in connection with purchase or sale of security. Wiggins v Janus Capital Group Inc. (In re Mut.
Funds Inv. Litig.) (2007, DC Md) 487 F Supp 2d 618.
113. Acquisition of treasury stock
Purchase of treasury stock is purchase of securities within purview of SEC Rule 10b-5. Tully v Mott Supermarkets, Inc. (1972, DC NJ) 337 F Supp 834, CCH Fed Secur
L Rep P 93377, 16 FR Serv 2d 30.
114. Agreements affecting prior sales
Plaintiffs became parties to new "purchase" and "sale" when they and corporation jointly abandoned earlier 1973 purchase and sales contract and substituted new
1979 purchase and sale contracts which substantially changed obligations of investor. Keys v Wolfe (1983, CA5 Tex) 709 F2d 413, CCH Fed Secur L Rep P 99413.
Where sales of herds of cattle in conjunction with maintenance contracts were investment contracts, subsequent exchange of maintenance contracts for new
modified maintenance contracts constituted sales of a securities for purposes of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); change of maintenance
contract represented new "investment decision" since maintenance contracts were pivotal to herd owners' investment package; in exchanging contract, herd owner
was making investment choice of whether to sell herd immediately or to commit himself to further substantial payments to increase his equity by breeding more
cattle and "growing" healthy ones to maturity; coupling of exchange of maintenance contracts with grant of additional cattle without charge satisfied purchase-sale
requirement of § 10(b) since, in accepting free animals, herd owners obligated themselves to pay additional maintenance charges on them. Ingenito v Bermec Corp.
Where plaintiffs were issued nonvoting stock in consideration for entering into subordination agreement with regard to debts owed to them by broker-dealer, and
thereafter executed extensions of those agreements, each agreement to extend arrangement represented new decision by lenders to invest in broker-dealer and for
purposes of SEC Rule 10b-5, and each extension agreement was entitled to be treated as sale or purchase of security. Fischer v New York Stock Exchange (1976, DC
Although contract to purchase or sell constitutes purchase or sale for purposes of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), approval of takeover by
shareholders of target company does not constitute contract to purchase or sell securities. Rediker v Geon Industries, Inc. (1978, SD NY) 464 F Supp 73.
115. Conversion options
Conversion option in convertible debenture qualifies as contract for purchase or sale of securities, within meaning of 15 USCS § 78j(b). Pittsburgh Terminal Corp. v
Baltimore & O. R. Co. (1982, CA3 Pa) 680 F2d 933, CCH Fed Secur L Rep P 98706, cert den (1982) 459 US 1056, 74 L Ed 2d 621, 103 S Ct 475, 103 S Ct 476 and
(criticized in Page Mill Asset Mgmt. v Credit Suisse First Boston Corp. (2000, SD NY) 2000 US Dist LEXIS 3941).
Owner of bank stock would not maintain action under § 78j(b) and Rule 10b-5 on grounds that acquirer of bank which had offered shareholders of bank either cash
or its own stock in exchange for their stock had failed to disclose merger negotiations which might lead to increase in value of acquirer's stock and would thus have
led shareholder to exchange more of its shares in acquired bank for acquirer's stock rather than cash, since Rule 10b-5 prohibits false or misleading statements or
omissions only in connection with purchase or sale of security, whereas shareholder had decided not to buy. Jackvony v Riht Financial Corp. (1989, CA1 RI) 873 F2d
Where holders of short term notes exchange old notes issued by not-for-profit corporation for new notes after conversion of corporation to for-profit enterprise, issue
of whether holders who exchanged notes were "purchasers" is close because substance of notes did not substantially change while form of corporation did, and
determination depends upon whether notes are to be considered "securities" within meaning of Act. Ahern v Gaussoin (1985, DC Or) 611 F Supp 1465, CCH Fed
Securities fraud claim will not be summarily dismissed for failure to allege fraud "in connection with sale or purchase" of security, even though plaintiff had
contractually committed to purchase of stock prior to issuance of allegedly fraudulent accounting audit, because postaudit amendment to investment contract by
which plaintiff relinquished right to realize cash payment and instead received option to convert stock conceivably was such significant change in nature of
investment or risks as to amount to new investment. Department of Economic Dev. v Arthur Andersen & Co. (1988, SD NY) 683 F Supp 1463, CCH Fed Secur L Rep P
93692.
116.--Supplemental indentures
Execution of supplemental indenture affecting conversion rights of indenture does not constitute purchase or sale under 10(b) of Securities Exchange Act (15 USCS §
78j(b)) and is not forced sale under forced seller doctrine since supplemental indenture does not so substantially change underlying security as to produce purchase
and sale under § 78j. Broad v Rockwell International Corp. (1980, CA5 Tex) 614 F2d 418, CCH Fed Secur L Rep P 97326, different results reached on reh (1981, CA5
Tex) 642 F2d 929, CCH Fed Secur L Rep P 97956, cert den (1981) 454 US 965, 70 L Ed 2d 380, 102 S Ct 506 and (ovrld as stated in U.S. States Bank Nat'l Ass'n v
U.S. Timberlands Klamath Falls (2004, Del Ch Ct) 2004 Del Ch LEXIS 106).
117. Corporate acquisition of own stock
Corporation's acquisition of its own shares in exchange for block of stock of second corporation owned by acquiring corporation was purchase within meaning of SEC
Rule 10b-5. Dasho v Susquehanna Corp. (1972, CA7 Ill) 461 F2d 11, CCH Fed Secur L Rep P 93342, 15 FR Serv 2d 1286, cert den (1972) 408 US 925, 33 L Ed 2d
336, 92 S Ct 2496 and cert den (1972) 408 US 925, 33 L Ed 2d 336, 92 S Ct 2498.
Scheme to defraud is not shown by mere allegation that corporation made 6 major acquisitions of its own shares in 4 years. Vaughn v Teledyne, Inc. (1980, CA9 Cal)
Closely held corporations that purchase their own stock have special obligation to disclose to sellers all material information. Castellano v Young & Rubicam, Inc.
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(2001, CA2) 257 F3d 171, 17 BNA IER Cas 1673, CCH Fed Secur L Rep P 91477 (criticized in Cromer Fin. Ltd. v Berger (2001, SD NY) CCH Fed Secur L Rep P
91550).
Former key employee's federal securities law claim is dismissed, where employee's forced resignation was caused by alleged misrepresentation of corporate officers
which resulted in his tendering his resignation and selling his stock back to company for minimal price under stock repurchase agreement, because such allegation,
even if true, could not support 15 USCS § 78j(b) claim since plaintiff inappropriately attempts to equate his termination with sale of stock. Menides v Colonial Group,
Inc. (1987, DC Mass) 681 F Supp 965, CCH Fed Secur L Rep P 93507.
118.--Redemptions of corporate issues
Redemption by corporation of convertible debentures was "purchase" by corporation within meaning of SEC Rule 10b-5, and debenture owners' standing to sue under
15 USCS § 78j(b) was not impaired by strict interpretation of "purchaser-seller" rule. Green v Hamilton Int'l Corp. (1977, SD NY) 437 F Supp 723, CCH Fed Secur L
Rep P 96192.
Corporate issuer's contract to obtain its common stock in exchange for convertible debenture is contract for purchase or sale within meaning of 15 USCS § 78j(b).
Pittsburgh Terminal Corp. v Baltimore & O. R. Co. (1981, WD Pa) 509 F Supp 1002, CCH Fed Secur L Rep P 98440, affd in part and revd in part on other grounds,
remanded (1982, CA3 Pa) 680 F2d 933, CCH Fed Secur L Rep P 98706, cert den (1982) 459 US 1056, 74 L Ed 2d 621, 103 S Ct 475, 103 S Ct 476 and (criticized in
Page Mill Asset Mgmt. v Credit Suisse First Boston Corp. (2000, SD NY) 2000 US Dist LEXIS 3941).
Former shareholders sufficiently state claim for which relief can be granted under 15 USCS § 78j, where they owned less than 400 shares of defendant's common
stock and, after reverse stock split, they had no choice but to redeem their "scrip" for 30 cents per share within 120 days or it became worthless, because "forced
sale" occurs when shareholder's investment is altered to point that he or she must choose between liquidating shares in exchange for cash or being completely
divested of any interest. Brewer v Lincoln Int'l Corp. (2000, WD Ky) 148 F Supp 2d 792.
119. Corporate takeover transactions
Corporation which made public offer to purchase another corporation's shares, and invited shareholders to tender their shares for purchase, but whose tender offer
failed, was not purchaser of securities for purposes of § 10b of Securities Exchange Act (15 USCS § 78j(b)). Iroquois Industries, Inc. v Syracuse China Corp. (1969,
CA2 NY) 417 F2d 963, CCH Fed Secur L Rep P 92526, cert den (1970) 399 US 909, 26 L Ed 2d 561, 90 S Ct 2199.
Solicitation of proxies or giving of them or failure to revoke proxy is not by itself purchase or sale of security, and claim by plaintiffs, depositors in savings and loan
institution, that defendants, by use of permanent proxies, perpetuated their power and ability to perform frauds, misrepresentations and concealments does not
state claim under 15 USCS § 78j(b) or SEC Rule 10b-5. Tcherepnin v Franz (1972, CA7 Ill) 461 F2d 544, CCH Fed Secur L Rep P 93474, cert den (1972) 409 US
1038, 34 L Ed 2d 487, 93 S Ct 516.
"Add on" agreement whereby tenderor agreed to compensate third party corporation in takeover of corporation was not "manipulative device" because agreement
did not create artificial barriers to operation of market place nor artificially affect market activity in order to mislead investors. Biechele v Cedar Point, Inc. (1984,
CA6 Ohio) 747 F2d 209, CCH Fed Secur L Rep P 91829.
No cause of action was stated under 15 USCS § 78j(b) where plaintiff company alleged that it and defendant had agreed to make joint offer to another company
which was selling 2 of its subsidiaries, under which agreement, if joint offer were accepted, plaintiff and defendant would each acquire one of subsidiaries, but that,
without any prior notice, defendant had made independent offer to purchase both subsidiaries, which offer was accepted, and defendant had refused to resell shares
of one of subsidiaries to plaintiff, but had instead resold them to third party. Ronzani v Sanofi S.A. (1990, CA2 NY) 899 F2d 195, CCH Fed Secur L Rep P 94994, 16
FR Serv 3d 1059.
"Sale of business" doctrine recognizes that purpose of federal securities laws is to protect passive investor who invests in common enterprise for purpose of profiting
from efforts of others; doctrine excludes purchase of 100 percent of stock of closely held corporation from Securities Acts; despite fact that agents of former owner
remained with company as managers rather than as consultants, court will apply sale of business doctrine to exclude purchase of corporation from Securities Acts.
Oak Industries, Inc. v Foxboro Co. (1984, SD Cal) 596 F Supp 601, CCH Fed Secur L Rep P 91657.
Corporation had not duty to disclose preliminary merger discussions to former employee who decided to leave company, which required sale of his company stock,
since disclosure of tentative discussions may be misleading to shareholders, rendering preliminary merger discussions immaterial as matter of law, with duty to
disclose arising where acquiring corporation is public, only when agreement in principle to merge has been reached. Guy v Duff & Phelps, Inc. (1985, ND Ill) 628 F
Securities fraud claim by stockholders of bank holding company is dismissed, where shareholders obtained shares in holding company through merger and exchange
of their stock in bank for stock in holding company, and transaction was not between different companies but was part of internal corporate reorganization, because
shares obtained through exchange as part of reorganization are not purchased or sold within meaning of 15 USCS § 78j. Goldberg v Hankin (1993, ED Pa) 835 F
Supp 815, CCH Fed Secur L Rep P 98197, subsequent app (1994, CA3 Pa) 30 F3d 1486.
120. Custodial transfer of stock
Plaintiffs failed to fulfill statutory purchase and sale requirements necessary to invoke Rule 10b-5, where antifraud action is based upon alleged wrongful conduct of
brokerage firm in connection with transfer of securities accounts between brokers, pursuant to contract, where plaintiffs never parted with ownership of securities,
nor was such ownership ever vested in any other party; custodial transfer of stock from one broker to another while legal ownership remains in same investor is not
sale within Rule 10b-5. Sacks v Reynolds Secur., Inc. (1978, App DC) 193 US App DC 80, 593 F2d 1234, CCH Fed Secur L Rep P 96715, 26 FR Serv 2d 463.
121. Issuance of bills of exchange
Issuance and acceptance of bills of exchange payable in Deutchemarks as purchase price of textile machinery, constituted "sale" of securities under § 10(b) of
Securities Exchange Act of 1934 (15 USCS § 78j(b)). MacAndrews & Forbes Co. v American Barmag Corp. (1972, DC SC) 339 F Supp 1401, CCH Fed Secur L Rep P
93532.
122. Issuance of stock
Issuance by corporation of its own stock in exchange for spurious assets was "sale" under antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS §
78j(b)) and SEC Rule 10b-5. Hooper v Mountain States Sec. Corp. (1960, CA5 Ala) 282 F2d 195, cert den (1961) 365 US 814, 5 L Ed 2d 693, 81 S Ct 695.
Issuance by corporation of its own securities constitutes sale for purposes of antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC
Rule 10b-5. Ruckle v Roto American Corp. (1964, CA2 NY) 339 F2d 24; Mader v Armel (1968, CA6 Ohio) 402 F2d 158, 19 Ohio Misc 97, 46 Ohio Ops 2d 392, CCH
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Fed Secur L Rep P 92294, 12 FR Serv 2d 542, 4 ALR Fed 1037, cert den (1969) 394 US 930, 22 L Ed 2d 459, 89 S Ct 1188; Schoenbaum v Firstbrook (1968, CA2
NY) 405 F2d 215, CCH Fed Secur L Rep P 92327, 12 FR Serv 2d 1233, cert den (1969) 395 US 906, 23 L Ed 2d 219, 89 S Ct 1747; Rekant v Desser (1970, CA5 Fla)
Corporation issuing securities, such as warrants, is seller of those securities for purposes of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule
10b-5, and its interest may be asserted in derivative action. Wright v Heizer Corp. (1977, CA7 Ill) 560 F2d 236, CCH Fed Secur L Rep P 96101, cert den (1978) 434
US 1066, 55 L Ed 2d 767, 98 S Ct 1243 and (ovrld as stated in Krieger v Gast (1998, ND Ill) 1998 US Dist LEXIS 15422).
SEC Rule 10b-5 promulgated pursuant to § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) prohibits fraud in connection with purchase of, or in
connection with contract to purchase, stock, and neither Act nor Rule 10b-5 expresses any requirement that stock actually have issued, so that person who has made
material misrepresentations in inducing another to part with something of value for purchase of security may not escape liability under Rule 10b-5 simply by refusing
to issue written instrument evidencing security. Sulkow v Crosstown Apparel, Inc. (1986, CA2 NY) 807 F2d 33, CCH Fed Secur L Rep P 93009.
123.--As indicia of ownership
Sale of all stock in corporation to purchaser who thereby acquires control of day-to-day operation of business is not transaction within scope of 15 USCS § 78j(b),
where transaction is motivated by commercial rather than investment purpose. Barsy v Verin (1981, ND Ill) 508 F Supp 952, CCH Fed Secur L Rep P 97943.
Plaintiff who purchases assets of business for cash, simultaneously incorporating business and issuing bulk of capital stock to himself is not entitled to fraud action
under 15 USCS § 77q against seller of business, as federal securities laws are not, in economic reality, intended to apply to transaction of that nature, since (1)
profitability of business depended not upon efforts of others but of plaintiff, (2) plaintiff did not acquire shares of stock from defendants but issued them to himself as
means of limiting his liability to creditors and public at large, so that issuance was too attenuated for alleged fraud to have taken place in connection with purchase
or sale of securities. Somogyi v Butler (1981, DC NJ) 518 F Supp 970, CCH Fed Secur L Rep P 98281.
124.--In merger
Exchange of securities pursuant to merger or consolidation of corporations constitutes purchase and sale for purposes of antifraud provisions of § 10b of Securities
Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. SEC v National Sec., Inc. (1969) 393 US 453, 21 L Ed 2d 668, 89 S Ct 564, CCH Fed Secur L Rep P 92334.
Exchange of stock in merger constitutes sale within meaning of antifraud provisions of § 10b of Securities Exchange Act (15 USCS § 78j(b)) serious gap in law would
exist if millions of shareholders involved in mergers or consolidations were left unprotected by antifraud provisions of statute. Mader v Armel (1968, CA6 Ohio) 402
F2d 158, 19 Ohio Misc 97, 46 Ohio Ops 2d 392, CCH Fed Secur L Rep P 92294, 12 FR Serv 2d 542, 4 ALR Fed 1037, cert den (1969) 394 US 930, 22 L Ed 2d 459, 89
S Ct 1188.
It is no longer open to question that exchange of shares in connection with merger or sale of assets constitutes "purchase or sale" within meaning of § 10b of
Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Swanson v American Consumer Industries, Inc. (1969, CA7 Ill) 415 F2d 1326, CCH Fed Secur L
Rep P 92458, 13 FR Serv 2d 509 (ovrld as stated in Krieger v Gast (1998, ND Ill) 1998 US Dist LEXIS 15422).
"Purchase or sale" requirement was met where plaintiff shareholders alleged broad scheme to defraud corporation, controlled by defendants, which would result in
acquisition of securities by corporation through merger with other companies controlled by defendant on terms disadvantageous to corporation, since resolution to
merge was not unlike partially consummated contract to buy or sell securities, and corporation was statutory purchaser-seller under 15 USCS § 78j(b) and SEC Rule
10b-5. Herpich v Wallace (1970, CA5 La) 430 F2d 792, CCH Fed Secur L Rep P 92714, 14 FR Serv 2d 833.
Proposed transaction whereby, under state merger statute, stockholder could be forced to surrender stock to corporation in return for cash at appraised value
amounted to sale under antifraud provisions of 15 USCS § 78j(b). Bryan v Brock & Blevins Co. (1974, CA5 Ga) 490 F2d 563, CCH Fed Secur L Rep P 94414, reh den
(1974, CA5 Ga) 493 F2d 664 and cert den (1974) 419 US 844, 42 L Ed 2d 72, 95 S Ct 77.
Person who exchanges stock pursuant to corporate merger is purchaser and seller of stock and therefore has standing to bring civil action based upon violation of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Marsh v Armada Corp. (1976, CA6 Mich) 533 F2d 978, CCH Fed Secur L Rep P 95496, cert
den (1977) 430 US 954, 51 L Ed 2d 803, 97 S Ct 1598.
Shareholder's allegations that corporate officers knew of and failed to disclose "strong likelihood" that market value of stock would decline prior to merger is
unsupported by Offer to Purchase which disclosed that dilution of per-share earnings of company would result from tender offer, that company would borrow heavily
to execute tender offer, and that company's current yearly earnings were down in first 9 months. Feldbaum v Avon Products, Inc. (1984, CA8 Mo) 741 F2d 234.
Although "merger" is not term of fixed and definite content, and transaction properly so described may or may not involve purchase and sale within meaning of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)) plaintiff corporation which issued its stock in exchange for stock of another corporation was engaged in
"purchase and sale" in view of broad statutory definition of those terms. H. L. Green Co. v Childree (1960, SD NY) 185 F Supp 95.
Issuance by corporation of its new shares of stock to another corporation in exchange for latter's outstanding stock pursuant to amalgamation agreement between
such two corporations, constitutes sale for purpose of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Cohen v Colvin (1967, SD NY) 266 F Supp
677.
Corporation's issuance of 3,020,831 previously unissued shares of its common stock to second corporation in exchange for net assets of second corporation's wholly
owned subsidiary involved purchase and sale of security. Loeb v Whittaker Corp. (1971, SD NY) 333 F Supp 484, CCH Fed Secur L Rep P 93263.
Merger is purchase and sale of stock within purview of 15 USCS § 78j(b) and SEC Rule 10b-5; person who is defrauded in violation of such rule in merger of
company in which he is stockholder has right to sue and have reasonable remedy for any wrong. Goldstein v Regal Crest, Inc. (1973, ED Pa) 59 FRD 396, CCH Fed
Minority shareholders satisfy purchase or sale requirement where merger was approved despite their dissent and merger resulted in exchange of stock. Umstead v
Durham Hosiery Mills, Inc. (1984, MD NC) 578 F Supp 342, CCH Fed Secur L Rep P 91405.
125.--In liquidation
Liquidation of corporation's assets, thereby converting its stock into claims for cash, made stockholder "seller" under § 10b of Securities Exchange Act (15 USCS §
78j(b)) and SEC Rule 10b-5. Coffee v Permian Corp. (1970, CA5 Tex) 434 F2d 383, CCH Fed Secur L Rep P 92871.
Liquidation of defendant corporation in which plaintiff was not allowed to participate constituted in effect sale of plaintiff's stock, and plaintiff was seller under 15
USCS § 78j(b). Dudley v Southeastern Factor & Finance Corp. (1971, CA5 Ga) 446 F2d 303, CCH Fed Secur L Rep P 93116, cert den (1971) 404 US 858, 30 L Ed 2d
101, 92 S Ct 109.
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Bankruptcy liquidation is not sale within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Ingenito v Bermec Corp. (1974, SD NY) 376 F Supp
Liquidation of securities under Securities Investor Protection Act qualifies as sale of securities where and to extent customers' claims to specific shares are satisfied in
cash due to shortage. Rich v Touche Ross & Co. (1976, SD NY) 415 F Supp 95.
Winding down activities, directed toward termination of active business operations of corporation, did not involve purchase or sale of securities so as to permit
minority shareholders to bring action against majority shareholders, who caused such winding down operations to be instituted, based upon alleged violations of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Alpex Computer Corp. v Pitney-Bowes, Inc. (1976, SD NY) 417 F Supp 328, CCH Fed
Although dissolution and liquidation of corporation is "sale" of securities to which 15 USCS § 78j applies, no violation of § 78j occurs absent showing of injury to
minority shareholders and intentional material misrepresentations or omissions by defendant majority shareholders. Jacobs v Hanson (1981, DC Del) 525 F Supp
Liquidation of real estate investment trust constitutes sale of securities, occurring at time trustees vote to liquidate, since it is at that point that nature of investment
changes from interest in going enterprise to mere right to receive money as between parties to sale, trust and shareholder, notwithstanding that exchange of cash
for investment interest may not occur until later. Bolton v Gramlich (1982, SD NY) 540 F Supp 822, CCH Fed Secur L Rep P 98438.
126. Loan and pledge transactions
Pledge of stock as additional consideration for extension of overdue commercial loan is not sale of securities within meaning of antifraud provisions of 15 USCS §
78j(b) and SEC Rule 10b-5, although pledge of securities can constitute "sale" under different circumstances; commodity broker's issuance of notes in partial
repayment of customers' deposits was "sale" of securities falling within purview of antifraud provisions of 15 USCS § 78j(b), where condition of issuance was
withholding of legal action by customers. SEC v Continental Commodities Corp. (1974, CA5 Tex) 497 F2d 516, CCH Fed Secur L Rep P 94724.
"Purchase or sale" requirement was satisfied where shares of stock were assigned, transferred, and delivered to plaintiff to be used as collateral for loans, and where
number of shares were to be retained by plaintiff in consideration of loan obtained by him. Kerbs v Fall River Indus. (1974, CA10 Utah) 502 F2d 731, CCH Fed Secur
L Rep P 94788 (criticized in Wright v Ernst & Young LLP (1998, CA2 NY) 152 F3d 169, CCH Fed Secur L Rep P 90266).
Disposition of shares in company pledged by its former officers, directors, and controlling shareholders through foreclosure sale by lender was "sale" for purposes of
§ 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Bosse v Crowell Collier & MacMillan (1977, CA9 Ariz) 565 F2d 602, CCH Fed Secur L Rep
P 96295, 1978-1 CCH Trade Cases P 61830, 23 UCCRS 830.
Pledge of stock as collateral for loan to owner of stock was not "purchase" for purposes of § 17(a) of Securities Act (15 USCS § 77q(a)) or § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)), since rights and privileges of parties are not affected by pledge in same manner as by "sale" or "purchase." National Bank of
Commerce v All American Assurance Co. (1978, CA5 Tex) 583 F2d 1295, CCH Fed Secur L Rep P 96609.
Stockbroker's obtaining of loan by pledging securities in margin accounts of his customers with lender was sale within meaning of 15 USCS § 78j. United States v
Kendrick (1982, CA9 Cal) 692 F2d 1262, CCH Fed Secur L Rep P 99004, cert den (1983) 461 US 914, 77 L Ed 2d 282, 103 S Ct 1892.
There was purchase and sale of security represented by pledge of 100 percent of stock of subsidiary as security for loans to subsidiary. Chemical Bank v Arthur
Andersen & Co. (1984, CA2 NY) 726 F2d 930, CCH Fed Secur L Rep P 99643, cert den (1984) 469 US 884, 83 L Ed 2d 190, 105 S Ct 253 and (ovrld as stated in
Muzinich & Co. v Raytheon Co. (2002, DC Idaho) 2002 US Dist LEXIS 26962).
Individual was actual purchaser of stock and thus had standing to bring private action under SEC Rule 10b-5 based on seller's alleged misrepresentations,
notwithstanding that stock was purchased by holding company, where representations giving rise to action were made directly to individual before holding company
even existed, thus inducing individual to involve himself in transaction by borrowing money to establish holding company and personally guaranteeing repayment of
one-half of its loan to purchase stock, relevant transactions were well documented in written notes, stock certificates, and canceled checks so that individual's
damages could be objectively calculated, and individual did not seek damages for decrease in value of his stock in holding company but for direct injury he suffered
as result of note and guarantee he executed in reliance on stock seller's representations. Grubb v Federal Deposit Ins. Corp. (1989, CA10 Okla) 868 F2d 1151, CCH
Execution and delivery of promissory notes by person who was stockholder and officer on behalf of corporation, and such person's subsequent pledging of stock in
corporation to secure corporation's debts, were not sales of securities within meaning of SEC Rule 10b-5. McClure v First Nat'l Bank (1973, ND Tex) 352 F Supp 454,
CCH Fed Secur L Rep P 93986, affd (1974, CA5 Tex) 497 F2d 490, CCH Fed Secur L Rep P 94737, reh den (1974, CA5 Tex) 502 F2d 1167 and cert den (1975) 420
US 930, 43 L Ed 2d 402, 95 S Ct 1132.
Partial discharge of debt by proceeds of foreclosure sale of stock pledged to secure debt was sale within meaning of § 10(b) of Securities Exchange Act (15 USCS §
78j(b)) and SEC Rule 10b-5. Dopp v Franklin Nat'l Bank (1974, SD NY) 374 F Supp 904, CCH Fed Secur L Rep P 94484, 14 UCCRS 866.
Since, to fall within scope of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, fraud alleged must be in connection with purchase or sale of
security, cause of action was not stated where officers of corporation alleged that they retained stock of corporation in reliance on banks' misrepresentations that
they would not call loans and that they would lend additional money to corporation; contention that officers offered to pledge stock to banks if banks would forbear
from calling outstanding loans did not satisfy purchase or sale requirement, mere expression of willingness to pledge stock not constituting sale of security. Stirling v
Chemical Bank (1974, SD NY) 382 F Supp 1146, CCH Fed Secur L Rep P 94810, app dismd (1975, CA2 NY) 511 F2d 1030, 19 FR Serv 2d 1450 (superseded by
statute as stated in Wyzik v Employee Ben. Plan of Crane Co. (1981, CA1 Mass) 663 F2d 348, 3 EBC 1142, 32 FR Serv 2d 1266) and (superseded by statute as
stated in Labuguen v Carlin (1986, CA7 Ill) 792 F2d 708, 5 FR Serv 3d 174) and (ovrld in part by Campos v Le Fevre (1987, CA2 NY) 825 F2d 671, 8 FR Serv 3d
642) and (superseded by statute as stated in Sellitti v R.H. Macy & Co. (In re R.H. Macy & Co.) (1994, SD NY) 173 BR 301) and (superseded by statute as stated in
In re Paine Webber Short Term United States Gov't Income Fund Sec. Litig. (1995, SD NY) 1995 US Dist LEXIS 12029) and affd (1975, CA2 NY) 516 F2d 1396 and
(criticized in Dreiling v Am. Express Travel Related Servs. Co. (2004, WD Wash) 351 F Supp 2d 1077).
Mere acceptance of stock pledge as collateral in privately negotiated transaction between borrower and lender does not of itself bring transaction within scope of
federal securities law; pledge of stock is not purchase or sale of securities which will give rise to claim under SEC Rule 10b-5. Mallis v Federal Deposit Ins. Corp.
(1975, SD NY) 407 F Supp 7, CCH Fed Secur L Rep P 95305, affd in part and revd in part (1977, CA2 NY) 568 F2d 824, CCH Fed Secur L Rep P 95823.
Mere acceptance of stock pledge as collateral in commercial loan transaction is not purchase or sale of securities and therefore does not invoke protection of § 10(b)
of Securities Exchange Act (15 USCS § 78j(b)); however, cause of action is stated where it is asserted that foreclosure on counterfeit stocks pledged as collateral
would be futile gesture, and that loans upon collateral are not collectible, in default, and unpaid, since, under circumstances, lender has effectively paid amount of
loan to purchase counterfeit securities. Lincoln Nat'l Bank v Lampe (1976, ND Ill) 414 F Supp 1270, CCH Fed Secur L Rep P 95637.
Pledge of bonds does not constitute sale under 15 USCS § 78j(b). Shelter Mut. Ins. Co. v Public Water Supply Dist. No. 7 (1983, ED Mo) 569 F Supp 310, CCH Fed
Secur L Rep P 99536, affd (1984, CA8 Mo) 747 F2d 1195, CCH Fed Secur L Rep P 91830, 40 FR Serv 2d 526 (criticized in Roy v City of Little Rock (1995, ED Ark)
902 F Supp 871).
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Although pledge of security constitutes sale for purposes of antifraud provisions of federal securities laws, investors were neither pledgors nor pledgees of securities
involved where dealer pledged securities to bank. First Federal Sav. & Loan Asso. v Oppenheim, Appel, Dixon & Co. (1986, SD NY) 629 F Supp 427, CCH Fed Secur L
Rep P 92505.
Federal Deposit Insurance Corporation, as pledgee of 50 percent of defendant corporation's stock, has standing to make Rule 10(b)-5 claim, despite fact that no
purchase or sale of security occurred, under 3 independent theories: (1) as "forced seller" since FDIC had equitable interest in stock which defendants rendered
without marketable value due to alleged fraudulent transaction, (2) as holder of beneficial interest in shares of troubled corporation, entitled to creditor status with
assets of corporation treated as trust fund and empowered to bring derivative action under North Carolina law, and (3) as pledgee under Rule 10(b)-5, standing in
position of purchaser with pledge transaction operating as sale under Rule 10(b)-5, with standing also to complain of forced sale caused by fraudulent liquidation.
Federal Deposit Ins. Corp. v Kerr (1986, WD NC) 637 F Supp 828, CCH Fed Secur L Rep P 92842.
Investors' promissory note payments did not constitute separate purchases of securities under 15 USCS § 78j(b), where typical investor initially made $ 150,000
commitment, paying $ 12,500 up front, agreeing to pay $ 12,500 in each of first 2 years on short term promissory notes, and also promising to pay off $ 112,500 on
long term promissory notes in 3 installments 14 to 16 years from subscription, because investors obligated themselves to pay $ 150,000 at outset and thus only had
valid securities fraud claim against those defendants associated with partnerships at time of investors' initial investments. Roberts v Heim (1987, ND Cal) 670 F Supp
1466, CCH Fed Secur L Rep P 93291, affd in part and revd in part (1988, CA9 Cal) 857 F2d 646, CCH Fed Secur L Rep P 94028, 12 FR Serv 3d 810, cert den (1989)
493 US 1002, 107 L Ed 2d 556, 110 S Ct 561 and (criticized in Washington Mutual Bank v Superior Court (2001) 24 Cal 4th 906, 103 Cal Rptr 2d 320, 15 P3d 1071,
2001 CDOS 712, 2001 Daily Journal DAR 925).
Disgruntled "investor" has no viable federal securities fraud claim against financial corporation, where investors purchased certificates of deposit (CDs) to participate
in CD Rollover Program, through one-on-one negotiation, and with no understanding that corporation intended to trade loan agreement publicly or that it would
distribute prospectus to investors, because federal securities laws are not properly invoked where loan results from direct negotiations between parties. TAB
Partnership v Grantland Fin. Corp. (1994, SD NY) 866 F Supp 807, CCH Fed Secur L Rep P 98482.
General partner's alleged misconduct of failing to pay plaintiffs return in accordance with their alleged status as partners is not actionable under 15 USCS § 78j(b),
where defendant contends monies provided to him were loans rather than payments for partnership interests, because alleged misconduct was not integral to
plaintiffs' purchase or sale of security. Bickhardt v Ratner (1994, SD NY) 871 F Supp 613, CCH Fed Secur L Rep P 98780.
Apartment buildings owner that had sought to refinance mortgages on its properties sufficiently alleged security for purposes of establishing prima facie claim of
securities fraud under 15 USCS § 78j(b) against investment banker, because (1) under option in which owner had burden or risk attendant to rating agencies'
assessments of properties' finances or operations, owner alleged it was obliged to issue rated securities for repackage and resale by banker, and (2) even if parties
contemplated that owner would merely transfer notes and mortgages on certain properties, rather than rated securities, mortgage notes would be securities where
banker intended to pool permanent loan notes and distribute participation certificates to public. Realtek Indus. v Nomura Sec. (1996, ND Ohio) 939 F Supp 572, CCH
127. Modification of partnership
Before changes in rights of security holder can qualify as "purchase" of new security under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and Rule 10b-5,
there must be such significant change in nature of investment or in an investment risks as to amount to new investment; modifications effected by adoption of new
partnership agreement which named new general partner, added large number of limited partners, expanded in detailed stated purposes of partnership, and made
number of other changes, did not constitute "purchase" and "sale" of new securities. Abrahamson v Fleschner (1977, CA2 NY) 568 F2d 862, CCH Fed Secur L Rep P
95889, cert den (1978) 436 US 905, 56 L Ed 2d 403, 98 S Ct 2236 and cert den (1978) 436 US 913, 56 L Ed 2d 414, 98 S Ct 2253.
Partner was entitled to summary judgment in securities fraud action filed by another partner's estate, alleging that partner entered into settlement agreement
concerning partnership shares without notifying it of profitable business deal because estate failed to state claim under 15 USCS § 78j(b) because it failed to
establish that alleged fraud occurred in connection with actual purchase or sale of security. Lawrence v Cohn (2003, CA2 NY) 325 F3d 141, CCH Fed Secur L Rep P
92301.
Partner's estate was not actual purchaser or seller of security where it did not have right of first refusal with respect to sale of limited partner's interest under either
partnership agreement or common law, and therefore, estate's common law rights did not fall within 15 USCS § 78c(a)(10)'s definition of "security." Lawrence v
Cohn (2003, CA2 NY) 325 F3d 141, CCH Fed Secur L Rep P 92301.
In order for changes in rights of security holder to qualify as purchase of new security so as to give rise to cause of action under § 10(b) of Securities Exchange Act
(15 USCS § 78j(b)) and SEC Rule 10b-5 based upon fraud perpetrated with respect to transaction, change must significantly affect investment risks of investor;
where modification of limited partnership agreement did not significantly affect those risks of limited partner, alleged fraud was not in connection with purchase of
security and civil action would not lie. Halperin v Edwards & Hanly (1977, ED NY) 430 F Supp 121, CCH Fed Secur L Rep P 96028.
Securities fraud action is not barred because there was no "purchase" of securities where plaintiffs' investment in apartment complex was initially structured as joint
venture, restructured as partnership, but under economic realities test, plaintiff's interest amounted to limited partnership. McConnell v Frank Howard Allen & Co.
(1983, ND Cal) 574 F Supp 781, CCH Fed Secur L Rep P 99538.
Limited partners' securities fraud complaint against managing general partner and various controlling entities is dismissed, even though forced seller doctrine may be
applied in limited partnership context, where partnership still has continuing ownership of 51 retail buildings, because actual liquidation of investment entity must be
complete or, at very least, foregone conclusion, and complaint fails to demonstrate that liquidation of limited partners' investment is even remote possibility. Jacobs v
Winthrop Fin. Assocs. (1999, DC Mass) 77 F Supp 2d 206, CCH Fed Secur L Rep P 90726.
128.--Forfeiture of partnership rights
Limited partner's forfeiture of partnership rights upon occurrence of condition provided for in partnership agreement constituted sale of security within meaning of
fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Murphey v Hillwood Villa Associates (1976, SD NY) 411 F Supp 287,
129. Parent-subsidiary exchanges
Stock-for-assets exchange between parent and subsidiary corporations, whereby parent corporation transferred its income-producing real estate to new subsidiary
corporation in exchange for all stock of subsidiary corporation, did not constitute purchase or sale of securities within meaning of 15 USCS § 78j or SEC Rule 10b-5.
Rathborne v Rathborne (1982, CA5 La) 683 F2d 914, CCH Fed Secur L Rep P 98786.
Where stockholders of corporation alleged that corporate officials engaged in securities fraud, stockholders who received shares in corporation as dividend from
corporation's parent company were not purchasers of stock as required to pursue action since they did not participate in any sort of investment decision and
transaction was not type meant to be governed by securities fraud statutes. In re Adelphia Communs. Corp. Sec. & Derivative Litig. (2005, SD NY) 398 F Supp 2d
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244.
130. Pension plan contributions
In complaint alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), sale occurred when employee gave his services to employer who in turn
contributed to pension plan, employee making his investment decision through employer's non-gratuitous contributions to plan. Schlansky v United Merchants &
Mfrs., Inc. (1977, SD NY) 443 F Supp 1054, 1 EBC 1871, CCH Fed Secur L Rep P 96353.
Securities fraud claims in action relating to corporation's employees' profit-sharing, savings and retirement plan and trust, will be dismissed on grounds there was no
purchase or sale of securities, notwithstanding plan accepted stock contributions from corporation, since plan gives trustees no discretion to refuse stock contribution
by company. O'Neil v Marriott Corp. (1982, DC Md) 538 F Supp 1026, 3 EBC 1430, CCH Fed Secur L Rep P 98743.
No offer, sale or purchase, and no furnishing of "value", are involved in operation of employee stock ownership plan (ESOP) which would cause securities laws to be
applicable, since there is no affirmative investment decision. Bauman v Bish (1983, ND W Va) 571 F Supp 1054, CCH Fed Secur L Rep P 99584.
Discharged officer's interest in employer's equity ownership plan constitutes "security," where unlike interest in employee stock option plan, participation was not
compulsory, was "contributory" as reward for employee's performance and was specifically intended to make participants "investors," and officer "purchased" security
when he accepted employment offer specifically upon employer's representations about vesting rights in plan. Dubin v E.F. Hutton Group (1988, SD NY) 695 F Supp
Participants of employee stock ownership plan who alleged that plan fiduciaries made materially false or misleading statements failed to state claim under § 10(b) of
Securities Exchange Act of 1934 because participation in plan was not voluntary and participants did not furnish value in exchange for stock they acquired through
plan; thus, plan was compulsory and noncontributory, and participation in such plan did not constitute purchase or sale of security under 15 USCS § 77b(3). Register
v Cameron & Barkley Co. (2006, DC SC) 467 F Supp 2d 519.
131. Recapitalization transactions
Recapitalization of European subsidiaries of domestic corporation, resulting in vesting of title to subsidiaries in certain officers and directors of corporation in fiduciary
capacity, could not constitute trading in securities, under Securities Exchange Act, although, had officers and directors appropriated subsidiaries, transaction in
subsidiary's stock would have met purchase or sale requirement. United States v Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
Neither creation of voting trust nor implementation of recapitalization plan provoked material change in shareholder investments or in risk thereof sufficient to
constitute purchase or sale of security within ambit of 15 USCS § 78j or SEC Rule 10b-5 (17 CFR § 240.10b-5). Watts v Des Moines Register & Tribune (1981, SD
Iowa) 525 F Supp 1311, CCH Fed Secur L Rep P 98411.
Corporation's securities fraud claims against insider traders must be dismissed, even though insider trading ring used inside information about corporation's
recapitalization plan to artificially increase price of stock and recapitalization and to earn $ 20 million in profits, because corporation was not purchaser or seller of
securities and suffered no actual damages in connection with purchase or sale. FMC Corp. v Boesky (1989, ND Ill) 727 F Supp 1182, CCH Fed Secur L Rep P 95250,
transf to, dismd (1993, SD NY) 825 F Supp 623, affd (1994, CA2 NY) 36 F3d 255, CCH Fed Secur L Rep P 98406, RICO Bus Disp Guide (CCH) P 8659.
132. Transactions outside stock exchange channels
Fact that transaction involving sale of securities is not conducted through securities exchange or organized over-the-counter market is irrelevant to coverage of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)); § 10(b) bars use of deceptive devices and contrivances with regard to purchase or sale of securities whether
conducted in organized market or face-to-face. Superintendent of Ins. v Bankers Life & Casualty Co. (1971) 404 US 6, 30 L Ed 2d 128, 92 S Ct 165, CCH Fed Secur L
Rep P 93262.
SEC Rule 10b-5 applies whether securities are traded on public stock exchange or sold through private placement. Radiation Dynamics, Inc. v Goldmuntz (1972, CA2
Area of private offerings of securities under exemption afforded by § 4(2) of Securities Act (15 USCS § 77d(2)) is so closely related to fairness of public and private
securities markets and allocation of investment capital that it must come within scope of SEC Rule 10b-5. Woolf v S. D. Cohn & Co. (1975, CA5 Fla) 515 F2d 591,
CCH Fed Secur L Rep P 95223, reh den (1975, CA5 Fla) 521 F2d 225, CCH Fed Secur L Rep P 95359 and vacated on other grounds (1976) 426 US 944, 49 L Ed 2d
1181, 96 S Ct 3161.
Antifraud provisions of Securities Exchange Act apply to many transactions which are not on organized American markets. Bersch v Drexel Firestone, Inc. (1975, CA2
NY) 519 F2d 974, CCH Fed Secur L Rep P 95080, 20 FR Serv 2d 340, cert den (1975) 423 US 1018, 46 L Ed 2d 389, 96 S Ct 453.
Provisions of 15 USCS § 78j(b) cover private transaction although stocks sold are not registered on any exchange. Northern Trust Co. v Essaness Theatres Corp.
(1952, DC Ill) 103 F Supp 954.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) is not applicable to stock listed but not registered on Honolulu stock exchange, and unlisted elsewhere.
Sawyer v Pioneer Mill Co. (1960, DC Hawaii) 190 F Supp 21, remanded on other grounds (1962, CA9 Hawaii) 300 F2d 200, cert den (1962) 371 US 814, 9 L Ed 2d
55, 83 S Ct 24.
Where defendant induced plaintiff to enter employ of corporation by offering plaintiff stock option agreement and making misrepresentations and failing to disclose
material facts with respect to condition and potential of corporation, district court had jurisdiction over subject matter notwithstanding fact that stock option was
personal and non-transferable; private nature of transaction affords no immunity from anti-fraud provisions of securities law. Collins v Rukin (1972, DC Mass) 342 F
Supp 1282, CCH Fed Secur L Rep P 93527, 16 FR Serv 2d 6.
Neither § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) nor SEC Rule 10b-5 require that securities acquired be registered on national securities exchange.
Kramer v Scientific Control Corp. (1973, ED Pa) 365 F Supp 780, CCH Fed Secur L Rep P 94449, 17 FR Serv 2d 1284.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) applies to private transactions not conducted through organized security markets, as well as
transactions which are so conducted. Harrison v Equitable Life Assurance Soc. (1977, WD Mich) 435 F Supp 281.
Investor fails to state securities fraud claim under 15 USCS § 78j, where investor was only limited partner in 3-partner, one-project endeavor to restore motel and
conference center, and had say in at least operation of such center, because this limited partnership interest is not investment contract "security" since it is not
investment in common enterprise in which investor is led to expect profits solely from efforts of promoter or third party. Bamco 18 v Reeves (1987, SD NY) 675 F
Various federal securities fraud claims must be denied summarily, where condominium purchasers complained about manner in which condominium units were
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offered and sold by vendors and lenders, because, as matter of law, offer and sale of condominiums do not constitute securities. Pliskin v Bruno (1993, DC Me) 838 F
Federal securities claims against bank are dismissed, even though synthetic transactions at issue in this case would indisputably be protected under amended 15
USCS § 78j(b) if they were issued after December 21, 2000, because these transactions are not now defined as securities, and were not protected by federal
securities law at time they took place. Caiola v Citibank, N.A. (2001, SD NY) 137 F Supp 2d 362, CCH Fed Secur L Rep P 91359, revd, remanded (2002, CA2 NY) 295
Unpublished: Plaintiffs' 2005 payment for annual membership dues was required by corporate by-laws and afforded plaintiff access to and use of hunting preserve
and related facilities maintained by defendant corporation (payment of dues was not purchase of security); because plaintiff's only qualifying purchase of security
occurred when he acquired single share of corporation common stock in 1988, his securities fraud claims were properly dismissed as barred by applicable statute of
limitations. Libaire v Kaplan (2010, CA2 NY) 2010 US App LEXIS 20594.
V.FALSE OR MISLEADING STATEMENTS OR OMISSIONS
A.In General
133. Generally
In order to be actionable under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5), statement must be
misleading; silence, absent duty to disclose, is not misleading under Rule 10b-5; in context of preliminary merger discussions, "no comment" statements are
generally functional equivalent of silence. Basic Inc. v Levinson (1988) 485 US 224, 99 L Ed 2d 194, 108 S Ct 978, CCH Fed Secur L Rep P 93645, 24 Fed Rules Evid
Serv 961, 10 FR Serv 3d 308.
Not every violation of fraud provision of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 can become or should be forced into category
headed "misrepresentations" or "nondisclosures"; fraudulent devices, practices, schemes, artifices, and courses of business are also interdicted by securities laws; it
is not sound to dismiss complaint merely because alleged scheme does not involve type of fraud that is usually associated with sale or purchase of securities; § 10(b)
and Rule 10b-5 prohibit all fraudulent schemes in connection with purchase or sale of securities, whether artifices employed involve garden type variety of fraud, or
present unique form of deception; novel or atypical methods should not provide immunity from securities laws. Competitive Associates, Inc. v Laventhol, Krekstein,
Horwath & Horwath (1975, CA2 NY) 516 F2d 811, CCH Fed Secur L Rep P 95090.
SEC Rule 10b-5 proscribes omissions of material facts only where facts are necessary to make statements made, in light of circumstances under which they were
made, not misleading so that alleged omission was not actionable where it did not relate to any affirmative statement made. Hayden v Walston & Co. (1975, CA9 Or)
Fact that complete disclosure has been made cannot end inquiry regarding possible violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), because even
in context of complete disclosure, misrepresentation may cause person to whom it is addressed to discount other information available to him; nevertheless, fact that
complete disclosure has been made is major consideration in determination of duty question and ultimate question of whether recovery should be allowed. Hughes v
Dempsey-Tegeler & Co. (1976, CA9 Cal) 534 F2d 156, CCH Fed Secur L Rep P 95513, cert den (1976) 429 US 896, 50 L Ed 2d 180, 97 S Ct 259 and (superseded by
statute as stated in Niss v NASD (1997, DC Cal) 989 F Supp 1302, CCH Fed Secur L Rep P 90160).
Where plaintiffs conceded that defendants had not engaged in material misstatements, in order to state cause of action for securities fraud under § 10(b) of
Securities Exchange Act of 1934, 15 USCS § 78j(b), they had to rely on material omissions prong of 15 USCS § 78u-4(b)(1). Baron v Smith (2004, CA1 Mass) 380
In civil action alleging liability under SEC Rule 10b-5, common law fraud requirement that plaintiff show misrepresentation on part of defendant is applicable, so long
as misrepresentation is read as including omissions as well as misstatements. Fox v Kane-Miller Corp. (1975, DC Md) 398 F Supp 609, affd (1976, CA4 Md) 542 F2d
915.
Investors failed to state claims for securities fraud, with certain enumerated exceptions where court granted leave to amend because, in part, investors did not
sufficiently plead how challenged statements were false when made as required by 15 USCS § 78u-4(b)(1) of Private Securities Litigation Reform Act. In re Ramp
Networks, Inc. Secs. Litig. (2002, ND Cal) 201 F Supp 2d 1051, CCH Fed Secur L Rep P 91753.
Publicly traded corporation and its CEO were denied judgment on securities fraud claims, where plaintiff shareholders raised sufficient allegations of misstatements
and non-disclosure of pending investigation by Federal Trade Commission. RMED Int'l, Inc. v Sloan's Supermarkets, Inc. (2002, SD NY) 207 F Supp 2d 292.
Class complaint sufficiently stated claims for fraudulent and misleading statements in violation of 15 USCS § 78j(b) against corporation's audit committee members
and member of board of directors where class complaint alleged that audit committee members signed documents which included allegedly fraudulent statements,
and sufficiently alleged recklessness against audit committee members, and class complaint sufficiently alleged insider trading against board member. Filler v Lernout
(In re Lernout & Hauspie Sec. Litig.) (2002, DC Mass) 286 BR 33, CCH Fed Secur L Rep P 92222, dismd, in part sub nom Bamberg v SG Cowen (2002, DC Mass) 236
F Supp 2d 79.
Pursuant to 15 USCS § 78j(b), it is unlawful to attempt to manipulate price of stock in connection with purchase or sale of any security registered on national
securities exchange or any security not so registered; where shareholders maintained that company's executive officers released false and misleading information
about company to public and that alleged conduct created false, misleading, and unjustifiable positive impressions of financial condition and performance of
company, thereby artificially inflating market and issuance prices of company's securities, shareholders adequately stated claim for relief. Bovee v Coopers & Lybrand
(2003, SD Ohio) 216 FRD 596.
Plaintiffs adequately alleged loss causation, even though steep market decline accompanying terrorist attacks helped speed alleged market manipulation scheme's
collapse, because plaintiffs alleged causal nexus between defendants' fraudulent conduct and plaintiffs' pecuniary loss. Stephenson v Deutsche Bank AG (2003, DC
Minn) 282 F Supp 2d 1032, 51 UCCRS2d 613.
Claim of open market purchaser of common stock under § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j, and S.E.C. Rule 10b-5, 17 C.F.R. §
240.10b-5, based on statements in company's 10-K filed with SEC, press releases, and registration statements filed in connection with several mergers, failed where
purchaser did not demonstrate genuine issue of material fact regarding whether defendants' statements were false or contained omission. In re World Access, Inc.
Sec. Litig. (2004, ND Ga) 310 F Supp 2d 1281.
134. Affirmative misrepresentation not necessary
Unlike actions at common law, it is clear from statutory language of Securities Exchange Act, that affirmative misrepresentation is not necessary for violations under
various statutes, but such statutory proscriptions encompass half-truths and failure to disclose material information. List v Fashion Park, Inc. (1965, CA2 NY) 340 F2d
457, 22 ALR3d 782, cert den (1965) 382 US 811, 15 L Ed 2d 60, 86 S Ct 23, reh den (1965) 382 US 933, 15 L Ed 2d 344, 86 S Ct 305.
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Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) proscribes nondisclosure as well as affirmative misrepresentation of material facts affecting stock's
value, and prohibition applies not only to officer buying for his own account but also to closely held corporation dealing in own securities. Arber v Essex Wire Corp.
(1974, CA6 Ohio) 490 F2d 414, CCH Fed Secur L Rep P 94357, 18 FR Serv 2d 847, cert den (1974) 419 US 830, 42 L Ed 2d 56, 95 S Ct 53.
To distinguish between primary and secondary liability, courts had to focus on specific conduct of executives in light of their role in securities market, rather than on
whether investors specifically relied on their statements; that was precisely what court did in deciding that executives' implied statements that they had reasonable
basis to believe that market timing disclosures in prospectuses were truthful and complete fell within purview of "make statement" requirement of Rule 10b-5(b);
therefore, district court erred by requiring Securities and Exchange Commission to allege actionable statements publicly attributed to executives as distinct element
of its claims of primary liability under § 17(a) (15 USCS § 77q(a)) of Securities Act of 1933, § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934, and Rule
10b-5. SEC v Tambone (2008, CA1 Mass) 550 F3d 106, CCH Fed Secur L Rep P 95016.
In order for plaintiffs to recover in action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), they must be able to show that misrepresentations
complained of were fraudulent; in determining whether misrepresentations were fraudulent, court is not limited to examining defendants' intent, since knowledge of
falsity, or reckless disregard for truth may be sufficient. Beecher v Able (1975, SD NY) 435 F Supp 397, CCH Fed Secur L Rep P 96104.
135. Deceptive conduct
Fact that manipulative scheme was known to some or all of corporation's directors does not negate element of deception; requisite "deception" under § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 is provided if disinterested directors or shareholders are misled, because they are fairly viewed as
standing in place of corporate entity under such circumstances. Alabama Farm Bureau Mut. Alabama Farm Bureau Mut. Casualty Co. v American Fidelity Life Ins. Co.
(1979, CA5 Fla) 606 F2d 602, CCH Fed Secur L Rep P 97192, reh den (1980, CA5 Fla) 610 F2d 818 and cert den (1980) 449 US 820, 66 L Ed 2d 22, 101 S Ct 77.
Jury verdicts convicting defendant, NYSE specialist, of violating 15 USCS § 78j and 17 CFR § 240.10b-5 (1995) were vacated on grant of his posttrial motion for
judgment of acquittal, where government failed to provide proof of customer expectations or violations by virtue of any deceptive practices. United States v Finnerty
In order to make out claim under section 10(b) of Securities Exchange Act (15 USCS § 78j(b)), there must be deception, that is to say fraudulent conduct, by way of
affirmative misrepresentation or omission of material facts. Barnett v Anaconda Co. (1965, SD NY) 238 F Supp 766.
Under SEC Rule 10b-5, there is civil redress for damage to corporation resulting from deception in disclosure of information which affects corporate decisions in
purchase and sale of securities even though corporation acts through stockholders; all information reasonably relevant to rational investment decision must be
disclosed to decision-making body, whether body be composed of directors, officers, or shareholders of corporation. Simon v New Haven Board & Carton Co. (1966,
DC Conn) 250 F Supp 297.
Mere silence, absent duty to speak, is not manipulative or deceptive device or contrivance under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Keene Corp.
v Weber (1975, SD NY) 394 F Supp 787, CCH Fed Secur L Rep P 95102, CCH Fed Secur L Rep P 95236.
Untrue statement within meaning of SEC Rule 10b-5(b) can be so considered only if it amounts to manipulative or deceptive device or contrivance within meaning of
§ 10(b) of Securities Exchange Act (15 USCS § 78j(b)); untrue statements and omissions to state material facts which Rule 10b-5(b) are concerned with are limited
to those which constitute manipulative or deceptive devices. Voege v Magnavox Co. (1977, DC Del) 439 F Supp 935, CCH Fed Secur L Rep P 96334.
In interpreting whether conduct was materially deceptive under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, whether conduct may
fairly be viewed as deceptive will generally depend upon circumstances of particular person or class allegedly deceived, their knowledge, and perceptive faculties;
whereas false statements or partial disclosures may be deceptive generally, mere silence is deceptive only to persons with particular reasons to draw specific
inferences from it. Klamberg v Roth (1979, SD NY) 473 F Supp 544, CCH Fed Secur L Rep P 97147, 28 FR Serv 2d 321.
Securities laws' prohibition of deceptive conduct is aimed at breaches of duty to disclose, and when corporation is alleged injured seller or purchaser in securities
transaction, deceptive conduct is shown only if there is breach of duty to disclose to either independent directors or shareholders. Oakhill Cemetery of Hammond,
Inc. v Tri-State Bank (1981, ND Ill) 513 F Supp 885, CCH Fed Secur L Rep P 98275.
Shareholders' allegations of channel stuffing and violations of generally accepted accounting principles (GAAP) were sufficient to state claim where shareholders
alleged that company misrepresented its financial condition by failing to disclose its channel stuffing activity and defendants' violations of GAAP distorted financial
information available to public. In re Sci. Atlanta, Inc. (2002, ND Ga) 239 F Supp 2d 1351, affd (2004, CA11 Ga) 374 F3d 1015, CCH Fed Secur L Rep P 92846, 17
FLW Fed C 689.
Defendants' motion to vacate arbitration award was denied; defendants' failed to show that arbitration award that found that defendants' had violated § 10(b) of
Securities and Exchange Act of 1934, 15 USCS § 78j(b), was made in manifest disregard for law; arbitrator rationally held that defendants violated § 10(b) because
they made untrue statements of material fact as to ownership, control, and shares of realty company and engaged in acts, practices, and course of business that
operated as fraud and deceit in connection with offer and sale of security. Glazer v AA Premier Realty, Ltd. (2003, ED NY) 294 F Supp 2d 296.
While there was nothing inherently improper about pressing for sales to be made earlier than in normal course, stock purchasers could state claim for securities fraud
by alleging that company materially misrepresented its financial condition by failing to disclose sales practices that encouraged customers to purchase substantial
advance inventories of product because such practices could reduce company's future revenues; moreover, company was obligated to reveal channel stuffing once
sales, earnings, and growth projections were disclosed because such information could be important to reasonable investor. Carpenters Health & Welfare Fund v
Coca-Cola Co. (2004, ND Ga) 321 F Supp 2d 1342, CCH Fed Secur L Rep P 92822.
Investors' complaint for violations of 15 USCS 78j was dismissed because, where complaint essentially alleged that investors were induced into investing in
businessman's corporation and he never intended to and did pay back investors' investments, nowhere in complaint did investors allege that they relied on any
representations of other defendants or that these caused damage. Geldzahler v Weaver (2004, SD NY) 327 F Supp 2d 258.
SEC properly alleged consulting firm defendants' "substantial assistance" in fraudulent "finders fee" scheme involving state pension fund where SEC sufficiently
alleged that consulting firm knew of fraudulent nature of scheme but nevertheless participated in it by urging increase of investment from state's treasurer and
accepted "finders fee" payment without providing meaningful assistance to pension fund or equity firm with whom state's pension funds were invested. SEC v Dibella
(2005, DC Conn) CCH Fed Secur L Rep 93625, partial summary judgment den, motion to strike den (2006, DC Conn) 409 F Supp 2d 122.
In motion for default judgment, SEC properly alleged violations against defendant to impose liability under 15 USCS § 77q(a), part of Securities Act of 1933, and
under 15 USCS § 78j(b), part of Securities Exchange Act of 1934, where defendant diverted approximately $ 2 million from two companies through series of
fraudulent transactions causing material misrepresentations and omissions in numerous financial forms and misappropriated funds from investors; permanent
injunction was appropriate for this violation. SEC v Lawbaugh (2005, DC Md) 359 F Supp 2d 418, CCH Fed Secur L Rep P 93141.
On motion for summary judgment in enforcement action brought by SEC against audit firm partners, summary judgment was improper because while one partner
presented arguments to support finding that he acted in good faith as to identified accounting irregularities, SEC was entitled to have inferences drawn it its favor
where it presented sufficient evidence to support jury finding of liability under 15 USCS § 78j to find that partner had scienter necessary to be well aware of danger
than company's financial statements materially misstated its financial condition but yet authorized audit firm to issue clean audit opinion. SEC v KPMG LLP (2006, SD
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NY) 412 F Supp 2d 349.
Plaintiffs' 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5 claims survived motion to dismiss, as misconduct alleged (that defendants managed corporate earnings and
systematically withheld positive information from market with express intention of artificially depressing price of stock, to bias ratio at which stock would be
exchanged) was precisely that which subdivisions (a) and (c) of S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, sought to redress. Lewis v Termeer (2006, SD NY) 445 F
Supp 2d 366.
Under heightened pleading standard of Fed. R. Civ. P. 9(b), SEC sufficiently alleged fraudulent scheme; while "as of" trades themselves are not illegal, SEC alleged,
pursuant to 15 USCS § 78j, that they were utilized for purpose of deceiving plan's investors, to hide facts and to prevent those investors from realizing that subject
investment was not timely made. SEC v Durgarian (2007, DC Mass) 477 F Supp 2d 342.
Claims of violations of Securities Exchange Act § 10(b), 15 USCS § 78j, were dismissed against three employees of mutual fund services company because SEC did
not demonstrate either substantial participation in fraudulent scheme to transfer losses from one client to others, and then conceal both underlying error and
fraudulent transfer, or strong inference that those employees acted with requisite scienter in signing certifications; in determining sufficiency of complaint alleging
violations of Securities Exchange Act § 10(b), legality of particular device is obviously important factor to consider when determining whether deceptive practice was
implemented, but it is not itself conclusive; terms of S.E.C. Rule 10b-5(c), 17 CFR § 240.10b(c), militate against requiring fraudulent scheme to involve clearly illegal
conduct. SEC v Durgarian (2007, DC Mass) 477 F Supp 2d 342.
Claims alleging violation of § 10b of Securities Exchange Act of 1934, 15 USCS § 78j(b) and 17 CFR § 240.10-5 were dismissed because no defendant was officer or
director during class period so shareholders could not rely on group pleading doctrine, company's co-founder did not engage in any deceptive conduct because he
had no duty to disclose his stock sales and shareholders failed to allege any causal connection between co-founder's nondisclosure and their loss. In re Nat'l Century
Fin. Enters., Inc. Fin. Inv. Litig. (2008, SD Ohio) 553 F Supp 2d 902.
Corporate executives could not be held liable under 15 USCS § 78j(b) and 17 CFR § 240.10b-5(a) and (c) for deceptive conduct where executives' actions were not
inherently deceptive; executives allegedly gave oral assurances of rights of return or pricing concessions in connection with legitimate sales. SEC v Lucent Techs.,
Inc. (2009, DC NJ) 610 F Supp 2d 342, CCH Fed Secur L Rep P 95216.
Complaint set forth by Securities and Exchange Commission (SEC) against four corporate managers alleging "round-trip transaction" scheme in violation of 15 USCS
§§ 77q, 78j, 78m, 78t, and related regulations was not subject to dismissal because SEC adequately stated plausible claims and provided sufficient information about
which managers were involved in which specific misconduct. SEC v Kelly (2009, SD NY) 663 F Supp 2d 276.
Unpublished: District court properly granted corporations, partner, and officer's motion for summary judgment on shareholder's federal securities claims under §
10(b) (15 USCS § 78j(b)) of Securities Act of 1934 and Rule 10b-5, 17 CFR § 240.10b-5 because shareholder readily admitted that he entered into Sale Agreement
knowing that he was unaware of company's financial condition from date of his resignation onward, shareholder had not shown that any of statements officer made
with respect to corporation's debt or its prospects in December 2000 were false, and officer's statements were not manipulative or deceptive as required under Rule
10b-5; moreover, because there was no underlying violation of Securities Exchange Act, shareholder's claim against partner under 15 USCS § 78t(a) also failed.
Cardon v Testout! Corp. (2007, CA10) 2007 US App LEXIS 19048.
136. Duty to disclose
Liability under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, where no misrepresentations are alleged, can be based only upon breach
of duty to disclose; ordinarily, those who are not parties to any purchase or sale are not under duty to disclose unless they are aiders and abettors or have
themselves substantially participated in some concealment. Murphy v McDonnell & Co. (1977, CA2 NY) 553 F2d 292, CCH Fed Secur L Rep P 96021.
Misstatement or omission, within meaning of SEC Rule 10b-5, promulgated under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), encompasses patently false
statements; silence or omission to state fact is proscribed only in certain situations: first, where person has duty to speak, and second, where defendant has
revealed some relevant material information even though he had no duty, since person may not deal in half-truths; in determining whether duty to speak arises,
court should consider: relationship between plaintiff and defendant, parties' relative access to information to be disclosed, benefit derived by defendant from
purchase or sale, defendant's awareness of plaintiff's reliance on defendant in making investment decisions, and defendant's role in initiating purchase or sale. First
Virginia Bankshares v Benson (1977, CA5 Ala) 559 F2d 1307, CCH Fed Secur L Rep P 96189, reh den (1977, CA5 Ala) 564 F2d 416 and cert den (1978) 435 US 952,
55 L Ed 2d 802, 98 S Ct 1580.
Lending institution has no duty to disclose based on its role as lender, and knowledge of customer's weak financial situation amounts neither to duty to disclose this
information nor to knowledge of fraud. Smith v American Nat'l Bank & Trust Co. (1992, CA6 Tenn) 982 F2d 936, CCH Fed Secur L Rep P 97273.
91550).
Prohibition of Rule 10b-5, which does not contain freestanding completeness requirement, against misleading and untrue statements is not prohibition against
statements that are incomplete; thus, once disclosure is made, there is no duty to make it complete and accurate. Brody v Transitional Hosps. Corp. (2002, CA9 Nev)
280 F3d 997, 2002 CDOS 1218, 2002 Daily Journal DAR 1540, CCH Fed Secur L Rep P 91692.
Order of Securities and Exchange Commission (SEC) finding that investment advisers and associated persons committed fraud under 15 USCS § 78j(b) was
supported by substantial evidence where advisers failed to disclose their financial interests in certain stocks to their clients or SEC and SEC relied on its experience
and expertise in determining that investment advisers were knowledgeable enough to recognize that their shareholder arrangement created potential conflict of
interest. Vernazza v SEC (2003, CA9 Cal) 327 F3d 851, 2003 CDOS 3423, 2003 Daily Journal DAR 4369, CCH Fed Secur L Rep P 92458, amd, motion den (2003,
CA9) 335 F3d 1096, 2003 Daily Journal DAR 7965 and reprinted as amd (2003, CA9 Cal) 2003 US App LEXIS 14351.
College did not have duty to disclose in official statement every possible material fact about its operations and finances, so long as disclosures that were made
satisfied statute; official statement needed only disclose enough accurate information and not omit pertinent information to allow investors to make informed
decision about whether to invest, and it did so. ACA Fin. Guar. Corp. v Advest, Inc. (2008, CA1 Mass) 512 F3d 46, CCH Fed Secur L Rep P 94554.
Dismissal of securities fraud claims brought under § 10b of Securities Exchange Act of 1934, 15 USCS § 78j(b) and 17 C.F.R. § 240.10-5 (Rule 10b-5) was affirmed
because while illegal payments to senator could arguably have been piece of hard information that was subject to disclosure, potential consequences of these
payments were type of predictions and soft information that did not give rise to duty of disclosure. To extent that some of these statements could have been made
after company became aware that payments to senator were being investigated, such knowledge did not impute knowledge of myriad of potential consequences that
could occur as result of investigation of senator. Zaluski v United Am. Healthcare Corp. (2008, CA6 Mich) 527 F3d 564, 2008 FED App 199P.
Dismissal of securities fraud action brought under § 10b of Securities Exchange Act of 1934, 15 USCS § 78j(b) and 17 CFR § 240.10b-5 (Rule 10b-5) was reversed
because complaint identified four confidential witnesses who worked for company and who allegedly would testify to existence and effect of stop-work orders on
company's profits and once defendants chose to tout company's backlog, they were bound to do so in manner that wouldn't mislead investors as to what that
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backlog consisted of. Berson v Applied Signal Tech., Inc. (2008, CA9 Cal) 527 F3d 982, CCH Fed Secur L Rep P 94743.
Although nondisclosure in breach of fiduciary duty satisfies 15 USCS § 78j(b)'s requirement of deceptive device or contrivance, affirmative misrepresentation is
distinct species of fraud; even if person does not have fiduciary duty to disclose or abstain from trading, there is nonetheless affirmative obligation in commercial
dealings not to mislead. SEC v Dorozhko (2009, CA2 NY) 574 F3d 42, CCH Fed Secur L Rep P 95296.
Denial of Securities and Exchange Commission motion for preliminary injunction on grounds that computer hacking could not be "deceptive" under § 10(b) of
Securities Exchange Act of 1934 was vacated and remanded; there was no fiduciary-duty requirement where alleged fraud was affirmative misrepresentation rather
than nondisclosure. SEC v Dorozhko (2009, CA2 NY) 574 F3d 42, CCH Fed Secur L Rep P 95296.
SEC Rule 10b-5 imposes duty to speak and to make full disclosure of material facts in those circumstances where silence would constitute fraud. Connelly v Balkwill
(1959, DC Ohio) 174 F Supp 49, 11 Ohio Ops 2d 289, 83 Ohio L Abs 513, affd (1960, CA6 Ohio) 279 F2d 685.
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), seller has duty to disclose those material facts which would not be revealed by buyer's exercise of due
care. McGraw v Matthaei (1972, ED Mich) 388 F Supp 84.
To prevail in action based upon violation of antifraud provisions of Securities Exchange Act, plaintiff must prove that defendant either made material representations
directly to him or, being duty bound to disclose material information to him, remained silent; full disclosure is only required where law imposes duty to speak, and
that duty exists only in circumstances which indicate investment or fiduciary relationship between seller and buyer, or knowledge, actual or implied, on part of seller
that unless he speaks buyer may act to his detriment. Branham v Material Systems Corp. (1973, SD Fla) 354 F Supp 1048, CCH Fed Secur L Rep P 93988.
General antifraud provisions of 15 USCS § 78j(b), and SEC Rule 10b-5 impose, upon persons engaged in sale of securities, strict duty of full disclosure and failure to
disclose any material fact in relation thereto constitutes violation of such provisions. SEC v M. A. Lundy Associates (1973, DC RI) 362 F Supp 226.
Corporation defendants were not liable for securities fraud under 15 USCS § 78j(b) for failing to inform public that proposed merger would not go through, where
merger termination was not certain until drop-dead date and, thus, defendants had no duty to inform public that deal was dead prior to that date. In re CDNOW, Inc.
Sec. Litig. (2001, ED Pa) 138 F Supp 2d 624, CCH Fed Secur L Rep P 91463.
Shareholders adequately alleged violations of 15 USCS §§ 78j(b), 78t(a), and 17 C.F.R. § 240.10b-5 by alleging that, when corporate customer from which
approximately one-third of corporation's revenue was generated became corporation's competitor, executives continued to state optimistic projections for corporation
because this alleged: (1) misstatement or omission of material fact; (2) made with scienter, as there was strong inference executives' misstatements were made with
intent to deceive investors; (3) upon which shareholders justifiably relied; and (4) which proximately caused their injuries when value of their stock dropped
dramatically. In re Compuware Secs. Litig. (2004, ED Mich) 301 F Supp 2d 672.
Shareholder's bare assertion--that company did not disclose impact on revenues from swaps or reciprocal transactions until last day of class period--failed because
shareholder did not plead facts that demonstrated that company had duty to disclose this information prior to its statement or that company failed to disclose
relevant transactions, so shareholder's § 10(b) of Securities Exchange Act claim was dismissed for failure to state claim. In re Flag Telecom Holdings, LTD. (2004, SD
NY) 308 F Supp 2d 249.
Securities fraud claims arising from corporation's failure to disclose imminent termination of its chairman and its president survived motion to dismiss with respect to
claims under § 10(b) (15 USCS § 78j(b)) and § 14(a) (15 USCS § 78n(a)) of Securities Exchange Act of 1934 alleging specific misleading statements concerning
their expected long-term employment; because neither registration statement nor prospectus supplement contained such statements, claim under § 11 (15 USCS §
77k) of Securities Act of 1933 was dismissed, and all claims against accounting firm were also dismissed. N.J. v Sprint Corp. (2004, DC Kan) 314 F Supp 2d 1119,
Financial consulting firm and financial public relations firm made material omissions of fact by failing to disclose that they were selling company's shares during and
after time that they were recommending company in their investment opinions; by stating that they, their affiliates, officers, directors, or employees "may" buy or
sell stock in their investment opinions, they failed to provide adequate disclosure. SEC v Gane (2005, SD Fla) 18 FLW Fed D 401.
Financial public relations and consulting firms repeated practice of promoting company's stock while failing to disclose their interest in and sale of stock was done in
violation of securities laws, and furthermore, scienter of firm's president was imputed to firms; those defendants violated § 17(a) (15 USCS § 77q(a)) of Securities
Act of 1933, § 10(b) (15 USCS § 78j(b))of Securities Exchange Act of 1934, and 17 C.F.R. § 240.10b-5 (2004) thereunder. SEC v Gane (2005, SD Fla) 18 FLW Fed D
401.
Court granted corporations' motion to dismiss investors' claims under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934, and Rule 10b-5, 17 C.F.R. §
240.10b-5 pursuant to Fed. R. Civ. P. 12(b)(6) and Private Securities Litigation Reform Act of 1995, 15 USCS § 78u-4 because (1) there could have been no omission
because corporations that were disclosed in proxy limitations on use of synthetic fuel credits which were imposed by Internal Revenue Code; (2) information that was
allegedly omitted, generally applicable tax provision, was not of type which corporations had duty to disclose because it was well-established law that securities laws
did not require disclosure of information that was publicly known; (3) even if it was assumed that corporations should have disclosed existence of alternative
minimum tax, it was simply not case that omission of that information made statements that were disclosed materially misleading. In re Progress Energy, Inc. Sec.
Litig. (2005, SD NY) 371 F Supp 2d 548, CCH Fed Secur L Rep P 93263.
Since purchasers did not allege that accountant discovered substantial understatement of reserves for returned merchandise within class period, purchasers could
not maintain claim against accountant under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, for failure to
disclose understatement. In re Warnaco Group, Inc. Opinion Sec. Litig. (II) (2005, SD NY) 388 F Supp 2d 307, CCH Fed Secur L Rep P 93572.
Purchasers failed to state claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5, that accountant failed to
publicly disclose that corporation was no longer in compliance with its debt covenants where there was no allegation that accountant was aware that corporation was
in default under its credit agreement, and fact that corporation defaulted under its credit agreements did not render any of accountant's prior statements false,
thereby giving rise to duty to correct. In re Warnaco Group, Inc. Opinion Sec. Litig. (II) (2005, SD NY) 388 F Supp 2d 307, CCH Fed Secur L Rep P 93572.
Complaint alleging violations of Securities Exchange Act § 10(b) failed to adequately allege, pursuant to Fed. R. Civ. P. 9(b), that defendants had duty to disclose
fund's losses; absent duty to disclose, there could be no primary violation based on material omission. SEC v Durgarian (2007, DC Mass) 477 F Supp 2d 342.
Where it was alleged that manufacturer of cardiovascular and endosurgical devices artificially inflated its stock prices, violating § 10(b) and § 20(a) of Securities
Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a), it was found not to have made material misstatements and omissions regarding civil lawsuit with another
manufacturer because it fulfilled its disclosure requirements regarding suit, comporting with requirements of Item 103 of Regulation S-K, 17 C.F.R. § 229.103, by
disclosing potential risk of pending litigation; that it settled and paid other manufacturer millions of dollars was of no consequence as loss resulting from
materialization of disclosed risk did not support claim of securities fraud; moreover, lead plaintiff failed to allege with particularity, as was required pursuant to 15
USCS § 78u-4(b), any actionable misstatement regarding litigation; challenged statements could not serve as basis for securities claim because they were corporate
puffery, statements of truth, or forward looking statements, which were not basis of liability pursuant to 15 USCS § 78u-5(c)(1)(A). In re Boston Sci. Corp. Sec. Litig.
(2007, DC Mass) 490 F Supp 2d 142.
Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a), it was found not to have made material misstatements and omissions regarding U.S. Department of Justice (DOJ)
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investigation where it fulfilled its obligations by disclosing potential risk of DOJ investigation in its filings; it had no duty to confess guilt, and its disclosures were
consistent with 17 C.F.R. § 229.401(f)(2); in addition, no loss causation was alleged, which required that loss be caused by concealed risk, but manufacturer's loss
was caused by materialization of risk that it had adequately disclosed; moreover, that manufacturer's executives invoked their Fifth Amendment rights was not
dispositive. In re Boston Sci. Corp. Sec. Litig. (2007, DC Mass) 490 F Supp 2d 142.
Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a), it was found not to have made material misstatements and omissions regarding its quality control, even though it
failed to inform market about three warning letters from U.S. Food and Drug Administration (FDA); FDA letters were not material and manufacturer had no duty to
disclose them since letters were informal and advisory, resulted in no enforcement action against company, and involved only three of manufacturer's 26 facilities;
moreover, no reasonable investor would have found manufacturer's comments about its focus on quality important in total mix of information that was available. In
re Boston Sci. Corp. Sec. Litig. (2007, DC Mass) 490 F Supp 2d 142.
Corporation and its officers were entitled to dismissal of city pension board's class action securities fraud action pursuant to 15 USCS § 78j(b) because (1) central
thrust of board's allegations concerning corporation's deficiencies alleged no more than corporate mismanagement, which did not support federal cause of action; (2)
executive's use of company jet for personal reasons was not awarded to, earned by, or paid to executive and thus did not have to be disclosed under 17 C.F.R. §
229.402; (3) board failed to meet pleading requirements of 15 USCS § 78u-4(b)(1), (2); (4) corporation's omission of fact that some of its officers were violating
corporation's newly adopted code of ethics from announcements of adoption of that code did not render statement of adoption misleading under17 C.F.R. §
240.10b-5; and (5) corporation's failure to disclose information relating to personnel changes were immaterial. Andropolis v Red Robin Gourmet Burgers, Inc. (2007,
DC Colo) 505 F Supp 2d 662.
Plaintiff's § 10(b) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), claim failed, as, inter alia, there was no duty to disclose that management engaged in
multi-tasking to address challenges associated with centralization; similarly, there was no duty to disclose challenges posed by shifting from regional to centralized
system. In re Winn-Dixie Stores (2007, MD Fla) 531 F Supp 2d 1334, CCH Fed Secur L Rep P 94532.
Plaintiffs alleged that Sarbanes-Oxley certifications were false or misleading because individual defendants had not disclosed to outside auditors and to investment
bank's audit committee any fraud that involved management or other employees who had significant role in registrant's internal control over financial reporting;
fundamental problem with plaintiffs' claim was that they did not allege with particularity basis for their belief that individual defendants did riot disclose insider
trading fraud to investment bank's auditors and its audit committee. In re FBR Inc. Sec. Litig. (2008, SD NY) 544 F Supp 2d 346.
Where plaintiffs' proxy allegations were not limited to failure to disclose breach of fiduciary duty but rather alleged that proxy statements failed to disclose that
publicly traded company abandoned its underwriting standards, which exposed itself to undisclosed level of heightened risk, court found that plaintiffs had
adequately stated claims under § 14(a) and Rule 14a-9, 17 CFR § 240.14a-9. In re Countrywide Fin. Corp. Derivative Litig. (2008, CD Cal) 554 F Supp 2d 1044.
Chief executive officer of space and communications corporation was entitled to summary judgment on investors' claims that he violated §§ 10(b) and 20(a) of
Securities Exchange Act of 1934, 15 USCS §§ 78j(b) and 78t(a), and Securities and Exchange Commission Rule 10b-5, 17 CFR § 240.10b-5, because he made false
and misleading statements which kept investors from learning that corporation was involved in negotiations to sell assets to another corporation which required
space and communications corporation to declare bankruptcy; space and communications corporation did not have duty to inform public that it was in negotiations
that might lead to bankruptcy, and information that was available to market, including in corporation's 10-K filings and reports from market analysts and reporters,
was sufficient to put investors on notice that bankruptcy was possibility. Beleson v Schwartz (2009, SD NY) 599 F Supp 2d 519.
Development of U.S. Supreme Court case law on 15 USCS § 78j(b) and 17 CFR § 240.10b-5(b) impliedly overrules or eliminates much of multifactor test of Virginia
Bankshares for determining duty to disclose; one who fails to disclose material information prior to consummation of securities transaction commits fraud only when
he is under duty to do so, and duty to disclose arises when one party has information that other party is entitled to know because of fiduciary or other similar relation
of trust and confidence between them. Newby v Enron Corp. (In re Enron Corp. Secs.) (2009, SD Tex) 610 F Supp 2d 600.
Defendant secondary-actor banks were not liable under 15 USCS § 78j(b) on allegations of participating in debtor company's structured finance transaction fraud
because banks had no duty to disclose information to plaintiff investors who had not had any contact with banks or relied on statements from banks in deciding to
invest. Newby v Enron Corp. (In re Enron Corp. Secs.) (2009, SD Tex) 610 F Supp 2d 600.
Unpublished: Although Illinois State Board of Investment asserted that corporation had particular duty, in connection with its February 2004 stock offering, to reveal
that its sales levels were exceedingly low and that it was in serious danger of failing to meet first revenue metric in July 2004, district court properly dismissed that
claim on ground that statements in February 2004 regarding sales levels and satisfaction of revenue metrics targeted for July 2004 would have been speculative and
immaterial, and appellate court agreed that because corporation had no duty to publicly disclose terms of its agreement with United States Postal Service, fact that
its sales revenues were low relative to those terms was not material information five months before date of first metric. Ill. State Bd. of Inv. v Authentidate Holding
Corp. (2010, CA2 NY) 2010 US App LEXIS 5226.
Unpublished: District court was correct to dismiss all claims related to corporation's general failure to reveal, prior to release of First Deficiency Notice, difficulties it
was experiencing in meeting revenue metrics called for in agreement it had with United States Postal Service because second amended complaint did not allege facts
establishing that corporation had duty to reveal that information. Ill. State Bd. of Inv. v Authentidate Holding Corp. (2010, CA2 NY) 2010 US App LEXIS 5226.
Unpublished: Because plaintiff had not identified any part of seven challenged statements that were rendered materially misleading by alleged omissions relating to
merger negotiations, dismissal of plaintiff's 15 USCS §§ 78j(b) and 78t(a) claims were affirmed; silence, absent duty to disclose, was not misleading. Thesling v
Bioenvision, Inc. (2010, CA2 NY) CCH Fed Secur L Rep P 95708.
137. Knowledge assumed of reasonable investors
Statements such as assertion that defendant investment bank had "'risk management processes that are highly disciplined and designed to preserve integrity of risk
management process," that it "set standard for integrity," and that it would "continue to reposition and strengthen its franchises with focus on financial discipline,"
were no more than "puffery" which did not give rise to securities violations; no investor would have taken such statements seriously in assessing potential
investment, for simple fact that almost every investment bank made these statements. Eca & Local 134 IBEW Joint Pension Trust of Chi. v JP Morgan Chase Co.
(2009, CA2 NY) 549 F3d 187.
Alleged omissions of broker are not actionable under 15 USCS § 78j(b), in action by investors, where alleged omissions are that (1) market accounts contain certain
degree of risk and (2) market decline can precipitate margin call requiring investor to put up more money, because information investors claim was withheld is so
basic that any investor could be expected to know it. Newman v Rothschild (1986, SD NY) 651 F Supp 160, CCH Fed Secur L Rep P 93035.
Stockholders' claim against corporation, alleging that corporation perpetrated fraudulent scheme to create and maintain artificially inflated stock prices, is dismissed,
where plaintiffs cited as evidence of fraud statements in corporation's annual reports that its affairs were conducted according to highest standards of personal and
corporate conduct and that regulatory policy was fundamentally important to its subsidiary, because no reasonable investor would consider statements to be
meaningful in making investment decision. Weill v Dominion Resources (1994, ED Va) 875 F Supp 331, CCH Fed Secur L Rep P 98714.
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Unpublished: Allegation that surviving party to merger failed to disclose to acquiring party that surviving party had paid its chief executive officer nearly $ 90 million
in compensation for most recent year and had made substantial loans and other payments to him as well, survived motion to dismiss fraud claim under § 10(b) of
Securities and Exchange Act, 15 USCS § 78j, because disclosure of size of officer's compensation would have been important to reasonable investor and would have
altered total mix of information available as to value of surviving party's shares. E*Trade Fin. Corp. v MarketXT Holdings Corp. (In re MarketXT Holdings Corp.)
(2006, BC SD NY) 2006 Bankr LEXIS 2746.
138. Materiality
District court's judgment that underwriter's official statement regarding industrial development bonds did not contain any misrepresentations could be upheld on
appeal if there were no misrepresentations or if misrepresentations and omissions complained of were not material; even admitted misrepresentation is actionable
only if it is material. Shawmut Bank, N.A. v Kress Assocs. (1994, CA9 Cal) 33 F3d 1477, 94 CDOS 6903, 94 Daily Journal DAR 12687, CCH Fed Secur L Rep P 98433.
91550).
Defendant corporation asserted that complaint contained no pleaded fact indicating it knew about any substantial losses or that those amounts actually were
substantial for $ 18 billion company, arguing that every manufacturer replaced its products, settled lawsuits, and paid claims as part of its day-to-day business; yet,
no one would contend these activities alone required reserves; this argument was unpersuasive for three reasons: first, assuming truth of facts set forth in
complaint, by March 2000, when its 1999 annual report was issued, over 2000 rollover accidents, 700 serious injuries, and 170 fatalities had occurred yielding
thousands of claims; second, payments were not as group routine or minor; third, to extent materiality question was close, courts generally reserved such questions
for trier of fact. City of Monroe Emples. Ret. Sys. v Bridgestone Corp. (2005, CA6 Tenn) 399 F3d 651, CCH Fed Secur L Rep P 93097, 2005 FED App 52P, reh den,
reh, en banc, den (2005, CA6) 2005 US App LEXIS 8053.
District court properly dismissed pursuant to Fed. R. Civ. P. 12(b)(6) fraud-on-the-market class action under 15 USCS § 78j(b) where corporation's alleged
incomplete disclosures about its sales force were not material for purposes of 15 USCS § 78u-4(b)(1)(B); investors did not raise plausible claim that stock prices
fluctuated with disclosures about sales staff or that reasonable investor would have received materially different impression of corporation's state of affairs had
corporation used language from later press releases to describe sales shortfalls in earlier press release. Onie v Conners (In re Cutera Secs. Litig.) (2010, CA9 Cal)
Where scheme involved third party (sellers) exercising their warrants and selling that stock to public, being able to do so only because issuer extended warrants'
term, as sellers' original shares were not enough to offset anticipated number of shares to be sold to sellers by petitioners, two officers of issuer, upon officers
exercising their stock options to replace sellers' shares by selling those optioned shares to sellers, it was unclear that scheme, while it allowed officers to resell and
realize substantial profit substantially simultaneously upon buying them, would have resulted in rescission claims or damages in lieu thereof against issuer since
unclean hands defenses appeared to preclude rescission claims under 15 USCS § 77l(a)(1), and thus, issues as to officers' fraud and reporting violations under 15
USCS §§ 77q(a)(1), 78j(b), were remanded for further findings on materiality. Zacharias v SEC (2009, App DC) 569 F3d 458, CCH Fed Secur L Rep P 95256.
Statute does not focus on causal relationship between misstatement and original purchase but, rather, on causal relationship between misstatement and subsequent
decline in value; thus, although plaintiff may successfully allege that statement made in prospectus was material within meaning of statute, plaintiff will recover no
damages where misstatements did not cause losses suffered by plaintiff. Akerman v Oryx Communications, Inc. (1984, SD NY) 609 F Supp 363, CCH Fed Secur L
Rep P 91680, affd in part and app dismd in part on other grounds, remanded (1987, CA2 NY) 810 F2d 336, CCH Fed Secur L Rep P 93101, 6 FR Serv 3d 1136.
Securities fraud action must fail to extent that it relies on conference call statement that company did not expect any surprises in fourth quarter, even though
investors claim that statement was misleading in that it fails to acknowledge commitment of millions of dollars to risky advertising campaign, because statement was
unrelated to advertising campaign, referring instead to recurring component problems, and in any event "surprises," by definition, are unexpected, making statement
meaningless and immaterial. Karacand v Edwards (1999, DC Utah) 53 F Supp 2d 1236, CCH Fed Secur L Rep P 90509.
Stock purchasers did not plead sufficient facts concerning motive to commit fraud, and court could not ascertain whether there was any basis for general allegation
that senior officers and directors should have known that their failure to disclose details of their alleged channel stuffing was materially misleading omission. In re
Trex Co., Inc. Sec. Litig. (2002, WD Va) 212 F Supp 2d 596, CCH Fed Secur L Rep P 91921.
On evidence provided, Securities and Exchange Commission (SEC) made prima facie case that defendants violated anti-fraud provisions of securities laws; failure to
disclose anywhere on websites or in other materials any information about individual's extensive criminal history, including convictions for fraud, was material
omission and some, if not all, of representations made about foundational companies on defendants' websites and in their literature was false. SEC v Prater (2003,
DC Conn) 289 F Supp 2d 39, CCH Fed Secur L Rep P 92627.
Investors' federal securities law claims against company and its officials failed because investors, on several occasions, did not plead fraud with requisite specificity;
even if pled with specificity, alleged misstatements were not material because: (1) they were puffery not actionable as matter of law; (2) public filings supported
statements; (3) even lies were not actionable when investor possessed information sufficient to call misrepresentation into question; (4) they were statements
predicting future events not worded as guarantees; (5) company had no duty to report on its ongoing Food and Drug Administrations approval process; or (6)
statements were inside information not reasonably calculated to influence investing public. Glaser v Enzo Biochem, Inc. (2003, ED Va) 303 F Supp 2d 724 (criticized
in Argent Classic Convertible Arbitrage Fund L.P. v Rite Aid Corp. (2004, ED Pa) 315 F Supp 2d 666, CCH Fed Secur L Rep P 92818) and (criticized in Swack v Credit
Suisse First Boston (2004, DC Mass) CCH Fed Secur L Rep P 92924) and affd in part and revd in part, remanded (2005, CA4 Va) CCH Fed Secur L Rep P 93134.
Company's announced need to significantly adjust its reported financials was sufficient to indicate that its original statements were materially false and plaintiffs pled
facts sufficient to establish strong inference of scienter with respect to all but one of individual defendants; moreover, size and nature of restatement suggested there
were systemic accounting abuses that caused serious public misrepresentation of its financial condition; therefore, court denied motions to dismiss allegations of
securities fraud by material misstatement pursuant to 15 USCS § 78j(b). In re Atlas Air Worldwide Holdings, Inc. Sec. Litig. (2004, SD NY) 324 F Supp 2d 474.
Biopharmaceutical company's statements concerning prospective effectiveness of drug in their drug development program were sufficiently material in shareholders'
securities fraud claims where reasonable investor would have considered statements significant in making their investment decision and this was underscored by fact
that company's stock dropped 57% after statements were made public. In re Regeneron Pharms., Inc. Sec. Litig. (2005, SD NY) CCH Fed Secur L Rep 93099
(criticized in In re NYSE Specialists Sec. Litig. (2005, SD NY) 405 F Supp 2d 281).
Fed. R. Civ. P. 12(b)(6) motion to dismiss by defendants, consulting firm and its principal owner, based on SEC's failure properly to allege material omissions under
15 USCS § 78j(b) and 15 USCS § 80b-6, was denied because SEC's allegations that these defendants shared personal relationship with state treasurer and were
provided "finders fee" related to 25 million dollar investment of state's pension fund but that defendants were not required to perform any work in return for finders
fee, were allegations that reasonable investor would have wanted to know before investing their pension funds with state treasurer. SEC v Dibella (2005, DC Conn)
CCH Fed Secur L Rep 93625, partial summary judgment den, motion to strike den (2006, DC Conn) 409 F Supp 2d 122.
Putative class action complaint alleging that CEO and CFO omitted critical information from public statements about occurrences that affected their company's
revenue stream--including product recall and Food and Drug Administration plant inspection--failed to state claim for making false and misleading statements under
15 USCS § 78j(b) because facts did not indicate that statements were material, requirement under Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act of
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1995, 15 USCS § 78u-4(b). Plumbers & Pipefitters Local Union 719 Pension Fund v Zimmer Holdings, Inc. (2009, SD Ind) 673 F Supp 2d 718.
Materiality is mixed question of law and fact, dependent on circumstances at time of alleged misstatement. Re Albert Glenn Yesner, CPA (2001) 2001 SEC LEXIS 978.
There is presumption of materiality for information concerning financial condition of company. In re Albert Glenn Yesner, CPA (2001) 2001 SEC LEXIS 978.
Unpublished: Appellate court could not conclude that information regarding amendment of agreement, which would potentially have allowed corporation to remain in
compliance with its terms and avoid cancellation by United States Postal Service (USPS) was so obviously unimportant to reasonable investor that dismissal of those
claims on grounds of materiality would have been appropriate; therefore, second amended complaint alleged sufficient facts to state claims premised on
corporation's duty to update statements made in conference call and its allegedly misleading statements; because district court appeared not to have considered
those statements as basis for liability, appellate court vacated district court's dismissal of complaint as to those claims; moreover, although corporation asserted that
statements were nonactionable under bespeaks caution doctrine and safe harbor provision, 15 USCS § 78u-5(c)(1), both defenses applied only to forward-looking
statements, and statements in question were statements of then-present fact. Ill. State Bd. of Inv. v Authentidate Holding Corp. (2010, CA2 NY) 2010 US App LEXIS
5226.
As to § 78j(b) and SEC Rule 10b-5, 17 CFR § 240.10b-5 to satisfy requirement that there be no deception, there need be only disclosure, where full disclosure
forecloses fiduciary's liability under misappropriation theory, because, if fiduciary discloses to source of confidential information that fiduciary plans to trade on
information, then there is no deceptive device; however, when person trading on basis of material nonpublic information owes duty of loyalty and confidentiality to
two entities for example, law firm and its client but makes disclosure to only one, trader may still be liable under misappropriation theory. United States v O'Hagan
(1997) 521 US 642, 138 L Ed 2d 724, 117 S Ct 2199, 97 CDOS 4931, 97 Daily Journal DAR 7991, CCH Fed Secur L Rep P 99482, 1997 Colo J C A R 1354, 11 FLW
Fed S 154, on remand, remanded (1998, CA8 Minn) 139 F3d 641, CCH Fed Secur L Rep P 90178.
How information is disclosed, as distinguished from what information is disposed, can lead to liability under both § 11 of Securities Act of 1933 (15 USCS § 77k) and
under SEC Rule 10b-5 promulgated pursuant to § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)), so that documents which were alleged to emphasize
positive aspects of business but "glossed over" negative aspects of business so as to induce sale of securities in business could be subject of action under § 11 of
1933 Act and Rule 10(b)-5. Isquith ex rel. Isquith v Middle S. Utils. (1988, CA5 La) 847 F2d 186, CCH Fed Secur L Rep P 93801, 11 FR Serv 3d 694, cert den (1988)
488 US 926, 102 L Ed 2d 329, 109 S Ct 310 and (superseded by statute as stated in In re Harmonic Inc. Secs. Litig. (2001, ND Cal) 163 F Supp 2d 1079, CCH Fed
If, in public accountant's preparation of financial statement to be used in connection with private placement of securities, application of accounting principles alone
will not adequately inform investors, accountants, as well as insiders, must take pains to bare all facts needed by investors to interpret financial statement
accurately; where financial statement of corporation referred to sale of property, which was largest single transaction corporation had ever entered into, it was
misleading for public accounting firm which prepared statement not to disclose its reservations and doubts concerning likelihood of corporation's receipt of full
payment; such duty was not satisfied by qualification in report which stated that it was subject to collectibility of balance receivable on contract, particularly in light
of fact that several million dollars remained due on contract and purchasing corporation had net worth of only $ 100,000, report revealing neither identity nor net
worth of purchasing corporation. Herzfeld v Laventhol, Krekstein, Horwath & Horwath (1974, SD NY) 378 F Supp 112, CCH Fed Secur L Rep P 94574, affd in part and
revd in part on other grounds (1976, CA2 NY) 540 F2d 27, CCH Fed Secur L Rep P 95660.
Press release did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) because it allegedly did not accurately describe corporation's financial picture
where release, when read together with other contemporaneous releases, gave fair and accurate description of corporation's financial problems; it is not necessary
that every release during period of time repeat information contained in earlier releases, and where series of releases issued within reasonably short period of time
accurately disclosed financial situation of company, individual deficiencies of any one release were cured by content of all releases taken as whole. United States v
Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
Generally, so long as material facts are disclosed or already known, it is not deceptive within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) to
fail to characterize those facts with pejorative nouns and adjectives or to fail to verbalize all adverse inferences expressly; reasonable person would not be deceived
by their nondisclosure, since he would be able to draw whatever inferences and append whatever characterizations he believed appropriate. Klamberg v Roth (1979,
SD NY) 473 F Supp 544, CCH Fed Secur L Rep P 97147, 28 FR Serv 2d 321.
Directors are entitled to summary dismissal of fellow director's securities fraud complaint about proposal to amend Articles of Incorporation to eliminate corporation's
right to redeem preferred stock at $ 100 per share, even though it may be true that proposed amendment would relinquish valuable corporate asset and would
impact comparative value of common and preferred stock of corporation, because these potentialities are not hidden from shareholders, who can readily discern
effects of straightforward proposal. Merino Vinas v Boto (1993, DC Puerto Rico) 827 F Supp 83, CCH Fed Secur L Rep P 98061.
Under "bespeaks caution" doctrine of 15 USCS § 78j(b), when offering document's forecasts, opinions, or projections are accompanied by meaningful cautionary
statements, forward-looking statements will not form the basis for a securities fraud claim if those statements did not affect "total mix" of information document
provided investors. In re ValueVision Int'l Sec. Litig. (1995, ED Pa) 896 F Supp 434, 23 Media L R 2377, CCH Fed Secur L Rep P 98996, dismd (1997, ED Pa) 957 F
Supp 699.
Shareholders' complaint asserting that corporate executives misrepresented drug evaluation by FDA, effectively manipulating stock prices, stated claims for relief
under §§ 10(b)and 20(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5. In re CV Therapeutics Sec. Litig.
(2004, ND Cal) 59 FR Serv 3d 251.
In shareholder's § 10(b) of Securities Exchange Act action, where company disclosed to investors that it expected prices to decline subsequent to its initial public
offering, many of misleading statements alleged by shareholder failed because they were not material in light of disclosures made by company. In re Flag Telecom
Holdings, LTD. (2004, SD NY) 308 F Supp 2d 249.
Individual's claim under § 10(b) of Securities Exchange Act, 15 USCS § 78j(b), alleging scheme to conceal material information, preventing him from learning true
and fair value of stock he received under merger agreements failed because companies, in their public filings, disclosed facts sufficient for individual to ascertain that
companies engaged in transactions with one another valuing stock substantially below market value; claim also failed for various other reasons, including that it was
time-barred and individual failed to plead facts indicating that companies knew he was acting on basis of mistaken knowledge. Dujardin v Liberty Media Corp. (2005,
SD NY) 359 F Supp 2d 337, CCH Fed Secur L Rep P 93207.
Individual's conduct was imputable to trust, where SEC had established that individual dominated and controlled trust; not doing so would have given trusts more
insulation than those persons who controlled them, thus creating unjustified means of circumventing securities laws. United States SEC v Blackwell (2007, SD Ohio)
477 F Supp 2d 891.
Talk on "street" does not make information public; proper and adequate disclosure of significant corporate developments can only be effected by public release
through appropriate public media, designed to achieve broad dissemination to investing public generally and without favoring any specific person or group. In re
Schaefer (1975) 46 SEC 59.
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140. Effect of means of publication or omission
With respect to false and misleading statements, or omissions of material fact, means through which such statements are published, or through which omissions
should have been published, are unimportant, and liability may attach under antifraud provisions of Exchange Act where such statements or omissions are made in
or omitted from letters to stockholders. Mills v Sarjem Corp. (1955, DC NJ) 133 F Supp 753.
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), means through which false and misleading statements are published, or through which material facts
omitted should have been published, are unimportant; liability may attach where such statements or omissions occur in prospectuses. Lerman v Tenney (1969, SD
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), it is not necessary that misstatement be made directly to particular person, or that material
information be purposely withheld from him individually for cause of action to arise in such person, or even that such misstatement or withholding be directed toward
particular identifiable class of persons, such as stockholders, since dissemination of misinformation to public in general, as by press release, or failure to make public
disclosure of material information, renders party liable for injury sustained by investors by reason of such misinformation or withholding. Astor v Texas Gulf Sulphur
Co. (1969, DC NY) 306 F Supp 1333, CCH Fed Secur L Rep P 92501.
In addition to responsibility for making disclosure of material facts, there is implicit in § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) further responsibility of
accomplishing disclosure in manner that results in facts being clearly and intelligently communicated and not obtusely to cryptically communicated; broker's
disclosure to customer with long and dependent relationship with broker was not sufficient when effected by means of confirmation slips where customer did not
understand code employed on such slips and broker did not educate customer with respect to code. Cant v A. G. Becker & Co. (1974, ND Ill) 374 F Supp 36, CCH Fed
If items disclosed in statement do not disclose facts accurately or reveal insufficient data, it is in violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
and SEC Rule 10b-5 whether it is in form of report required to be filed with SEC or registered national security exchange, press release, or letter to stockholders.
United States v Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
Investors state viable securities fraud claim against airline, where they allege (1) filing of financial statements during class period showing upward trend in airline's
profitability, (2) failure to disclose that profits were due to airline's failure to comply with FAA regulations and other safety guidelines, and (3) misrepresentations that
airline's safety record was among best and that its imminent growth would be significant, because misrepresentations and omissions as to safety and growth of
airline were certainly material and were issued in press releases, official financial statements, and at investor conferences in connection with purchase or sale of
securities. In re ValuJet, Inc., Sec. Litig. (1997, ND Ga) 984 F Supp 1472, CCH Fed Secur L Rep P 99579.
Securities fraud plaintiffs must replead to include much more specific information, where, inter alia, they seek to have individual defendants found liable for all
alleged false and misleading statements under "group-published information" doctrine, because they fail to allege that individual defendants were directly involved in
preparation of statements or to specify which statements provide basis for application of doctrine. In re Autodesk, Inc. Sec. Litig. (2000, ND Cal) 132 F Supp 2d 833,
Securities fraud claims of investors in Thailand steel mill may proceed, even though lack of reliance on offering memorandum dooms claims made on that basis,
where investors also clearly claim timely reliance on misrepresentations made at "road show," both orally and in slides, because jury must decide whether timely
receipt of offering memorandum can defeat investors' reliance on material presented at road show. Gabriel Capital, L.P. v NatWest Fin., Inc. (2001, SD NY) 177 F
Under provisions of Securities Exchange Act with respect to false and misleading statements or omissions of material fact, means through which such statements are
published, or through which omissions should have been published, are unimportant, and liability may attach where such statements or omissions are made in or
omitted from verbal communications. First Jersey Secur., Inc. v SEC (1984) 194 NJ Super 284, 476 A2d 861, CCH Fed Secur L Rep P 91522, app dismd (1985) 101
NJ 208, 501 A2d 893.
141.--Speeches
Stockholder stated good claim under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 in alleging that 2 directors of corporation had
fraudulently failed to disclose material inside information in making speech to induce securities dealers to promote corporation's stock. Sprayregen v Livingston Oil
Co. (1968, SD NY) 295 F Supp 1376, CCH Fed Secur L Rep P 92272, 12 FR Serv 2d 21.
142.--Corporate reports and proxies
Shareholders who showed that there were material misstatements and omissions contained in proxy statements soliciting proxies for proposed merger established
necessary elements for recovery under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Swanson v American Consumers Industries, Inc. (1973, CA7 Ill) 475
Federal securities laws were not violated when proxy statements issued in connection with merger did not reveal breach of fiduciary duty, since breach concerned
state law claim, and was not material because fact that tendered price was artificially low was evident from numbers disclosed in proxy. Kademian v Ladish Co.
(1986, CA7 Wis) 792 F2d 614, CCH Fed Secur L Rep P 92764.
Plaintiff's claim that defendants omitted material information with respect to $ 6.8 million note in company's 2000 Form 10-K was non-starter; 2000 Form 10-K was,
by its terms, consolidated return, and it included financial data for both parent company and its subsidiaries, in compliance with § 13 and § 15(d) of Securities
Exchange Act of 1934, 15 USCS §§ 78m, 78o(d). Baron v Smith (2004, CA1 Mass) 380 F3d 49, CCH Fed Secur L Rep P 92896.
Liability may arise under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where material facts are misstated or omitted from proxy statements. Norte & Co. v
Huffines (1968, SD NY) 304 F Supp 1096, CCH Fed Secur L Rep P 92204, reh den, supp op (1968, SD NY) 288 F Supp 855, affd in part and remanded in part on
other grounds (1969, CA2 NY) 416 F2d 1189, CCH Fed Secur L Rep P 92483, cert den (1970) 397 US 989, 25 L Ed 2d 396, 90 S Ct 1121.
Alleged misrepresentations in proxy statement may give rise to claim under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Loeb v Whittaker Corp. (1971,
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 were violated where individual failed to cause material information to be disclosed
in annual reports of corporation, proxy materials, and SEC reports regarding securities holdings. SEC v General Refractories Co. (1975, DC Dist Col) 400 F Supp
1248, CCH Fed Secur L Rep P 95291, 1 Fed Rules Evid Serv 105.
Although certain facts might appear to be adequately disclosed on face of proxy statement, inquiry into circumstances under which statements were made might
reveal that statements gave distorted impression of facts in violation of SEC Rule 10b-5. Holt v Katy Industries, Inc. (1976, SD NY) 71 FRD 424, CCH Fed Secur L
Rep P 95602, 23 FR Serv 2d 975.
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Federal securities laws are not violated by failure to include in proxy statements information concerning earlier merger transaction involving acquiring corporation,
information concerning acquiring corporation's intentions when to use tax-loss carry forwards of acquired corporation, statements concerning future business
prospects of acquired corporation, or information concerning alleged breach of fiduciary duties by acquiring corporation. Hahn v Breed (1984, SD NY) 587 F Supp
1369.
No violation of Rule 10b-5 by bank is proved, because dissatisfied shareholders were unable to establish that proxy statement was representation on which they were
entitled to rely or that causal connection existed between alleged violation and injury, where proxy statements only recited what bank anticipated shareholders would
be entitled to receive for their shares, and shareholders could not show they sold bank stock in reliance upon alleged misrepresentation of value of shares. Yabsley v
Conover (1986, ND Ill) 644 F Supp 689, CCH Fed Secur L Rep P 93139.
Statement from 1982 Annual Report of computer corporation indicating that corporation had refined its planning process cannot provide basis for 15 USCS § 78j(b)
liability, where new forecasting method turned out to be flop, despite evidence of internal executive statements 8 months later warning that "forecasting process is
not working," because cases are legion to effect that 20-20 hindsight in securities cases is equivalent to Monday morning quarterbacking--enjoyable but
nonproductive. In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
143.--Press statements
SEC Rule 10b-5 is violated whenever assertions are made by corporation in manner reasonably calculated to influence investing public by means of financial news
media if such assertions are false or misleading or are so incomplete as to mislead. SEC v Texas Gulf Sulphur Co. (1968, CA2 NY) 401 F2d 833, CCH Fed Secur L Rep
P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
Corporation and its president violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where corporation issued press release, drafted by president, containing
misleading information as to mineral discovery by corporation. Mitchell v Texas Gulf Sulphur Co. (1971, CA10 Utah) 446 F2d 90, CCH Fed Secur L Rep P 93019, 14
FR Serv 2d 1544, 29 ALR Fed 620, cert den (1971) 404 US 1004, 30 L Ed 2d 558, 92 S Ct 564, reh den (1972) 404 US 1064, 30 L Ed 2d 754, 92 S Ct 734 and cert
den (1972) 405 US 918, 30 L Ed 2d 788, 92 S Ct 943.
Corporation violated provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by issuing press release where framers of press release did not exercise
due diligence in its issuance, and where press release was misleading to reasonable investor using due care. SEC v Texas Gulf Sulphur Co. (1970, SD NY) 312 F Supp
77, CCH Fed Secur L Rep P 92572, affd in part and revd in part on other grounds (1971, CA2) 446 F2d 1301, CCH Fed Secur L Rep P 93072, cert den (1971) 404 US
1005, 30 L Ed 2d 558, 92 S Ct 561, reh den (1972) 404 US 1064, 30 L Ed 2d 753, 92 S Ct 733 and cert den (1971) 404 US 1005, 30 L Ed 2d 558, 92 S Ct 562, reh
den (1972) 404 US 1064, 30 L Ed 2d 753, 92 S Ct 733 and cert den (1971) 404 US 1005, 30 L Ed 2d 558, 92 S Ct 563, reh den (1972) 404 US 1064, 30 L Ed 2d
753, 92 S Ct 734 and cert den (1971) 404 US 1005, 30 L Ed 2d 558, 92 S Ct 563, reh den (1972) 404 US 1064, 30 L Ed 2d 754, 92 S Ct 734.
Officer and director of corporation is liable to those who engage in securities transactions based upon misleading statements or omissions contained in or omitted
from newspaper article relating to issuer where such officer or director furnished information to writer of article and where article is correct representation of such
information. Blakely v Lisac (1973, DC Or) 357 F Supp 267, 17 FR Serv 2d 153.
Statements can be misleading, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, where items disclosed do not describe
facts accurately or where insufficient data are revealed; misleading, misrepresented or untruthful character of information released, so as to constitute violation of §
10(b) and Rule 10b-5, may appear from nature of statement considered alone, or, when facts are fully disclosed, from halftruths, omissions or absence of full candor
contained therein; determination of whether press release is misleading, so as to be in violation of § 10(b) and Rule 10b-5, depends upon whether release conveys
to public false impression of situation at time of issuance or, where it is alleged that insufficient data have been disclosed, whether sufficient facts have been
disclosed so that informed investment decision can be made. United States v Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
Defendants' alleged violation of 15 USCS § 78j(b) through issuance of press releases in its alleged failure to disclose purpose for corporate actions and nondisclosure
of plaintiffs' proposed merger is dismissed, where nondisclosure of impure motives or of fiduciary breach does not constitute federal securities fraud. Pullman-
Peabody Co. v Joy Mfg. Co. (1986, DC NJ) 662 F Supp 32, CCH Fed Secur L Rep P 93760.
Press release reporting that computer corporation has "introduced" new product possessing unique quality that sets it apart from other disk drives cannot be basis
for 15 USCS § 78j liability, where report merely states true facts that new, innovative product is being introduced to market, because positive statements about new
product were not "premature, without reasonable basis, and materially misleading." In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed
Securities fraud defendants cannot be held liable for information contained in April 1994 magazine article, where investors do not contest that copies of that
magazine were delivered to post offices for mailing April 14, 1994, because investors would not have received magazine until after close of class period on April 15,
information in article could not have affected them, and it is immaterial as matter of law. In re Kidder Peabody Sec. Litig. (1998, SD NY) 10 F Supp 2d 398,
reconsideration den, request den, motion den (1998, SD NY) 1998 US Dist LEXIS 14386.
Fact that computer manufacturer and its chief executive officer (CEO) hosted media events, held meetings and conference calls with financial analysts and
participated in interviews is sufficient to show that they intended that their statements be communicated to market and that shareholders made detailed allegations
about statements analysts actually made to market as result of information provided at computer manufacturer's media events, meetings, and conference calls was
insufficient to survive motion to dismiss because shareholders' claims did not sufficiently allege that information provided was knowingly false or misleading to
proceed under conduit theory of liability under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b). In re Apple Computer, Inc. (2002, ND Cal) 243 F Supp
2d 1012, CCH Fed Secur L Rep P 92407, affd (2005, CA9 Cal) CCH Fed Secur L Rep P 93203.
In action in which SEC filed suit against defendants, corporation, its chief executive officer, and its in-house counsel (organizational defendants) and three individuals
(consultant defendants), alleging violations of §§ 5 and 17(a) of Securities Act of 1933, § 10(b) of Securities Exchange Act of 1934, and S.E.C. Rule 10b-5
promulgated thereunder, summary judgment was denied on securities fraud claims against one of consulting defendants where issues of fact remained as to his
knowledge and state of mind at time of his alleged conduct. United States SEC v Universal Express, Inc. (2007, SD NY) 475 F Supp 2d 412, CCH Fed Secur L Rep P
94165.
In action in which SEC filed suit against defendants, corporation, its chief executive officer, and its in-house counsel (organizational defendants) and three individuals
(consultant defendants), alleging violations of §§ 5 and 17(a) of Securities Act of 1933, § 10(b) of Securities Exchange Act of 1934, and S.E.C. Rule 10b-5
promulgated thereunder, SEC was granted summary judgment on securities fraud claims against organizational defendants where (1) organizatoinal defendants did
not dispute that they created and issued press releases publicly announcing hundreds of millions of dollars in financing commitments and heralding acquisitions of
other companies, nor did they dispute that these statements were at best misleading and sometimes wholly fantastical; and (2) conclusory claim that organizational
defendants verified "titles" and "operative language" did nothing to demonstrate their reasonable belief in truth of their statements. United States SEC v Universal
Express, Inc. (2007, SD NY) 475 F Supp 2d 412, CCH Fed Secur L Rep P 94165.
144.--Prospectus statements
Language of prospectus, testimony of parties expressing their intentions, and testimony of market experts provided sufficient evidence for jury to have found that
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prospectus was ambiguous and misleading in that it omitted material facts that would have disclosed company's right to call bonds. Harris v Union Electric Co. (1986,
CA8 Mo) 787 F2d 355, CCH Fed Secur L Rep P 92535, cert den (1986) 479 US 823, 93 L Ed 2d 45, 107 S Ct 94.
Section 11 of Securities Act of 1933 (15 USCS § 77k) does not provide exclusive federal remedy to purchaser of securities in registered public offering who alleges
misstatements and omissions in prospectus, such purchaser may also maintain action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule
10b-5 thereunder. Orn v Eastman Dillon, Union Sec. & Co. (1973, CD Cal) 364 F Supp 352, CCH Fed Secur L Rep P 94189.
Misleading prospectus can play part in scheme which violates SEC Rule 10b-5 when misrepresentation is of sort that would cause reasonable investors to rely
thereon and, so relying, cause them to purchase or sell corporation's securities. Fox v Prudent Resources Trust (1974, ED Pa) 382 F Supp 81, CCH Fed Secur L Rep P
94826, 19 FR Serv 2d 447.
Publishing of information which was true at one time, but which is no longer true, as, for example, by use of out-of-date prospectus, violates antifraud provisions of
Securities Exchange Act. Darrah v Garrett (1984, ND Ohio) CCH Fed Secur L Rep P 91472.
Defendants have violated § 10(b) of Securities Exchange Act, (15 USCS § 78j(b)) where they knowingly and recklessly filed with SEC and disseminated, and caused
to be disseminated to investors and potential investors, prospectus containing materially false and misleading statements, material misrepresentations and omissions
of material fact. SEC v Champion Sports Management, Inc. (1984, SD NY) 599 F Supp 527, CCH Fed Secur L Rep P 91843.
145. Statements not controlled by issuer
Company may so involve itself in preparation of reports and projections by outsiders as to assume duty to correct material errors in those projections, where officials
of company have, by their activity, made implied representation that information they have reviewed is true or at least in accordance with company's views. Elkind v
Liggett & Myers, Inc. (1980, CA2 NY) 635 F2d 156, CCH Fed Secur L Rep P 97716.
Defendant construction company in action for damages for alleged violations of 15 USCS § 78j(b) based upon defendant's failure, in response to market rumors and
unusually heavy trading in defendant's stock, to notify Stock Exchange that it had been awarded $ 1,000,000,000 overseas construction contract and request that
trading in its shares be suspended, had no duty to make such notification and request, since it did not originate rumors and did not know reason for market
developments, but acted scrupulously, with no intent to defraud investors, when it revealed to Exchange that award of contract might be reason for unusual market
activity in its stock and endorsed Exchange's decision to halt trading pending public announcement of contract. State Teachers Retirement Bd. v Fluor Corp. (1981,
CA2 NY) 654 F2d 843, CCH Fed Secur L Rep P 98005.
Court found that entanglement test is correct approach to analyze third-party statements. Bielski v Cabletron Sys. (In re Cabletron Sys.) (2002, CA1 NH) 311 F3d
As to materially misleading statements, district court erred in overly restrictive test it applied to statements made by third parties--in this instance mostly market
analysts--which were in turn based on statements made by company officials; appellate court rejected district court's determination that executives or directors must
have either "controlled" content of third party statements or adopted them, and instead, joined majority of courts in applying "entanglement" test. Bielski v
Cabletron Sys. (In re Cabletron Sys.) (2002, CA1 NH) 311 F3d 11, CCH Fed Secur L Rep P 92202.
Although defendants cannot be held liable for information that is promulgated by and financial forecasts that are created by third parties, unless defendants put their
own imprimatur on information and projections, they can be held liable under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), when statements that
are contained in analysts' reports clearly originated from defendants and they do not otherwise represent third party's projection, interpretation, or impression.
Nursing Home Pension Fund, Local 144 v Oracle Corp. (2004, CA9 Cal) 380 F3d 1226, CCH Fed Secur L Rep P 92909.
For person to be liable under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for materially misleading statement or omission, such statement or omission
must be directly attributable to person charged therewith; where statement or omission is misleading, but where it is beyond control of person charged, such as
misstatement or omission contained in newspaper article, charged person is not liable therefor under § 10(b); statement does not violate § 10(b) where it employs
term which is subject to varying interpretation so long as, with respect to fact to which it relates, term represents reasonable interpretation thereof; for example, to
state that price offered for securities is fair and adequate does not constitute misrepresentation where price concerned is above book or market value. Mills v Sarjem
Corp. (1955, DC NJ) 133 F Supp 753.
Directors of corporation were under no duty, under SEC Rule 10b-5, to retract unsigned newspaper articles which in no way attributed any representation to
directors, of which they had no detailed knowledge, and nature of which could not have induced reasonable investor into blind reliance. Hutto v Texas Income
Properties Corp. (1976, SD Tex) 416 F Supp 478.
Forecasts by 2 independent analysts could not be imputed to company and its officers as basis for Rule 10b-5 liability, where articles did not quote any company
officials or reports or describe any misstatements of fact by company officials, because investor only offered vague claims of "guidance" by company without any
specification of acts that allegedly led analysts astray. Colby v Hologic, Inc. (1993, DC Mass) 817 F Supp 204, CCH Fed Secur L Rep P 97609.
Corporate officers' and directors' motion to dismiss granted in suit alleging securities fraud, where plaintiff's claim was based on allegedly misleading forecasts issued
by market analysts, since complaint failed to provide specific allegations of adoption of the forecasts by corporate insiders or knowledge by insiders that the forecasts
were unreasonable. In re Caere Corporate Sec. Litig. (1993, ND Cal) 837 F Supp 1054, CCH Fed Secur L Rep P 98121.
Shareholders' complaint for securities fraud satisfied neither Fed. R. Civ. P. 12(b)(6) and 9(b), nor heightened pleading requirements of Private Securities Litigation
Reform Act of 1995 (PSLRA), Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified in various sections of 15 USCS §§ 77a et seq. and 78a et seq.); with respect to
shareholders' claims under § 10(b) of Exchange Act and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, defendants' (a company and its president) alleged
misrepresentations were either forward-looking statements that were not actionable under PSLRA, or not attributable to defendants. In re Keithley Instruments, Inc.
Secs. Litig. (2002, ND Ohio) 268 F Supp 2d 887.
146. Opinions or predictions
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), reasoned and justified statement of opinion with sound factual or historical basis is not actionable, but
where there was gross disparity between prediction and fact, and where person making prediction had made other misrepresentations and failed to disclose other
information, which misrepresentations and failures to disclose were relevant to accuracy of prediction, such prediction was actionable. G & M, Inc. v Newbern (1973,
CA9 Or) 488 F2d 742, CCH Fed Secur L Rep P 94181, 17 FR Serv 2d 1410.
Prediction in form of financial forecast relating to corporation may be regarded to be "fact" within meaning of SEC Rule 10b-5. Marx v Computer Sciences Corp.
Disclosed predictions concerning company during sale of securities of company can be subject of action under § 11 of Securities Act of 1933 (15 USCS § 77k) and
SEC Rule 10b-5 promulgated pursuant to § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)); whether undisclosed predictions can be actionable must
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await trial court's careful, sensitive inquiry, recognizing in statutory policy interests both in requiring and not requiring disclosure, and focusing on particular nature of
predicted information lack of disclosure of which was questioned, and determining what specific facts surrounding predictive information indicated about information's
importance, reliability, or impact on potential investor. Isquith ex rel. Isquith v Middle S. Utils. (1988, CA5 La) 847 F2d 186, CCH Fed Secur L Rep P 93801, 11 FR
Serv 3d 694, cert den (1988) 488 US 926, 102 L Ed 2d 329, 109 S Ct 310 and (superseded by statute as stated in In re Harmonic Inc. Secs. Litig. (2001, ND Cal)
163 F Supp 2d 1079, CCH Fed Secur L Rep P 91488).
Material statements which contain speaker's opinion are actionable under 15 USCS § 78j(b) if speaker does not believe opinion and opinion is not factually
well-grounded. Mayer v Mylod (1993, CA6 Mich) 988 F2d 635, CCH Fed Secur L Rep P 97379, 25 FR Serv 3d 151.
Statements that are predictive in nature are actionable only if they were false when made. Shushany v Allwaste, Inc. (1993, CA5 Tex) 992 F2d 517, CCH Fed Secur L
Rep P 97710, 25 FR Serv 3d 1547, reh den (1993, CA5) 1993 US App LEXIS 16369.
Press release that was issued by company on October 11, 2000, contained forward-looking statements, and therefore came under protection of statutory safe harbor
of 15 USCS § 78u-5(c)(1); thus, none of statements that were made by company in press release, which plaintiffs sought to attribute to defendants, were actionable
under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), or S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5. Baron v Smith (2004, CA1 Mass) 380 F3d 49, CCH
To extent that plaintiffs relied on language that was in press release to bolster its claim that company violated § 10(b) of Securities Exchange Act of 1934, 15 USCS §
78j(b), and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, that information was not considered probative of alleged omissions, as they were protected by statutory safe
harbor of 15 USCS § 78u-5(c)(1), unless company had actual knowledge that statements were false or misleading; plaintiffs made no allegation that defendants had
actual knowledge statements regarding company freeing itself from operating leases in bankruptcy were actually false or misleading. Baron v Smith (2004, CA1
Mass) 380 F3d 49, CCH Fed Secur L Rep P 92896.
While investors' allegations regarding obvious conflicts of interest and general state of corruption within firm's analyst ranks may have been enough to upset ethically
sensitive observer, they were insufficient, on their own, to support fraud pleading under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 with respect
to subjective falsity of eight "buy" recommendations issued on corporation's stock. Such allegations were tantamount to pleading conclusory statements regarding
motive and opportunity, and such generalities, without more, were insufficient to plead scienter in case under Private Securities Litigation Reform Act, 15 USCS §
78u-4, and thus, investors' allegations were insufficient to show that firm's analyst reports concerning corporation were at odds with analysts' privately held beliefs.
Brown v Credit Suisse First Boston LLC (In re Credit Suisse First Boston Corp. Analyst Reports Secs. Litig.) (2005, CA1 Mass) 431 F3d 36, CCH Fed Secur L Rep P
93597.
In federal securities class action, complaint--which advanced theory of material misstatements about safety of new drug and related theory about material
overstatements of market for drug and growth in company's sales and alleged that acts and omissions of all defendants but one violated 15 USCS §§ 78j(b) and
78t(a), and that all defendants violated 15 USCS § 78t-1--failed to meet pleading requirements for scienter. N.J. Carpenters Pension & Annuity Funds v Biogen Idec
Inc. (2008, CA1 Mass) 537 F3d 35.
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, seller of securities, even though insider, is not obligated to confer upon outside
investors benefit of his superior financial or other expert analysis by disclosing his educated guesses or predictions, and he is under no obligation to render economic
forecast; there was no violation where seller, who was officer and employee of issuer, failed to disclose his conclusions that certain of his fellow employees were
incompetent, or that bankruptcy was imminent, since that information was opinion and was neither fact nor material. Jackson v Oppenheim (1974, SD NY) 411 F
Supp 659, CCH Fed Secur L Rep P 94894, affd in part and revd in part (1976, CA2) 533 F2d 826, CCH Fed Secur L Rep P 95497.
Forecast, essentially prediction, may be regarded as "fact" within meaning of SEC Rule 10b-5; however, comments that program was doing well and that prospective
buyer of partnership interest in program could expect similar performance, which were based on content of prospectus and informational reports provided by reliable
source, and where person making statement neither knew comments to be untrue nor had any reason to believe they were based on false information, did not
violate rule since reasoned and justified statement of opinion, one with sound factual or historical basis, is not actionable thereunder. Eichen v E. F. Hutton & Co.
(1975, SD Cal) 402 F Supp 823, CCH Fed Secur L Rep P 95316, 54 OGR 1.
In action against accountants, who prepared audit report relating to corporation, brought under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule
10b-5, accountants could not avoid liability on ground that report was in form of opinion; weight of certified public accountant's opinion audit is presumed to have
basis in fact and not in speculation. McLean v Alexander (1976, DC Del) 420 F Supp 1057, CCH Fed Secur L Rep P 95725.
Under federal securities laws, reasoned and justified statement of opinion, one with sound factual or historical basis, is not actionable. Meier v Texas International
Drilling Funds, Inc. (1977, ND Cal) 441 F Supp 1056, CCH Fed Secur L Rep P 96132.
Newspaper article quotes that new product "is going to be phenomenally successful in first year" and "is going to make computer corporation's growth before this
look small" fall into unactionable category of expressions of opinion, predictions or forecasts, where quotes appeared in article raising serious doubts about new
product's prospects for success, because disparity between what defendant corporate executives knew and what general market knew at time was not wide enough
information gap to impose on defendants duty to disclose negative facts in order to prevent predictions from being materially misleading. In re Apple Computer Sec.
Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
Computer corporation chairman's statement in business magazine article that "I don't think we will have any trouble selling all Lisas we can build" is unactionable
statement of opinion, especially since statement appeared in article that presented decidedly sobering picture of brash young company's prospects with "Lisa,"
because seen in this context, not only is statement not misleading, but virtually no disclosure by chairman at that point would have significantly altered total mix of
information already available to investors. In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
Corporate officer's statement in 1982 Annual Report that "from all that I've seen so far, success should continue" is not actionable misstatement, where statement is
qualified by preceding disclosure that management had problem with specific previous computer system product but was able to remove, re-engineer and
re-introduce product successfully, because, in context, statement was obviously fair and reasoned opinion with sound historical and factual basis. In re Apple
Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
Securities fraud claim against corporation, directors, and officers may proceed but only on basis of representations made after October 1984, where investors claim
corporation's forecasts and projections of its 1985 growth were false and misleading, because rosy projections set forth through October 1984 were supported by
record 1984 sales and other information but evidence of downturn in semiconductor industry began mounting in late 1984, creating question of material fact as to
propriety of disclosures from that time on. In re Kulicke & Soffa Industries, Inc. Sec. Litigation (1988, ED Pa) 697 F Supp 183, CCH Fed Secur L Rep P 94135.
Securities fraud claim is stated under 15 USCS § 78j, where complaint alleges that statements by corporate officers referring to quality of corporation's management
were false and made in order to induce stock purchases, notwithstanding that statements involve degree of subjective impression; otherwise, glowing yet relatively
vague language would be allowed even if fraudulent. In re Midlantic Corp. Shareholder Litig. (1990, DC NJ) 758 F Supp 226.
Securities fraud class action against large business machines corporation must fail, where stockholder alleges that internal reports not disclosed in public reports
misled public regarding future financial performance and caused stock price to rise rapidly and then nosedive at end of first quarter of 1991, because allegedly
concealed information is both consistent with and provides reasonable basis for publicly stated opinions regarding future company performance, making such general
opinions and projections by board chairman and director of investor relations not actionable under 15 USCS § 78j(b). Wright v International Business Machines Corp.
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Company's motion for summary judgment in securities fraud action under 15 USCS § 78j granted, where complaining shareholders did not establish that statements
of goals and projections in annual report were false or misleading; accurate information was available from news reports, reports of stock analysts and stock prices;
and nondisclosure of discrepancies between projections and internal reports does not give rise to fraud action, because, given disclosure of relevant facts such as
impending layoffs by company, there is no evidence that company intended to commit fraud. Steiner v Tektronix, Inc. (1992, DC Or) 817 F Supp 867, CCH Fed Secur
L Rep P 97321.
Federal securities fraud claim against stockbroker must fail, where broker allegedly made 3 statements about speculative overcounter stocks: (1) that they were just
as good as another stock offering, (2) that they were hot on market, and (3) that they could do as well as money market, because these statements were mere
opinions and not material misrepresentations. Marchese v Nelson (1993, DC Utah) 809 F Supp 880.
Shareholders' securities fraud claim is dismissed, where allegedly fraudulent statements consisted of optimistic and ultimately incorrect projections for release dates
of computer products, and for increased sales and earnings, because shareholders failed to plead that difference between optimistic projections and disappointing
result is attributable to fraud, or to show that, at time projections were made, either (1) officers did not genuinely believe projections, (2) officers had no reasonable
grounds for believing projections, or (3) actual situation undermined grounds for belief in projections. Borow v nVIEW Corp. (1993, ED Va) 829 F Supp 828, CCH Fed
Secur L Rep P 98211, affd without op (1994, CA4 Va) 27 F3d 562, reported in full (1994, CA4 Va) 1994 US App LEXIS 16242.
Securities fraud complaint against tobacco industry leader must be dismissed, despite some optimistic statements made in January in various reports about
prospects for 1993, followed by announcement in April of new marketing strategy that included price reduction of 40 cents per pack on flagship Marlboro brand,
decrease in projected earnings, and consequent 25 percent decrease in stock price, because, taken together, totality of all statements cited reflects neither
misleading optimism nor fraud. In re Philip Morris Sec. Litig. (1995, SD NY) 872 F Supp 97, CCH Fed Secur L Rep P 98509, affd in part and revd in part, remanded
sub nom San Leandro Emergency Medical Group Profit Sharing Plan v Philip Morris Cos. (1996, CA2 NY) 75 F3d 801, CCH Fed Secur L Rep P 99017, 34 FR Serv 3d
530.
Securities fraud claims will be dismissed under "bespeaks caution" doctrine, to extent they allege misstatements concerning training program, quality of
management, and anticipated number of new openings, in class action against steakhouse chain's Upton v McKerrow (1995, ND Ga) 887 F Supp 1573, CCH Fed
Secur L Rep P 98706, motions ruled upon (1996, ND Ga) CCH Fed Secur L Rep P 99060.
Securities fraud class action must fail summarily, where it relies on allegedly misleading statements that (1) there are "indications" that product is "gaining market
share," (2) company has "accelerated effort to create new products," and (3) merger was "perhaps smoothest of mergers in recent history," because these are all
simply statements of corporate optimism, not material or actionable since reasonable investors do not rely upon them when making investment decisions. Grossman
v Novell, Inc. (1995, DC Utah) 909 F Supp 845, CCH Fed Secur L Rep P 99006, affd (1997, CA10 Utah) 120 F3d 1112, CCH Fed Secur L Rep P 99507, 1997 Colo J C
A R 1616.
Magistrate was correct in his determination that corporation's opinion as to whether its business practices were legal was "soft information," and was not required to
be disclosed. Morse v McWhorter (1998, MD Tenn) 200 F Supp 2d 853, adopted, mod, dismd (2000, MD Tenn) 200 F Supp 2d 853 and subsequent app (2002, CA6
Tenn) 290 F3d 795, 2002 FED App 176P (criticized in D.E. & J L.P. v Conaway (2003, ED Mich) 284 F Supp 2d 719).
Investors' securities fraud claim against information technology company must fail, to extent it is based on Wall Street Journal article quoting chief executive, even
though he expresses surprise "at how Wall Street turned on his company," where he also acknowledges that company faces tighter computer-consulting budgets at
major corporations, because there is no indication his statements were false or misleading at time he made them, and they are properly characterized as broad,
optimistic statements about company's future. Carney v Cambridge Tech. Partners, Inc. (2001, DC Mass) 135 F Supp 2d 235, CCH Fed Secur L Rep P 91415.
Motion to dismiss stock purchaser's complaint alleging claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 C.F.R.
§ 240.10b-5, was granted, where complaint did not sufficiently plead that sales forecasts were false when made; without identifying any concrete mechanism
through which possession of certain information revealed misleading nature of sales forecasts, bald assertion of falsity of initial sales forecasts was deficient. In re
QLT Inc. Sec. Litig. (2004, SD NY) 312 F Supp 2d 526, CCH Fed Secur L Rep P 92721.
Company and its officers did not guarantee that drug would be federally approved but merely expressed non-actionable opinions and personal optimism about
regulatory events not under company's control. In re Bristol-Myers Squibb Sec. Litig. (2004, SD NY) 312 F Supp 2d 549, CCH Fed Secur L Rep P 92727.
Unpublished: Investors failed to state claim under 15 USCS § 78j(b) arising from alleged misstatements in initial public offering press release that subsidiary of
pharmaceutical company would be independent from company following planned spin-off; statements fell within safe harbor under 15 USCS § 78u-5 for forward-
looking statements accompanied by meaningful cautionary language. In re Merck & Co., Inc. Sec. Litig. (2004, DC NJ) 2004 US Dist LEXIS 28930, affd (2005, CA3
NJ) 432 F3d 261, CCH Fed Secur L Rep P 93606.
147. Miscellaneous
Person dealing with corporation in securities transaction violates SEC Rule 10b-5 when he denies corporation's directors access to material information known to him,
thus disabling corporation from availing itself of informed judgment on part of its board regarding merits of transaction. Superintendent of Ins. v Bankers Life &
Casualty Co. (1971) 404 US 6, 30 L Ed 2d 128, 92 S Ct 165, CCH Fed Secur L Rep P 93262.
Proposal need not be final or consummated in order to be relevant to shareholder decisionmaking, and where occurrence of proposed course of action has reached
stage of probability rather than mere possibility, negotiations concerning proposed action must be disclosed even though future event is not absolutely certain to
occur; failure to disclose proposal which had very good chance of succeeding or to amend certain statements in registration statement and prospectus made these
documents false and misleading. SEC v Mize (1980, CA5 Tex) 615 F2d 1046, CCH Fed Secur L Rep P 97362, reh den (1980, CA5 Tex) 618 F2d 781 and cert den
(1980) 449 US 901, 66 L Ed 2d 131, 101 S Ct 271.
Violation of Securities and Exchange Act of 1934 (15 USCS § 78j) is found where securities trader and 2 confederates, based upon information obtained by
employees of investment banking firms, purchase stock in companies that are merger and takeover targets of clients of investment firms, even though neither
investment firms nor their clients are at anytime purchaser or seller of target company securities or involved in any transaction with defendant or any of his
confederates. United States v Newman (1981, CA2 NY) 664 F2d 12, CCH Fed Secur L Rep P 98332, 66 ALR Fed 833 (criticized in United States v Bryan (1995, CA4 W
Va) 58 F3d 933, CCH Fed Secur L Rep P 98787) and (criticized in United States v ReBrook (1995, CA4 W Va) 58 F3d 961, CCH Fed Secur L Rep P 98794).
Allegations that defendant failed to disclose facts material only to support action for breach of state-law fiduciary duties ordinarily do not state claim under § 10(b) or
under § 14(a) or (e) of Securities Exchange Act of 1934 (15 USCS § 78j(b) or § 78n(a) or (e)), and certainly this is true of allegations of garden-variety
mismanagement, such as managers failing to maximize value for shareholders or directors failing to adequately inform themselves or of managers acting in generally
self-entrenching fashion; but where remedy of injunction is needed (and is available under state law) to prevent injury to company for willful misconduct of
self-serving nature, disclosure of facts necessary to make other statements not misleading is required where misleading statements will allow shareholders into
foregoing injunctive remedy. Field v Trump (1988, CA2 NY) 850 F2d 938, CCH Fed Secur L Rep P 93905, 100 ALR Fed 421, cert den (1989) 489 US 1012, 103 L Ed
2d 185, 109 S Ct 1122.
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Unsuitability claim under 15 USCS § 78j(b) is subset of ordinary § 78j(b) fraud claim in which plaintiff must allege material misstatements or omissions, indicating
intent to deceive or defraud, in connection with purchase or sale of security. Brown v E.F. Hutton Group, Inc. (1993, CA2 NY) 991 F2d 1020, CCH Fed Secur L Rep P
97420 (superseded by statute as stated in Louros v Kreicas (2005, SD NY) CCH Fed Secur L Rep P 93233).
91550).
Prohibition of Rule 10b-5, which does not contain freestanding completeness requirement, against misleading and untrue statements is not prohibition against
statements that are incomplete; thus, once disclosure is made, there is no duty to make it complete and accurate. Brody v Transitional Hosps. Corp. (2002, CA9 Nev)
280 F3d 997, 2002 CDOS 1218, 2002 Daily Journal DAR 1540, CCH Fed Secur L Rep P 91692.
Judgment dismissing plaintiffs' securities fraud complaint was affirmed, where offering memoranda explicitly warned of risk that stocks at issue might not be
registered, and facts regarding substantial impediments to registration were disclosed or implied in offering memoranda. Halperin v eBanker USA.COM, Inc. (2002,
District court did not err when it granted summary judgment for company on claim that false statements, that corporation's inventory problem had been quantified
and would be short term were made, because officer's script, slides, and declaration showed that he did not say that problems with corporation were temporary or
transitory and because company established that there was no evidence to support investors' claim that officer stated that inventory problem was minor and
temporary. Emplrs. Teamsters Local Nos. 175 & 505 Pension Trust Fund v Clorox Co. (2004, CA9 Cal) 353 F3d 1125.
Plaintiffs failed to state claim for defendants' alleged material omissions in its public filings regarding two synthetic leases where company disclosed material facts
that were necessary to allow reasonable investor to make informed decision regarding purchase of company's stock; nor did defendants omit material information
that was necessary for reasonable investor to determine company's financial condition with respect to $ 6.8 million note; finally, there was no question that company
disclosed fact that it had guaranteed 50 percent of debt of South American joint venture. Baron v Smith (2004, CA1 Mass) 380 F3d 49, CCH Fed Secur L Rep P
92896.
Investors alleged that successors to business committed fraud in violation of Securities Exchange Act of 1934, S.E.C. Rule 10b-5, and Washington Securities Act by
misrepresenting that $ 25 million initial stock sale was completed by adding to document to be given to prospective investors language that stated that document
had not been updated to reflect recent events and did not reflect that $ 25 million private equity fund raising had been completed; by making that allegation, in
addition to allegation that investors knew initial stock sale was not yet complete and was contingent on conditions that had not yet occurred, investors stated claim
for relief; thus, district court erred by dismissing their claims pursuant to Fed. R. Civ. P. 12(b)(6). Livid Holdings Ltd. v Salomon Smith Barney, Inc. (2005, CA9 Wash)
Because investors alleged ordinary negligence in their 15 USCS § 77k and 15 USCS § 77l claims, and pled those claims separately from their 15 USCS § 78j(b)
claims against same defendants, they avoided triggering Fed. R. Civ. P. 9(b), and given that Securities Act claims were expressly negligence-based and pled distinctly
in complaint from fraud-based claims, it was error for district court to hold that they sounded in fraud. In re Suprema Specialties, Inc. Secs. Litig. (2006, CA3 NJ)
438 F3d 256.
Consolidated class action complaint did not allege valid claim for primary liability under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), because
plaintiffs failed to sufficiently show that defendants committed actions with purpose and effect of creating false appearance in furtherance of scheme to defraud;
furthermore, complaint failed to allege with particularity that defendants acted with purpose and effect of creating false appearance of company's revenues with aim
of deceiving investing public. Simpson v AOL Time Warner Inc. (2006, CA9 Cal) 452 F3d 1040.
In connection with criminal charges of conspiracy to commit securities fraud in violation of 18 USCS § 371, contrary to 15 USCS § 78j(b) and 17 CFR § 240.10b-5,
and securities fraud, principally in violation of § 240,10b-5, and aiding and abetting in violation of 18 USCS § 2, defendant one had no fiduciary duty in quarterly
filings to rectify defendant two's alleged misstatements to analysts, as § 78j(b) and § 240.10b-5 did not contemplate general failure to rectify others' misstatements,
nor did § 78j(b) encompass aiding and abetting liability; dismissal of that omissions liability theory from indictment was not error, since Government's contention
that defendant one actually made omissions by not rectifying defendant two's purported misstatements conflated two independent grounds of liability under §
240.10b-5(b)--misrepresentations and misleading statements. United States v Schiff (2010, CA3 NJ) 602 F3d 152, CCH Fed Secur L Rep P 95715.
Investor's securities fraud action against corporation for alleged false and misleading statements regarding future earnings and growth of corporation must fail where
(1) investor did not allege facts that statements made were untrue, (2) statements of past sales say nothing about possible future growth and are not misleading,
(3) statement in newspaper by company president regarding future growth was not fraudulent where investor offers no sources for knowledge it seeks to impute to
president and president had less than complete control over article, and (4) statements made after investor purchased his stock are not actionable under 15 USCS §
78j. Schwartz v Novo Industri, A/S (1987, SD NY) 658 F Supp 795, CCH Fed Secur L Rep P 93234.
District court granted company and others summary judgment on stockholders' 15 USCS § 78j(b) claims where transcripts of conference and conference call showed
that company representatives had not made any of allegedly misleading statements regarding merging company's inventory problems. In re Clorox Co. Secs. Litig.
(2002, ND Cal) CCH Fed Secur L Rep P 92227, corrected (2002, ND Cal) 238 F Supp 2d 1139, affd (2004, CA9 Cal) 353 F3d 1125.
Shareholders suing corporation for securities violations did not prove requirements for class certification; conflicts among representatives, subclasses, and class as
whole were too great to ignore and negated adequacy of representation; further, shareholders did not show common questions predominated over individual
questions. In re Healthsouth Corp. Secs. Litig. (2003, ND Ala) 213 FRD 447.
Presumption of reliance on allegedly misleading registrations statements and analysts report applied to named securities purchasers' 15 USCS § 78j(b) class action
claims where allegations of quid pro quo relationship between telecommunications company and auditors were integral to claims of false statements and material
omissions and named purchasers had no burden to prove reliance on omission. In re WorldCom, Inc. Sec. Litig. (2003, SD NY) 219 FRD 267, request gr (2003, SD
NY) 2003 US Dist LEXIS 19737.
Purchasers' claims brought under 15 USCS § 78j(b) against sellers of securities issued by specialty furniture retailer were dismissed pursuant to Fed. R. Civ. P. 9(b) &
12(b)(6) and 15 USCS § 78u-4(b)(1) where purchasers failed to specifically allege why sellers' representations regarding collection methods were false or
misleading, failed to explain why servicing obligations had not passed to bank, failed to indicate amount that rates of loss and delinquency figures were supposedly
under or overstated, failed to show relationship between allegedly unorthodox accounting practices and allegedly misleading representations, failed to specify why
statements as to aggregate total amount owed under contracts and subordination of certain certificates were misleading, and sellers had disclosed that proceeds
from earlier securities offerings would be used to repay previously issued stock certificates in their entirety. AIG Global Secs. Lending Corp. v Banc of Am. Secs. LLC
(2003, SD NY) 254 F Supp 2d 373.
Securities and Exchange Commission (SEC) showed, by preponderance of evidence, that three officers of corporation committed securities fraud by violating § 10(b)
(15 USCS § 78j(b)) of Securities Exchange Act of 1934, where court found that: (1) in carrying out their fraud, officers used means and instrumentalities of
interstate commerce, including, among other things, mails and wires, including Internet, news wires and telephone lines, to send and/or disseminate false and
misleading statements concerning corporation; (2) as officers disseminated false and misleading information into marketplace through SEC filings, press releases and
shareholder letters, they did so "in connection with" purchase or sale of security; (3) with respect to press releases, shareholders letters, annual reports, financial
statements and SEC filings, officers made series of false and misleading statements and omissions between 1995 and 1998; (4) misstatements and omissions at
issue in this matter were material to investing public, as they were type of information shareholders and potential investors were likely to consider in making
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investment decision; and (5) officers knew or, if they did not know, were at least reckless in not knowing that they were disseminating materially false and
misleading statements and omissions in press releases, shareholders letters, annual reports, financial degree and SEC filings. SEC v Solucorp Indus. (2003, SD NY)
274 F Supp 2d 379.
Where amended complaints pled facts sufficient to establish duty to disclose, breach of that duty, transaction causation, loss causation, and scienter, plaintiffs stated
valid claim for material omissions. Stephenson v Deutsche Bank AG (2003, DC Minn) 282 F Supp 2d 1032, 51 UCCRS2d 613.
Investors' claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), were dismissed where investors alleged that price of company's stock was
artificially inflated by scheme in which stock analysts were secretly paid to praise company and its stock; however, with one debatable exception, all of analysts'
reports that were cited by investors were published at least one week after private placement, so to extent that investors alleged analysts' recommendations were
solicited to boost demand for initial issuance of stock, claims failed as to all reports except for one report whose exact date of publication was matter of dispute;
further, although investors insisted that 450 percent increase in price of shares during week following private placement was proof enough of defendants' misdeeds,
claims failed absent duty on part of company and its chairman to disclose payments that were at issue. Garvey v Arkoosh (2005, DC Mass) 354 F Supp 2d 73, CCH
Investors' claims under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), were dismissed where investors alleged that price of company's stock was
artificially inflated by scheme in which stock analysts were secretly paid to praise company and its stock; even assuming viable theory of aiding and abetting, claims
failed because disclosures were contained in analysts' reports, and any reasonable investor that was told that publisher of investment report had received $ 700,000,
$ 100,000, or even $ 50,000 to tout particular stock would have given analyst's recommendation proverbial grain of salt regardless of source of funds. Garvey v
Arkoosh (2005, DC Mass) 354 F Supp 2d 73, CCH Fed Secur L Rep P 93098.
In securities fraud action, allegations regarding press release that was allegedly approved by defendant bank failed first, and most importantly, because these
assertions ran afoul of bright line rule requiring attribution to defendant at time statement was made; press release was defendant corporation's and was not
attributed to bank at time of its dissemination or otherwise; it therefore could not serve as basis for 15 USCS § 78j(b) liability. In re Parmalat Sec. Litig. (2005, SD
NY) 376 F Supp 2d 472.
Investors failed to sufficiently plead claim under § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, because laundry list of
various statements followed by list of "specific" reasons why statements were false were insufficient where statements were not linked with reasons. Thus, claims did
not meet requirements of Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737, 15 USCS § 78u-4(b)(1), and Fed. R. Civ. P. 9(b). In re
Alcatel Sec. Litig. (2005, SD NY) 382 F Supp 2d 513, CCH Fed Secur L Rep P 93132.
In securities fraud action, securities purchasers sufficiently alleged material misstatements and/or omissions as to their claims concerning corporation's alleged
investment misrepresentations where purchasers alleged that any statements regarding corporation's investments and net income were false and misleading because
they failed to disclose that corporation was carrying impaired assets that should have been written off, failed to disclose corporation's general investment policy and
portfolio, and failed to provide specific information about company's actual investments, all in violation of generally accepted accounting practices. Purchasers alleged
that such disclosures would have revealed particularly poor quality of corporation's investments, its lack of liquidity in its bond holdings, and substantial nature and
extent of unrealized losses it was carrying. In re Unumprovident Corp. Secs. Litig. (2005, ED Tenn) 396 F Supp 2d 858, motion gr, in part, motion den, in part,
dismd, in part, motion gr, in part, motion den, in part (2005, ED Tenn) 2005 US Dist LEXIS 31853.
In securities fraud action, securities purchasers sufficiently alleged causation as to their claims concerning corporation's alleged claims handling misrepresentations
because purchasers pointed to two sizeable dips in corporation's stock price following disclosures of information which in some marginal way tended to disclose
existence of alleged underlying fraudulent scheme. In re Unumprovident Corp. Secs. Litig. (2005, ED Tenn) 396 F Supp 2d 858, motion gr, in part, motion den, in
part, dismd, in part, motion gr, in part, motion den, in part (2005, ED Tenn) 2005 US Dist LEXIS 31853.
In securities fraud action, securities purchasers did not sufficiently allege causation because beyond their general allegations of having purchased another entities
certificates at inflated price, none of events cited involved revelations or disclosures of corporation's allegedly unlawful and/or fraudulent claims handling practices. In
re Unumprovident Corp. Secs. Litig. (2005, ED Tenn) 396 F Supp 2d 858, motion gr, in part, motion den, in part, dismd, in part, motion gr, in part, motion den, in
part (2005, ED Tenn) 2005 US Dist LEXIS 31853.
In securities fraud action, securities purchasers sufficient alleged material misstatements and/or omissions as to their claims concerning corporation's alleged claims
handling misrepresentations because they alleged that corporation instituted company-wide policy under which disability claims were approved or denied based not
upon merit but according to pre-determined financial objectives designed to maximize amount of claims reserves that could be eliminated from corporation's books
and then recognized as income. Purchasers alleged that corporation conceived, instituted, and oversaw claims handling strategy that was, at best, unethical and then
both failed to credit this conduct as cause of company's success and knowingly failed to reflect potential liabilities in corporation's financial disclosures. In re
Unumprovident Corp. Secs. Litig. (2005, ED Tenn) 396 F Supp 2d 858, motion gr, in part, motion den, in part, dismd, in part, motion gr, in part, motion den, in part
(2005, ED Tenn) 2005 US Dist LEXIS 31853.
Former employee had no right to rely on statements made by attorney's opposing her in litigation against her former employer and as such her § 10b of Securities
Exchange Act of 1934, 15 USCS § 78j(b), claim and her claims for fraudulent misrepresentation, negligent misrepresentation, and third party professional negligence
failed. Thompson v Paul (2005, DC Ariz) 402 F Supp 2d 1110.
Investors adequately stated Securities Exchange Act claim using group pleading doctrine. In re Van Der Moolen Holding N.V. Sec. Litig. (2005, SD NY) 405 F Supp 2d
388.
Allegations concerning defendant's desire to sustain appearance of corporate profitability are not legally sufficient to plead motive to commit securities fraud, so
allegations concerning importance of defendant subsidiary's revenue to defendant parent company's revenue growth, without more, were inadequate to properly
plead motive to commit fraud. In re Van Der Moolen Holding N.V. Sec. Litig. (2005, SD NY) 405 F Supp 2d 388.
Where plaintiff investors alleged no facts to demonstrate that defendant parent company exerted pressure of any sort on defendant subsidiary or on chief executive
officer or chief financial officer of subsidiary, but rather investors merely reiterated unremarkable fact that proprietary trading was most profitable aspect of
subsidiary's operation, allegations, without more, did not amount to evidence of parent pressure, and as such were not sufficient to plead that parent company or
individual defendants had motive to commit securities fraud. In re Van Der Moolen Holding N.V. Sec. Litig. (2005, SD NY) 405 F Supp 2d 388.
Plaintiff investors properly alleged that, inter alia, during class period defendant parent company was engaged in program of strategic acquisitions designed to
maintain its position in market undergoing unprecedented consolidation, parent company intended to use its shares of defendant subsidiary to finance some or all of
these acquisitions, and parent company's competitors were also engaged in programs of strategic acquisitions during class period; such allegations adequately
alleged that parent company was motivated to artificially inflate value of its shares of subsidiary company in order to maximize use of those shares as currency for
acquisitions. In re Van Der Moolen Holding N.V. Sec. Litig. (2005, SD NY) 405 F Supp 2d 388.
In SEC enforcement action, engagement partners in audit firm had ultimate authority to determine whether audit opinion should be issued so that they were properly
responsible for primary liability for misstatements under 15 USCS § 78j and 15 USCS § 77q(a); however, concurring review partner could only be liable as aider and
abettor under 15 USCS § 78t(f). SEC v KPMG LLP (2006, SD NY) 412 F Supp 2d 349.
In action that purchasers of corporation's securities brought pursuant to 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5, statements that corporation
made about its plans to bring Universal Mobile Telecommunications System (UMTS) product to market were protected by safe harbor provision of Private Securities
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Litigation Reform Act of 1995, 15 USCS § 78u-5(c)(1)(A)(i), because each statement was accompanied by cautionary statements that would have put reasonable
investor on notice that plans to launch UMTS product were contingent on various factors and that there was risk that product would not be launched as planned. In
re Sierra Wireless, Inc. Sec. Litig. (2007, SD NY) 482 F Supp 2d 365, CCH Fed Secur L Rep P 94302.
Chief operating officer's (COO) motion to dismiss securities fraud claims under § 10b of Securities Exchange Act of 1934, against him was granted because COO's
statement that inventory system was "dynamic" was too vague to constitute actionable misrepresentation and COO's mere participation in conference calls during
class period was not sufficient to subject him to liability under Private Securities Litigation Reform Act of 1995. Communs. Workers of Am. Plan for Emples. Pensions
& Death Bens. v CSK Auto Corp. (2007, DC Ariz) 525 F Supp 2d 1116, CCH Fed Secur L Rep P 94407.
Where plaintiffs brought nothing more than generalized and conclusory assertions that defendants made false representations about company's financial health, this
did not satisfy heightened pleading standard imposed on securities actions by Private Securities Litigation Reform Act, 15 USCS § 78u-4. Furthermore, because
claims of control-person liability under 15 USCS § 78t, part of Securities Exchange Act of 1934, were derivative claims and only actionable if plaintiffs adequately
alleged primary violation under 15 USCS § 78j, part of Securities and Exchange Act, all of plaintiff's claims were dismissed. Roth v OfficeMax, Inc. (2007, ND Ill) 527
F Supp 2d 791.
In action in which shareholder alleged that corporation's stock dropped dramatically as result of seven-year-long stock options backdating scheme, director and
officer could not be held liable under § 10(b) of Securities and Exchange Act of 1934 for misrepresentations or misstatements that were made before commencement
of class period; shareholder did not identify source of any duty to correct alleged misstatements or precise avenue for making corrections. In re Openwave Sys. Secs.
Litig. (2007, SD NY) 528 F Supp 2d 236, CCH Fed Secur L Rep P 94509.
Plaintiff's § 10(b) of Securities Exchange Act of 1934, 15 USCS §§ 78j(b), claim failed; although, defendant executives made some representations that were specific
and could be considered significant, plaintiff did not identify concrete statements or explain why they were false at time that they were made; further, complaint,
read as whole, did not meet requirements of Private Securities Litigation Reform Act of 1995 for pleading scienter because allegations did not support inference that
defendants knew or really should have known that targeted statements were false at time that they were made or otherwise lacking necessary information, 15 USCS
§ 78u-4(b)(1)-(2). In re Winn-Dixie Stores (2007, MD Fla) 531 F Supp 2d 1334, CCH Fed Secur L Rep P 94532.
In derivative lawsuit, shareholders failed to show that former and current directors violated § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and 17
CFR § 240.10b-5, in order to show demand futility for their suit, because they did not show that failure to disclose fact that Securities and Exchange Commission
(SEC) had issued Wells Notice against corporation constituted false and misleading statement about corporation. In re Morgan Stanley Derivative Litig. (2008, SD NY)
Plaintiffs claimed that defendants' brief description of compliance program's aims misled investors into believing that they had effective compliance program that
would root out any impropriety, including alleged insider trading scheme, but such allegation failed to state claim of securities fraud; defendants were not alleged to
have provided any qualitative assurances that investment bank's compliance program was properly managed or employed best procedures in industry. In re FBR Inc.
Sec. Litig. (2008, SD NY) 544 F Supp 2d 346.
Count two of indictment--securities fraud--withstood defendant's attack: first, it tracked language of 17 CFR § 240.10b-5, which provided elements for securities
fraud; second, it identified four representations in press release that, if proven false, would subject defendant to criminal liability; the indictment therefore
accomplished its dual purpose and in attacking accuracy of accounting firm's accounting decisions, defendant jumped procedural gun because whether corporation or
firm accounted for corporation's first quarter revenue correctly was factual dispute that might or might not be relevant at end of day. United States v Johnson (2008,
ED Va) 553 F Supp 2d 582.
Plaintiffs' § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5, survived motion to dismiss because court was
not persuaded by argument that plaintiffs unreasonably relied on allegedly misleading press release, as officers had not cited any authority suggesting that plaintiffs
were required to seek out specific article on specific website and compare it to press release before purchasing corporation stock. Sawant v Ramsey (2008, DC Conn)
570 F Supp 2d 336.
Plaintiff's complaint, which alleged that defendants made false statements and failed to disclose material information during the course of negotiating and closing a
private placement transaction with plaintiff, failed to state a federal securities claim because, even assuming defendants made the alleged omissions and
misstatements, the omissions were not materially misleading to plaintiff under the expressed terms of the written agreement governing the private placement, and
the misstatements were not materially misleading because they constituted non-actionable "puffery." Harborview Master Fund, LP v LightPath Techs. (2009, SD NY)
601 F Supp 2d 537.
Where corporate executives did not draft or sign financial reports filed with Securities and Exchange Commission, and where reports did not contain any statements
attributed to executives, executives could not be held primarily liable for securities fraud under 15 USCS § 78j(b) based on "bright line" test; "bright line" test
governed based on law of case; intervening decision regarding scope of "scheme" liability did not govern primary liability resulting from misstatements. SEC v Lucent
Techs., Inc. (2009, DC NJ) 610 F Supp 2d 342, CCH Fed Secur L Rep P 95216.
In securities fraud case in which investors moved for leave to file amended complaint against certified public account (CPA) firm, CPA firm was correct that proposed
amended complaint failed to plead facts that established that it made material misstatements or omissions of fact, that plaintiffs relied on any such statements or
omissions, or that any such reliance caused plaintiffs' injury, and that amendment would be futile; investors' proposed amended complaint did not adequately plead
transaction causation, reliance element of securities fraud claim. In re Interbank Funding Corp. Secs. Litig. (2009, DC Dist Col) 668 F Supp 2d 44, CCH Fed Secur L
Rep P 95508.
In securities fraud case in which investors' claim against certified public account firm was that it, through its statements about funding company's securities, violated
Section 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and investors urged court to presume transaction causation based on Affiliated Ute
presumption, since reliance was not impossible to prove as CPA firm offered positive statements, that presumption did not apply. In re Interbank Funding Corp. Secs.
Litig. (2009, DC Dist Col) 668 F Supp 2d 44, CCH Fed Secur L Rep P 95508.
In securities fraud case in which investors' claim against certified public account firm was that it, through its statements about funding company's securities, violated
Section 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and investors urged court to presume transaction causation based on fraud created market
theory, that theory did not apply; investors had not connected CPA firm's alleged fraud to securities' unmarketability. In re Interbank Funding Corp. Secs. Litig.
(2009, DC Dist Col) 668 F Supp 2d 44, CCH Fed Secur L Rep P 95508.
Publication of company's code of conduct on its website did not constitute representation that its code of conduct was not being violated and thus, it could not be
misleading for purposes of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), City of Roseville Employees' Ret. Sys. v Horizon Lines, Inc. (2009, DC Del)
False or misleading Sarbanes-Oxley certification could form basis of misleading statement for purposes of § 10(b) of Securities Exchange Act of 1934, 15 USCS §
78j(b), where investors asserted that, at time of certification, company and its executives knew, or consciously avoided any meaningful exposure to information that
rendered their Sarbanes-Oxley certification erroneous. City of Roseville Employees' Ret. Sys. v Horizon Lines, Inc. (2009, DC Del) 686 F Supp 2d 404, CCH Fed Secur
L Rep P 95522.
In action brought by pension trust on behalf of purchasers of common stock defendant company alleging that company and defendant officers made false and
misleading public statements about current and projected success of company's growth strategy and one of its products that artificially inflated value of common
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stock in violation of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5 and that officers were liable as "control persons" under §
20(a) of Exchange Act, 15 USCS § 78t(a), cautionary language accompanying all of challenged statements was meaningful for purposes of 15 USCS § 78u-5(c)(1)(A)
safe harbor because cautionary statements addressed specific, principal risks associated with company's business and were more than merely boilerplate litany of
generally applicable risk factors, and safety harbor covered defendants' quarterly earnings per share and comparable sales growth projections throughout class
period as they were quintessential forward-looking statements under § 78u-5(i)(1)(A), as well as statements about product and company's growth strategy that did
not make any specific, verifiable representation about present state of affairs, but statements that were assertions about present facts were not covered by safe
harbor. W. Wash. Laborers-Employers Pension Trust v Panera Bread Co. (2010, ED Mo) 697 F Supp 2d 1081.
In this action under § 10(b) of Securities Exchange Act of 1934, court denied plaintiffs' motion for summary judgment to find statement--"our China ramp is
proceeding on plan"--false as matter of law; whether statement was misleading given available inside information depends upon credibility and weight afforded
officer's explanation. In re Remec Inc. Sec. Litig. (2010, SD Cal) 702 F Supp 2d 1202.
Auditors violate 15 USCS § 78j(b) and Rule 10b-5 when they prepare and certify publicly filed financial statements that they know, or are reckless in not knowing,
are false; auditors also violate these provisions by issuing false audit report. In re Philip L. Pascale, CPA (2004) 82 CCH SEC Doc 3231, 2004 SEC LEXIS 1015.
Unpublished: Defendant, former vice-president of public cable television company, aided and abetted company's 15 USCS § 78j(b), violations, which included filing
Form 10-Q and issuing press releases that contained false or misleading information, when he created certain false documents. SEC v Mulcahey (2009, CA2 NY)
2009 US App LEXIS 3785.
Unpublished: Natural gas lease owners were entitled to judgment as matter of law under Fed. R. Civ. P. 50(a) as to investor's securities claims under 15 USCS § 78j,
S.E.C. Rule 10b-5, and Tex. Rev. Civ. Stat. Ann. art. 581-33A because investor failed to show that owners breached any of specific duties of operator under joint
operating agreements and there was no evidence that owners knew that projections contained in business plan were false when made. Arkoma Basin Projet Ltd.
P'ship v West Fork Energy Co. LLC (2010, CA5 Tex) 2010 US App LEXIS 13269.
Unpublished: SEC failed to state claim of substantial involvement against chief operating officer under § 17(a) of Securities Act of 1933, 15 USCS § 77q(a), and
under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5 because there was no allegation that he had any role in actual drafting
or editing of Forms 10-K, much less required significant role; also, failure to absence of specific facts of his involvement, beyond his presence at meetings, was not
sufficient to satisfy Fed. R. Civ. P. 9(b). SEC v Fraser (2009, DC Ariz) 2009 US Dist LEXIS 70198.
Unpublished: Statements that were not alleged to be false were inactionable under § 10(b) of Securities and Exchange Act of 1934. In re Cambrex Corp. Secs. Litig.
(2005, DC NJ) CCH Fed Secur L Rep P 93561.
Unpublished: Although class' allegations regarding remedial measures suggested that company's management team exhibited poor judgment, obstinacy, arrogance
and incompetence, corporate mismanagement was not actionable fraud under 15 USCS § 78j(b) or 17 § 240.10b-5. In re Impac Mortg. Holdings, Inc. (2008, CD Cal)
554 F Supp 2d 1083.
Unpublished: Dismissal of plaintiffs' securities fraud claims was affirmed because plaintiffs had failed to plead, with requisite particularity, facts supporting jury's
inference that corporation had made material misrepresentations in offering circular; plaintiffs simply repeated their basic allegations that defendants must have
known that offering circular contained inaccurate valuations of corporation's leasehold interests and goodwill because later financial reports contained lower
valuations, but such "fraud by hindsight" theory was not actionable. Bay Harbour Mgmt. LLC v Carothers (2008, CA2) CCH Fed Secur L Rep P 94759.
B.Particular Misstatements or Omissions As to Issuer
1.Issuer's Potential
148. Generally
Misleading statements or omissions of material fact regarding probable future of issuer are fraudulent under Securities Exchange Act. SEC v Texas Gulf Sulphur Co.
(1968, CA2 NY) 401 F2d 833, CCH Fed Secur L Rep P 92251, 2 ALR Fed 190, cert den (1969) 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
Financial forecast relating to corporation, essentially prediction, may be regarded to be "fact" within meaning of SEC Rule 10b-5. Marx v Computer Sciences Corp.
Allegations that at time controlling shareholders of bottling company purchased stock of company from other shareholders they failed to disclose that soft drink
manufacturer whose product corporation bottled had embarked on restructuring program or that acquisitions of bottlers had increased tremendously in recent years
did not assert omissions of "material" facts as required for action under SEC Rule 10b-5, and thus should not have been submitted to jury regardless of any limiting
instruction, because purchasers had no duty to disclose acquisitions in industry, whether publicly known or not, that were not related to transaction for which
disclosure was being made. Ward v Succession of Freeman (1988, CA5 La) 854 F2d 780, CCH Fed Secur L Rep P 94019, reh den, en banc (1988, CA5 La) 863 F2d
882 and cert den (1989) 490 US 1065, 104 L Ed 2d 629, 109 S Ct 2064.
Before acquisition activity relating to corporation can rise to level of materiality, so as to make failure to disclose such activity when engaging in purchase and sale of
stock of corporation actionable under SEC Rule 10b-5, acquisition activity must involve negotiations between corporation and another corporation, and where
acquiring company had not opened discussions with company whose stock was subject of purchase and sale transaction until after transaction, cause of action under
Rule 10b-5 based on failure to disclose acquisition possibility should not have been submitted to jury. Ward v Succession of Freeman (1988, CA5 La) 854 F2d 780,
CCH Fed Secur L Rep P 94019, reh den, en banc (1988, CA5 La) 863 F2d 882 and cert den (1989) 490 US 1065, 104 L Ed 2d 629, 109 S Ct 2064.
Failure of banking corporations located in different states to disclose to owner of stock in one of corporations when they entered into agreement for purchase of her
stock that they had discussed merging if interstate banking became legal was neither misleading nor material as required for omission of information to give rise to
cause of action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 promulgated thereunder, since Rule 10b-5 imposes duty to
disclose only when silence would make other statements misleading or false, and sellers had failed to identify any statements made misleading by defendants'
nondisclosure of merger discussions, and information concerning merger was not material since, at best, merger discussions had culminated in vague "agreement" to
establish relationship, with no agreement as to price or structure of deal; materiality of information concerning proposed merger is directly related to likelihood
merger will be accomplished, and information concerning speculative and tentative discussions is of dubious and marginal significance to discussion of investor in
reaching decision as to purchase and sale of stock. Taylor v First Union Corp. (1988, CA4 SC) 857 F2d 240, CCH Fed Secur L Rep P 94021, cert den (1989) 489 US
1080, 103 L Ed 2d 837, 109 S Ct 1532.
Acquiring corporation in merger does not violate fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by including information statement in
proxy materials which disclosed that corporation was formed solely for purpose of merger and that simple result of merger would be 100 percent ownership of
corporation to be acquired; violation can not be based on assertion that statement did not set forth valid business purpose since lack of valid business purpose is not
necessarily fatal under federal securities laws; nothing within provisions of § 10(b), or rules thereunder, requires projection of future business conditions. Lessler v
Dominion Textile, Ltd. (1975, SD NY) 411 F Supp 40.
Mere fact that forecast is inaccurate does not make it violative of SEC Rule 10b-5, but absent reasonable method of preparation or valid basis, reckless and
unfounded statements as to future earnings and future acquisitions of corporation are sufficiently misleading to be actionable under Rule; however, letter in which
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business forecast was included did not contain material omissions of factors which led to unexpected downturn of business; lengthy strike, Army's cancellation of
major contract, and increase in interest rates were neither known to nor were foreseeable by management of corporation sending letter at time letter was drafted.
REA Express, Inc. v Interway Corp. (1976, SD NY) 410 F Supp 192, CCH Fed Secur L Rep P 95421, revd on other grounds (1976, CA2 NY) 538 F2d 953.
Relevant facts relating to value of stock of closely held corporation, which must be disclosed in transaction involving that stock, include future prospects of
corporation, nature of business engaged in, nature of any competition, and skill of management. Rude v Cambell Square, Inc. (1976, DC SD) 411 F Supp 1040, CCH
Material facts, under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, include not only information disclosing earnings and distributions of
company but also those facts which affect probable future of company and those which may affect desire of investors to buy, sell, or hold company's securities;
whether information is material will depend at any given time upon balancing of indicated probability that event will occur and anticipated magnitude of event in light
of totality of company activity. St. Louis Union Trust Co. v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1976, ED Mo) 412 F Supp 45, CCH Fed Secur L Rep P 95554,
revd on other grounds (1977, CA8 Mo) 562 F2d 1040, CCH Fed Secur L Rep P 96151, cert den (1978) 435 US 925, 55 L Ed 2d 519, 98 S Ct 1490.
Shareholders' 15 USCS § 78j(b) complaint raises genuine questions of material fact properly reserved for jury, where shareholders allege corporation and directors
made and omitted statements which falsely overestimated sale price expected for corporation assets, despite fact that eventual sale price obtained was well within
range represented by corporation, because court cannot as matter of law declare that reasonable juror could not find that reasonable investor could have been
misled by unmitigated, high-flying prose of corporation. In re Union Carbide Corp. Consumer Products Business Sec. Litigation (1987, SD NY) 676 F Supp 458, CCH
Claims of misrepresentation asserted against limited partnership in 15 USCS § 78j(b) action are dismissed where offering memorandum prepared by defendants
unequivocably warned potential investors of investment risk, provided information concerning status of corporation with which partnership had entered into
agreement, and warned that IRS might determine that partnership was not "for profit" activity. Feinman v Schulman Berlin & Davis (1988, SD NY) 677 F Supp 168,
Company that purchased its own stock had duty to inform seller about possible buyout of company under 15 USCS § 78j(b), because (1) at time of purchase,
company had some communications regarding possibility of buyout and (2) merger or acquisition discussions are "material" even if entities involved had not reached
agreement in principle as to price and structure of transaction, since transaction was buyout to privately held corporation, notwithstanding that acquisition never took
place. McLaury v Duff & Phelps, Inc. (1988, ND Ill) 691 F Supp 1090, 52 BNA FEP Cas 558, 46 CCH EPD P 38050, CCH Fed Secur L Rep P 93767.
Summary judgment is inappropriate in shareholders' securities fraud class action, where class alleges fraudulent scheme regarding misleadingly positive statements
about merger negotiations which caused stock price to rise dramatically and then fall, because even if merger negotiations were in fact conducted, misleading
representations about their progress or predictions about their outcome are potentially actionable. In re Atlantic Financial Management, Inc. Sec. Litigation (1988, DC
Mass) 718 F Supp 1003, CCH Fed Secur L Rep P 94445.
"Fraud on market" claim under 15 USCS § 78j(b) cannot be decided on summary judgment motions, where both personal computer hard disk drives manufacturer
and its stockholders rely heavily on contradictory news accounts to establish what market did or did not know based on manufacturer's disclosures or lack thereof,
because stockholders' submissions do not prove that omitted information remained unknown, and manufacturer's submissions, while showing that information
concerning failure of its risky market strategy did seep into market, do not yet prove "truth on market" defense since it is not clear that such information reached
market "credibly." In re Seagate Tech. II Sec. Litig. (1992, ND Cal) 802 F Supp 271, 92 Daily Journal DAR 13359, CCH Fed Secur L Rep P 97028.
Environmental services corporation shareholders' federal securities fraud complaint is dismissed, even though individual insiders sold off thousands of shares for
period of approximately one month prior to water commission's denial of application for hazardous waste project permits, which caused stock price to drop from
almost $ 6 to $ 1 per share, because facts reveal that corporation disclosed all material facts regarding risks entailed in permit process. Levin v Hunter Envtl. Servs.
(In re Hunter Envtl. Servs.) (1996, DC Conn) 921 F Supp 914, CCH Fed Secur L Rep P 99257.
Federal securities fraud claim against portfolio manager must be denied summarily, where investors claim that manager who invested portfolio funds heavily in
computer corporation misled market by way of statements published in financial journal, because statements must be factual and specific to perpetrate fraud on
market, and quotes here were just generally optimistic and predictive of future success. In re Fidelity/Apple Sec. Litig. (1997, DC Mass) 986 F Supp 42.
Securities fraud claim against corporation focusing on products and services that would help customers resolve so-called "Year 2000 problem" is dismissed, where it
relies in part on company's late 1997 claim that it was experiencing "unprecedented market demand," because such statement, placed in context, represents
precisely type of "rosy affirmation" and vague optimistic hyperbole that First Circuit has held to be mere corporate puffery. In re Peritus Software Servs., Inc. (1999,
DC Mass) 52 F Supp 2d 211, CCH Fed Secur L Rep P 90500.
Securities fraud claim based on corporate executive's statement that merging company was "thriving business" must fail, where company had enjoyed 9 quarters of
increased earnings and net revenues, its core business had experienced 65 percent revenue growth during prior year, and statement was qualified by information
about losses on new contract, because statement was too vague to be anything other than puffery. Freedman v Value Health, Inc. (2001, DC Conn) 135 F Supp 2d
317, CCH Fed Secur L Rep P 91479, affd (2002, CA2 Conn) 34 Fed Appx 408, CCH Fed Secur L Rep P 91791 and (criticized in In re Alliance Pharm. Corp. Sec. Litig.
(2003, SD NY) 279 F Supp 2d 171).
Contextual approach to assessing applicability of puffery defense set forth in Number Nine-Peritus-Allaire line of cases made clear that company's statements that it
was "premier," "dominant," or "leading" must not be assessed in vacuum (i.e., by plucking statements out of their context to determine whether words, taken per se,
are sufficiently "vague" so as to constitute puffery); this, deus ex machina approach would have been plainly insufficient and statements were properly interpreted
only by reference to relevant circumstances that underlay their meaning. Scritchfield v Paolo (2003, DC RI) 274 F Supp 2d 163, CCH Fed Secur L Rep P 92476.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for securities broker to make false and misleading representations with respect to
prospective business outlook of issuer of securities being sold. In re Underhill Secur. Corp. (1965) 42 SEC 689.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for securities broker, in selling stock of corporation, to make material misrepresentations
with respect to business prospects of issuer of securities notwithstanding that broker had no intent to defraud and had honest optimism about prospects of company.
In re Schmidt, Sharp, McCabe & Co. (1965) 42 SEC 745.
Securities broker violated antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where it had its employees, in conducting high pressure
securities sales campaign, make fraudulent and unbased claims as to business prospects of issuers of securities being sold. In re Hamilton Waters & Co. (1965) 42
SEC 784.
149. Earnings and profits predictions
Forecast, made approximately 2 months before end of corporation's fiscal year, as to what earnings would be for year was "untrue" statement of fact if corporation
did not believe, at time forecast was made, that earnings would be as projected. Marx v Computer Sciences Corp. (1974, CA9 Cal) 507 F2d 485, CCH Fed Secur L
Rep P 94904.
Alleged statement that earnings of corporation would be at specified figure at future time, made by chairman of board of directors, who was never involved with
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corporation's operations, at breakfast meeting without reference to notes or papers and without reference to specific future time, could not be basis of civil recovery
under SEC Rule 10b-5 since it was at most opinion or prediction rather than statement of fact; no investor would attach importance to bare earnings prediction
without thorough analysis of company, including discussion with its operating officers. Black v Riker-Maxson Corp. (1975, SD NY) 401 F Supp 693.
Statements which grossly overestimate business volume and prospective profits of corporation are material. REA Express, Inc. v Interway Corp. (1976, SD NY) 410 F
Supp 192, CCH Fed Secur L Rep P 95421, revd on other grounds (1976, CA2 NY) 538 F2d 953.
Reasonable person in position of considering investment in corporation would deem important its certified audit with particular emphasis upon accounts receivable as
independent confirmation of existence of sales, so that such information is material under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule
10b-5. McLean v Alexander (1976, DC Del) 420 F Supp 1057, CCH Fed Secur L Rep P 95725.
SEC Rule 10(b)-5 may be violated by inaccurate or misleading projection of future earnings. Connellan v Himelhoch (1981, ED Mich) 506 F Supp 1290, CCH Fed
Software manufacturer's motion to dismiss securities fraud action for failure to state claim is granted, where shareholders alleged that manufacturer failed to disclose
anticipated shift in sales from higher-profit customers to lower-profit customers, because SEC filings by manufacturer contained business cycle information from
which shift could have been anticipated; company made no projections about sales to low-profit and high-profit customers; failure to disclose general economic
trends--as opposed to internal firm information--cannot be basis of securities fraud allegation, because economic trend information is generally available; and sales
figures indicate sales in accordance with product-mix projections. In re Exabyte Corp. Sec. Litig. (1993, DC Colo) 823 F Supp 866, CCH Fed Secur L Rep P 97711.
Defendant corporation's accurate reports of earnings and financial successes were not material misrepresentations under 15 USCS § 78j(b) and 17 C.F.R. §
240.10b-5(b), and financial forecasts were immaterial under "bespeaks caution" doctrine and sheltered by safe harbor of 15 USCS § 78u-5(c)(1)(B). In re ATI Techs.,
Inc., Sec. Litig. (2002, ED Pa) 216 F Supp 2d 418, CCH Fed Secur L Rep P 91987, settled, injunction gr (2003, ED Pa) 2003 US Dist LEXIS 7062 and (criticized in
Adams v Kinder-Morgan, Inc. (2003, CA10 Colo) 340 F3d 1083, CCH Fed Secur L Rep P 92479).
Purchasers' sole allegation in complaint brought under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j, which linked company and officers to purported
accounting fraud was assertion that company overstated financial results in order to keep anticipated merger on track, and to help ensure that they would secure
personal financial benefits that would flow to them if merger went ahead as planned; such allegation was inadequate to plead scienter under 15 USCS § 78u-4.
Anderson v First Sec. Corp. (2002, DC Utah) 249 F Supp 2d 1256.
Revenue goal statements were not materially misleading, as no reasonable investor would have relied on these statements in arriving at investment decision; when
revenue goal statements were made, company was planning to increase its activities and revenue by (1) expanding its product market beyond software to include
hardware, and (2) expanding its geographic markets beyond North America. SEC v Gane (2005, SD Fla) 18 FLW Fed D 401.
Shareholders' allegations concerning company's improper shipping, false and unreliable sales forecasts, overstated revenue recognition, inventory deficiencies, and
lack of internal controls failed to state claim under 15 USCS § 78j(b) where shareholders did not adequately described how statements were false. In re Remec Inc.
Secs. Litig. (2006, SD Cal) 415 F Supp 2d 1106.
Testimony of two coconspirators established that defendant directed scheme designed to defraud investors by artificially enhancing revenue that corporation
announced on April 26, 2001 and earnings announcement was transmitted through interstate commerce by telephone, internet, and press release distribution
service. United States v Johnson (2008, ED Va) 553 F Supp 2d 582.
150.--Statements made without basis or knowledge
Accountant's reference to accounts receivable on balance sheets do not apply to statements of operations and retained earnings, and accountant can only be held to
have necessary scienter to support claim of misrepresentation under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) if evidence supports inference that when
it expressed opinion it had no genuine belief that it had information on it which it could predicate that opinion; one month discrepancy in due dates between invoice
and purchase order are not sufficient, standing alone, to be evidence that accountant was aware that it was without sufficient knowledge to form opinion about
accounts receivable. McLean v Alexander (1979, CA3 Del) 599 F2d 1190, CCH Fed Secur L Rep P 96879, 49 ALR Fed 373.
Predictions of sales for corporation of approximately twice those of previous year constituted violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
where there was no basis for such estimates and no investigation of their accuracy had been made, particularly where, had such investigation been made, it would
have been discovered that projections had no support from available facts. Green v Jonhop, Inc. (1973, DC Or) 358 F Supp 413, CCH Fed Secur L Rep P 93940.
Holders of common stock purchased after April 25 first quarter earnings statement and held at time of July 21 second quarter earnings statement state securities
fraud claim against corporation and its officers, where previous year annual report predicted "further profit improvements," $ 4 million first quarter loss was said to
be "anticipated" and not reason for reevaluation of expected full-year profit improvement, but then $ 13 million second quarter loss made corporate principals
publicly "less confident that company would be more profitable in 1989 than in 1988" which caused price of stock to fall, because opinion or forecast of earnings may
violate 15 USCS § 78j(b) if made without reasonable basis or by ignoring facts seriously undermining accuracy of forecast. Good v Zenith Electronics Corp. (1990, ND
Ill) 751 F Supp 1320, CCH Fed Secur L Rep P 96142.
Purchasers of computer company stock may not recover under 15 USCS § 78j, where purchasers claim that company issued misleading statements about its
earnings prospects so that its officers could sell significant amounts of their stock at inflated prices, prior to announcing lower than expected earnings causing 30
percent drop in stock's value, because evidence failed to show that company was aware of undisclosed facts undermining accuracy of its 1990 earnings projections as
its 1990 financial plan was too obsolete to serve as evidence that company's projection was unreasonable, uncertainty in company's relationship with its major
customers was well known, and company had at least some reasonable basis to believe in projections. In re Adobe Systems, Inc. Sec. Litigation (1992, ND Cal) 787
Securities fraud claim is denied summarily to extent it is based on new service report, in which vice-president is quoted as saying he "expected" corporation to ship
1.2 to 1.7 million units in second quarter, even though corporation ended up shipping only 844,056 units, where vice-president at time lacked reasonable basis to
foresee that customers would experience delays in their own manufacturing facilities, because word "expects" limits potential to mislead, and inability to foresee
future does not constitute fraud. In re Tseng Lab. Sec. Litig. (1996, ED Pa) 954 F Supp 1024, CCH Fed Secur L Rep P 99074, affd without op (1997, CA3 Pa) 107 F3d
8.
Where investor refiled securities fraud claims in Alabama federal court after Alabama state court had dismissed similar claims on grounds of forum non conveniens,
second suit was barred by collateral estoppel and applicable statutes of limitations, where it was clear that investor should have discovered any injury more than two
years prior to filing suit; limitations period should not be tolled where investor had disregarded court's order as to where to file his claims; and investor elected to
bypass class actions. Chazen v Deloitte & Touche, LLP (2003, ND Ala) 247 F Supp 2d 1259, affd in part and revd in part (2003, CA11 Ala) 88 Fed Appx 390.
151.--Cautionary language used
Investors in real estate partnership do not state claim under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) where they allege that offering
memorandum contained intentional misrepresentations as to potential cash and tax benefit of partnership, but offering memorandum made it quite clear that its
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projections of potential cash and tax benefits were necessarily speculative in nature and that no assurance could be given that these projections would be realized,
and, indeed, memorandum warned prospective investors that actual results may vary from predictions and that these variations may be material. Luce v Edelstein
(1986, CA2 NY) 802 F2d 49, CCH Fed Secur L Rep P 92932, 6 FR Serv 3d 117.
In investor's action against company for violations of § 10(b) (15 USCS § 78j(b)) and Rule 10b-5 of Securities Exchange Act of 1934, in addition to qualifying her
timetable estimate by use of word "approximately," many of officer's statements were cautions in themselves, and officer identified important problems with
corporation that could have caused her estimate of approximate timetable to be off; therefore, sufficient warnings accompanied timetable estimate, and company
was protected from liability under safe harbor provision of Private Securities Litigation Reform Act, 15 USCS § 78u-5(c). Emplrs. Teamsters Local Nos. 175 & 505
Pension Trust Fund v Clorox Co. (2004, CA9 Cal) 353 F3d 1125.
Where plaintiff Securities and Exchange Commission alleged defendants, two principals and their firm, violated 15 USCS §§ 77q(a), 78j(b), in selling registered
limited liability partnership interests, district court erred in finding that there was no securities fraud because while early circulars advised that there were no
assurances that any amount of debt purchased in debt pools could actually be recovered, after June 2002, unrebutted testimony showed that defendants knew their
business model was not succeeding, materials continued to paint rosy picture, and defendants continued to sell interests without disclosing lack of success or specific
reasons why business was failing, thus, that finding was vacated and on remand, district court was to reconsider issues of scienter and remedies. SEC v Merchant
Capital, LLC (2007, CA11 Ga) 483 F3d 747, CCH Fed Secur L Rep P 94194, 20 FLW Fed C 459.
Investors in limited partnership for development of transdermal and ophthalmic pharmaceutical products fail to state viable claim under 15 USCS § 78j(b), where
private placement memorandum abound with warnings of risky nature of investment, because future presentations or projections of potential profits were prefaced
by cautionary language and tempered by specific warnings of significant risk factors and disclosure of underlying factual assumptions. Barrios v Paco Pharmaceutical
Servs., Inc. (1993, SD NY) 816 F Supp 243, CCH Fed Secur L Rep P 97373.
Securities fraud class action suit fails as matter of law, where stockholders base their case on series of statements concerning corporation's growth and revenues
which turned out to be overly optimistic, because projections of future earnings took on cautionary tone as conditions changed, and were not "specific guarantees"
providing proper basis for fraud claim. Bentley v Legent Corp. (1994, ED Va) 849 F Supp 429, CCH Fed Secur L Rep P 98309, affd without op sub nom Herman v
Legent Corp. (1995, CA4 Va) 50 F3d 6, reported in full (1995, CA4 Va) CCH Fed Secur L Rep P 98650.
Securities fraud claim of limited partners who purchased limited partnership interests in real estate properties offered through private placement memoranda (PPMs)
against accounting firm which had prepared PPMs is not dismissed, where PPMs contained language concerning limited scope and inherent uncertainty of projections
for limited partnership, and where plaintiffs alleged that accountants prepared or approved financial projections that bore no relation to reality and misrepresented
market for commercial real estate, because while cautionary language in PPMs may have prevented reliance on projections as forecast of future, this language did
not prevent reliance on them as indicating absence of fraud. Pasternak v Colonial Equities Corp. (In re Colonial Ltd. Partnership Litig.) (1994, DC Conn) 854 F Supp
64, CCH Blue Sky L Rep P 73928, CCH Fed Secur L Rep P 98303, RICO Bus Disp Guide (CCH) P 8577, motion gr sub nom Hirsch v Arthur Anderson & Co. (1994, DC
Conn) 178 BR 40, claim dismissed sub nom Seeman v Arthur Andersen & Co. (1995, DC Conn) 896 F Supp 250 and affd (1995, CA2 Conn) 72 F3d 1085, 28 BCD
494, CCH Bankr L Rptr P 76756 (criticized in Official Comm. of Unsecured Creditors v R.F. Lafferty & Co. (2001, CA3 Pa) 267 F3d 340, 38 BCD 147) and (criticized in
In re Flag Telecom Holdings, Ltd. Sec. Litig. (2005, SD NY) 352 F Supp 2d 429, CCH Fed Secur L Rep P 93108).
Securities fraud claim by purchasers of stock against corporate seller is dismissed, even though purchasers alleged that information regarding corporation's
competitive position in market is false and misleading where prospectus (1) spelled out competition corporation's products were facing and would face in future, (2)
warned investors that competitive pressure might result in price reductions and decline in sales volume, and (3) warned of difficulties in completing and shipping
product and effect upon corporation's position in market, because prospectus adequately bespeaks caution. In re Quarterdeck Office Sys. (1994, CD Cal) 854 F Supp
1466, CCH Blue Sky L Rep P 74002, CCH Fed Secur L Rep P 98522.
Securities fraud claim against waste collection and treatment corporation must fail, where investors challenge 1989 "guarantee" of continuation of past few years'
revenue growth trend through fiscal 1990 and beyond, because language and context of statement make clear that it was not "assurance" or "guarantee" but merely
projection or prediction, counteracted by later publishing of actual rates of earnings growth, actual revenues and costs, and "profitability trends" throughout fiscal
year 1990. In re Browning-Ferris Indus. Sec. Litig. (1995, SD Tex) 876 F Supp 870.
Securities fraud claim against computer company and 2 of its officers must fail, where crux of claim is that defendants, knowing that company was not doing as well
as anticipated, nonetheless continued to tout record-breaking statistics and failed to timely correct public perception that company was financially healthy, because
alleged misrepresentations are either (1) puffery, (2) true because based on actual facts, or (3) balanced by cautionary language, and there is simply no evidence
that defendants intended to mislead market. Stavroff v Meyo (1995, ND Ohio) 987 F Supp 987, affd without op (1997, CA6 Ohio) 129 F3d 1265, reported in full
(1997, CA6 Ohio) 1997 US App LEXIS 32774.
Plaintiffs' allegations that defendants made misleading statements concerning corporation's business and earnings failed under "bespeaks caution" doctrine and safe
harbor provision of Private Securities Litigation Reform Act, 15 USCS § 78u-5(c)(1), as allegedly fraudulent statements were forward-looking in nature and were
accompanied by cautionary language, including numerous specific factors that could affect statements. In re Cross Media Mktg. Corp. Sec. Litig. (2004, SD NY) 314 F
Under certain circumstances, cautionary statements can give rise to 15 USCS § 78j(b) liability; it was alleged that at time that defendant foreign limited liability
company was warning investors about regulatory risk, it knew or was recklessly ignorant of fact that its subsidiary's employees were violating NYSE rules, so limited
liability company's cautionary statements concerning risks associated with misconduct of employees were actionable. In re Van Der Moolen Holding N.V. Sec. Litig.
(2005, SD NY) 405 F Supp 2d 388.
Careful review of pertinent cautionary statements revealed that they fully satisfied requirements of Private Securities Litigation Reform Act, 15 USCS § 78u-5;
statements were extensive and covered ground identified by investors as relevant and they warned, in clear language, that statements regarding expected projected
profits and demand were merely predictions that were subject to risk; in sum, application of cautionary statements prong of safe harbor was itself sufficient to render
corporation and officers forward-looking statements non-actionable under 15 USCS § 78j(b) and Rule 10b-5. In re Smith & Wesson Holding Corp. Sec. Litig (2009,
DC Mass) 604 F Supp 2d 332.
Duty to disclose inside information to purchaser of corporate stock, as required by Securities and Exchange Act of 1934 (15 USCS § 78j(b)), was not violated by
corporation which examined and commented on several earnings forecasts prepared by outside analysts but did not disclose its own, less favorable forecasts. Elkind
v Liggett & Myers, Inc. (1980, CA2 NY) 635 F2d 156, CCH Fed Secur L Rep P 97716.
Corporation making tender offer for its own stock was not required by § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 to disclose
corporation's financial projections showing improvement in business where corporation did disclose audited financial statements for past years and unaudited
financial statements for fiscal year just ended and where corporation's tender offer statement indicated that corporation expected increased sales from continuing
operations but decreased earnings from such operations. Walker v Action Indus. (1986, CA4 Va) 802 F2d 703, CCH Fed Secur L Rep P 92943, cert den (1987) 479 US
1065, 93 L Ed 2d 1000, 107 S Ct 952, reh den (1987) 480 US 926, 94 L Ed 2d 703, 107 S Ct 1389.
Statement in prospectus for registered fund which was closed-end investment company, to effect that shares were expected to trade at discount from or premium to
their net asset values, was not materially misleading in predicting bright trading future for shares, since when taken together and in context, prospectus would not
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mislead reasonable investor about nature of investment. I. Meyer Pincus & Assoc., P.C. v Oppenheimer & Co. (1991, CA2 NY) 936 F2d 759, CCH Fed Secur L Rep P
96061.
Where chief operating officer of corporation disclosed to securities salesman, prior to public disclosure of information, that corporation's earnings for given quarter
would be less than had been anticipated, such tip was material, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. SEC v
Lum's, Inc. (1973, SD NY) 365 F Supp 1046, CCH Fed Secur L Rep P 94134.
Memorandum prepared by insider stockholder, and allegedly not provided by insider to individual who purchased stock from him, contains material information,
within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, where memorandum, which relates to corporation which is in business
of publishing and distributing educational books and other audio-visual materials, stated that: (1) when given book was planned, no one in corporation realized that
it could not make profit until it had sold 25,000 copies, which fact was discovered only after book was published and in book stores; (2) publicity department had run
costly ads in newspapers when books which were subject of those ads were not in stores; (3) books were added to corporation's book list when no one in corporation
had seen, let alone read those books, and without any preliminary production and editorial costing having been performed; and (4) corporate management produced
films without scripts, without school curricular orientation, and largely without purchasers. Jackson v Oppenheim (1974, SD NY) 411 F Supp 659, CCH Fed Secur L
Rep P 94894, affd in part and revd in part (1976, CA2) 533 F2d 826, CCH Fed Secur L Rep P 95497.
President and board chairman of corporation who knowingly provided potential purchasers of 38 percent of corporation's outstanding stock with quarterly reports
inaccurately reflecting cost of goods sold, accounts receivable, loss attributable to lease transaction, and distorting true earnings of corporation, was guilty of making
misrepresentations within meaning of 15 USCS § 78j and SEC Rule 10b-5. Alna Capital Associates v Wagner (1982, SD Fla) 532 F Supp 591, CCH Fed Secur L Rep P
99037, affd in part and revd in part (1985, CA11 Fla) 758 F2d 562.
Computer corporation's published expressions of satisfaction at market's reception of its new personal office system in spring of 1983 prior to shipment of computers
cannot provide basis for securities "fraud on market" cause of action, where reasonable investor might assess information that acceptance of new computer was
high, orders placed for new computer were more numerous than expected, and interest by individuals at dealer level was surprisingly high as either expressions of
opinion or representations of fact, because at that time rational basis existed for very positive opinion about new product sales and, insofar as statements were
factual, they were factually correct. In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
Defendants are entitled to summary judgment in securities fraud class action, where stock purchasers complained that numerous parties involved in stock sale
misrepresented business prospects for company's existing line of computer products, and concealed severe production and profitability problems with new product
lines, because no specific statements complained of were materially misleading and research report predictions of success were reasonably based on company's
history of remarkable growth. In re Convergent Technologies Sec. Litigation (1988, ND Cal) 721 F Supp 1133, CCH Fed Secur L Rep P 94492, affd (1991, CA9 Cal) 91
CDOS 6897, 91 Daily Journal DAR 10487, CCH Fed Secur L Rep P 96211, amd, reh, en banc, den (1991, CA9 Cal) 948 F2d 507, 91 Daily Journal DAR 14945
(superseded by statute as stated in In re Harmonic Inc. Secs. Litig. (2001, ND Cal) 163 F Supp 2d 1079, CCH Fed Secur L Rep P 91488).
Investors' class action securities fraud claim against petroleum services company is summarily denied, despite investors' argument that company's statements
regarding future of petroleum services market were intentionally misleading and evidence of internal corporate documents painting gloomy picture, because
statements were in nature of predictions backed by self-optimism and recent successes and were not reckless although inaccurate in hindsight. Levine v NL
Industries, Inc. (1989, SD NY) 720 F Supp 305, CCH Fed Secur L Rep P 94557, affd (1991, CA2 NY) 926 F2d 199, 32 Envt Rep Cas 1777, CCH Fed Secur L Rep P
95784, 21 ELR 20556.
Securities fraud plaintiff class must be narrowed to include only purchasers of stock between 6/17/85 and 8/5/85, because 5/30/85 optimistic press release had
reasonable basis in recent history of company, but 6/17 and 7/18 statements of company, continuing optimistic forecast and failing to correct original projections
then known to be virtually unreachable, were material and intentionally or recklessly misleading, thus constituting parts of illegal course of conduct to defraud
market. Kirby v Cullinet Software, Inc. (1989, DC Mass) 721 F Supp 1444, CCH Fed Secur L Rep P 94849.
Stockholders' securities fraud action is dismissed, where firm changed focus of its business from government contracts to commercial applications, stockholders
complain that firm made unwarranted optimistic statements about anticipated profits based on new business focus, firm claimed to own patent rights which really
belonged to others, and firm mischaracterized contracts, because firm had reason to believe its optimistic statements were true, and shareholders do not allege
specific incidents of fraud with sufficient detail and evidence of scienter to support misrepresentation and fraud claim. Haltman v Aura Sys. (1993, CD Cal) 844 F
Securities fraud claims of computer corporation stockholders are dismissed in part, where management's publicly disclosed estimates and projections were overly
optimistic in hindsight but not type of information ordinarily relied on by market, and where information concerning corporation's inferior customer service was
credibly available to market, because stockholders failed to raise genuine issue of material fact as to "reliance" on failure to disclose (1) global information, and (2)
extent to which company's lack of direct customer service support had negative effect on financial performance. In re Compaq Sec. Litig. (1993, SD Tex) 848 F Supp
Investors sufficiently alleged material misstatements to state claim under 15 USCS § 78j(b), where corporation expressed intention to offer European stock and
made statement that sales would reach level that internal reports showed to be impossible, because speaker was aware of undisclosed facts that made statements
materially false. In re Clearly Canadian Sec. Litig. (1995, ND Cal) 875 F Supp 1410, CCH Fed Secur L Rep P 98803, 31 FR Serv 3d 972.
Federal securities fraud complaint will not be denied summarily, despite claim that mere "puffing" or expressions of corporate optimism cannot lead to liability under
15 USCS § 78j(b), because corporate officer specifically told business news service that company would meet Wall Street analysts' earning estimates and mentioned
definite earnings and precise revenue numbers, which would have represented most profitable quarter in company's history, when in fact company lost 13 cents per
share. In re V-Mark Software, Sec. Litig. (1996, DC Mass) 928 F Supp 122, CCH Fed Secur L Rep P 99286.
Technology company did not withhold material adverse information when it issued press release stating that revenues and earnings for second quarter would be
higher than in first quarter, even assuming statement would otherwise be actionable under 15 USCS § 78j(b), where company adopted "action plan" to avert
threatened decline in earnings and revenues, difference in projected revenues was only slight, and company typically realized majority of revenues in third month of
quarter, making second quarter projection of third quarter revenues tentative at best. In re Symbol Techs. Class Action Litig. (1997, ED NY) 950 F Supp 1237, CCH
Dismissal of shareholders' 15 USCS § 78j(b) claim is appropriate insofar as it asserts liability based on "margins are holding up" statement, where April 3, 1995
statement in 1994 annual report was that "so far . . . our business continues to grow and our 1995 margins are holding up," because statement provided no
indication that margins would continue to hold up beyond April 3, and it is difficult to see how statement could be rendered false or misleading by subsequent failure
to disclose diminishing profit margins. Freedman v Value Health, Inc. (1997, DC Conn) 958 F Supp 745, CCH Fed Secur L Rep P 99470.
Professional investor's 15 USCS § 78j(b) claim must fail, despite allegations of receiving materially misleading income projections and hearing materially misleading
claims about corporation's ability to meet terms of its lease in future, because such future projections about corporation's expected performance are not actionable,
especially since projections and statements were not set forth in purchase agreement. United Resources Equity Partners I, L.P. v National Energetics Co. (1997, SD
Summary judgment is granted to promoter of partnership developing fast-food restaurants, denying investor's claim of securities fraud, even though promoter did
state, inter alia, that costs per restaurant should not exceed $ 575,000 and that he felt certain location "would do $ 2 million" and that limited partners could expect
30 percent yearly return on their investment, where partnership ultimately failed and investment lost money, because these were not material, untrue statements of
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fact but were more in nature of reasonable predictions or projections. Kleban v S.Y.S. Restaurant Mgmt. (1998, ND Ill) 994 F Supp 932, CCH Fed Secur L Rep P
90262.
Securities fraud claim that press release falsely stated or implied that distributor was required to make $ 150 million in purchases of corporation's women's health
products over 5-year term of agreement, including $ 25 million in first year, must fail, where release did not state or imply that revenues of $ 150 million were
guaranteed over 5 years or that $ 25 million in revenues would be achieved in first year and, at best, all release did was describe--perhaps with some enthusiasm
and optimism--revenue goals that corporation hoped to achieve from distribution agreement. In re Galileo Corp. Shareholders Litig. (2001, DC Mass) 127 F Supp 2d
Amended securities fraud claim that financial corporation violated generally accepted accounting principles by failing to record in 1998 effect of losses in value of
certain mortgage-backed securities must fail, where mere fact that accounting adjustments were made in one period does not support inference that they should
have been made in earlier period, because, as matter of law, alleged misstatement of earnings of $ 79 million cannot be material for company reporting operating
earnings of $ 3.7 billion in fiscal 1998. In re First Union Corp. Sec. Litig. (2001, WD NC) 128 F Supp 2d 871.
Securities fraud complaint against world's largest soup company will not be dismissed, even though press releases merely referred to "volume-driven growth" and
reported that "shipments are made promptly," where releases did not sufficiently explain entire sales practice of "loading," in which "sold" product was loaded onto
trucks but was heavily discounted, stored for overstocked buyers, and often returned, because complaint adequately alleges that releases were misleading and
material. In re Campbell Soup Co. Sec. Litig. (2001, DC NJ) 145 F Supp 2d 574, CCH Fed Secur L Rep P 91464.
Putative class action securities fraud case against computer-oriented company may proceed, where it alleges company misled investors by failing to disclose that its
core business had materially shrunk and instead painted grossly misleading picture of its current performance and future prospects, and that officers capitalized on
inflated value of stock by selling more than $ 1.5 million worth during class period, because allegations are sufficiently specific, set forth material misrepresentations,
and describe stock sales and business conditions giving rise to inference of scienter. Manavazian v ATEC Group, Inc. (2001, ED NY) 160 F Supp 2d 468, CCH Fed
Investors' 15 USCS § 78j(b) class claims arising from alleged misrepresentations as to wireless communications corporation's subscriber growth were dismissed
where allegedly fraudulent growth projection fell within safe harbor under 15 USCS § 78u-5(c)(1); language used was forward-looking and clearly warned of risk at
issue, projection was immaterial, and investors did not sufficiently plead actual knowledge by defendants that projection was unreasonable when made. In re
Alamosa Holdings, Inc. Sec. Litig. (2005, ND Tex) 382 F Supp 2d 832, CCH Fed Secur L Rep P 93215.
Under bespeaks caution doctrine, and in light of ample warnings in initial public offering (IPO) prospectuses, no reasonable investor could have interpreted IPO prices
to be valuations of market value of securities, so that prospectuses' alleged omissions of defendants' true beliefs about market valuation were immaterial as matter
of law. Liu v Credit Suisse First Boston Corp. (In re Initial Pub. Offering Sec. Litig.) (2005, SD NY) 383 F Supp 2d 566, CCH Fed Secur L Rep P 93216.
Allegations that company used unrealistic assumptions to perform goodwill impairment analysis, thereby violating 15 USCS § 78j(b), were insufficient to meet
heightened pleading standards of Private Securities Litigation Reform Act (PSLRA) where allegations did not establish strong inference that gross profit margin
estimates were false, baseless, fraudulent, or unreasonable as result of deliberately reckless or conscious misconduct; similarly, allegations that company violated
generally accepted accounting principles by not performing another goodwill analysis sooner than seven months after its last one failed to state claim under 15 USCS
§ 78j(b) where allegations lacked specificity required to show strong inference of scienter under PSLRA. In re Remec Inc. Secs. Litig. (2006, SD Cal) 415 F Supp 2d
1106.
Corporation and executives were granted summary judgment on investors' class action under Securities Exchange Act of 1934 because generalized and optimistic
statements regarding earnings guidances, overall profitability, financial well-being, and corporation's good relationship with Office of Comptroller of Currency (OCC)
did not pose triable fact issue as to whether statements were false when made; desire of executives, who never sold stock during class period to obtain raises and
bonuses did not show motive and opportunity; also, statement about relationship with OCC during its ongoing investigation did not show recklessness. In re Metris
Cos., Inc., Sec. Litig. (2006, DC Minn) 428 F Supp 2d 1004, CCH Fed Secur L Rep P 93856.
Allegations of corporation's difficulty in making accurate forecasts, internal forecasts that were above and below those actually issued, and poor performance in first
two months of year did not plead with particularity sufficient facts which gave rise to strong inference that corporation and its executives actually knew that their
public earnings projections, forward-looking statements, were false or misleading; accordingly, stock purchaser's claims under § 10(b) and § 20(a) of Securities
Exchange Act of 1934 were dismissed for failure to meet pleading requirements of Private Securities Litigation Reform Act, specifically 15 USCS § 78u-5(c)(1)(B).
Yellen v Hake (2006, SD Iowa) 437 F Supp 2d 941.
Investors' motions for partial summary judgment were granted in part because defendants did misrepresent that they possessed patented technology, worth of that
technology and return on investment; however, investors failed to prove violations of federal and state securities registration laws; individual was as subject to
controlling personal liability for securities fraud violations. Flaxel v Johnson (2008, SD Cal) 541 F Supp 2d 1127.
The statement, "We are pleased with solid results we reported today" and have "good reason to be optimistic about our future growth prospects," fits definition of
puffery. In re Bausch & Lomb, Inc. Secs. Litig. (2008, WD NY) 592 F Supp 2d 323, CCH Fed Secur L Rep P 95007.
In this action under § 10(b) of Securities Exchange Act of 1934, defendants' motion for summary judgment was denied as to September 2003 statements because
interpretation of financial forecasts may be open to debate, but plaintiffs presented evidence that company had internally forecast large losses just three days before
Chief Executive Officer predicted company would show profit at end of fiscal year 2004. In re Remec Inc. Sec. Litig. (2010, SD Cal) 702 F Supp 2d 1202.
Securities broker violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) through use, in selling securities of corporation, of brochure which failed to disclose
operating losses of corporation. In re Carvalho (1963) 41 SEC 620.
It was violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 for broker, in attempting to sell securities which
ranged in price between $ 2 and $ 20, to assert without justification that company's per share earnings would range from 90 cents to $ 1. In re Richard C. Spangler,
Inc. (1976) 46 SEC 238.
Unpublished: Section 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), claim failed, as, inter alia, almost all statements identified by appellant were
projections about defendant company's financial growth, or expressions of general optimism about financial health; such positive portrayals were not actionable
under § 10(b); accordingly, company's optimistic statements that it was, for example, slated to begin to generate strong revenue and earnings growth in 2002, did
not give rise to liability under § 10(b). Key Equity Investors Inc. v Sel-Leb Mktg. Inc. (2007, CA3 NJ) 2007 US App LEXIS 21392.
Unpublished: Securities fraud plaintiffs' allegations regarding revenue guidances were sufficiently particular pursuant to Fed. R. Civ. P. 9(b) and Private Securities
Litigation Reform Act, 15 USCS §§ 78u-4 et seq., requirement that plaintiffs allege reason or reasons why statement was misleading, and if allegation regarding
statement or omission was made on information and belief, facts upon which belief was formed, where plaintiffs' quoted former employee who personally developed
model that supported $ 144 million revenue estimate for 2001, and higher percentage growth assumptions for later years; because claim as that models were not
based on anything other than multiplication using Excel spreadsheet, it would be hard to be more specific than directly quoting source who claimed that he made up
arbitrary guidances; as such, plaintiffs sufficiently alleged in that all of post-initial public offering statements that cited these numbers were misleading under § 10(b)
of Securities Exchange Act of 1934, 15 USCS § 78j(b), and SEC Rule 10b-5, 17 CFR § 240.10b-5. In re Tellium , Inc. Sec. Litig. (2005, DC NJ) 2005 US Dist LEXIS
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19467.
153. Financing
Borrower's failure to disclose to bank letter from third party which cast doubts upon ability of third party to honor its obligation to purchase securities pledged by
borrower to bank as security for loan was material, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), loan officer having testified that he did
not believe he would have made loan if he had seen letter. SEC v Dolnick (1974, CA7 Ill) 501 F2d 1279, CCH Fed Secur L Rep P 94762.
Press release which gave impression that real estate project was virtually certain to be completed, whereas there were hurdles to development which were so
formidable (such as requisite massive financing) that it was in fact little more than idea in which developers had faith, violated § 10(b) of Securities Exchange Act (15
USCS § 78j(b)). SEC v Management Dynamics, Inc. (1975, CA2) 515 F2d 801, CCH Fed Secur L Rep P 95017, 19 FR Serv 2d 1405.
In "all or none" securities offering, it is violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 for underwriter to
declare that offering sold when minimum amount had not been realized, since corporation may need certain minimum amount in order to carry out enterprise for
which funds are being raised and, if less than minimum is raised, corporation might not be able to carry out its plans effectively, and investors could suffer severe
losses. A. J. White & Co. v SEC (1977, CA1) 556 F2d 619, CCH Fed Secur L Rep P 96087, cert den (1977) 434 US 969, 54 L Ed 2d 457, 98 S Ct 516.
Bank which had entered into financing arrangement with limited partnership organized to engage in oil and gas exploration whereby borrowings of partnership were
to be secured by letters of credit from investors, could not be held primarily liable under SEC Rule 10b-5 for alleged material omissions in sale of investment interests
in limited partnership based on allegation that misleading loan documents describing structure and nature of securities transaction created duty to disclose other
material facts regarding transaction where fair reading of documents did not indicate whether bank viewed partnership exploration program as particularly attractive
or unattractive for investment, nor was it shown how any particular statement in loan documents was rendered misleading by omissions thereby creating duty to
disclose, nor did bank have any independent duty to disclose arising from quasi-fiduciary relationship with investors. Schlifke v Seafirst Corp. (1989, CA7 Ill) 866 F2d
935, CCH Fed Secur L Rep P 94174, 106 OGR 446.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for prospectus to fail to disclose problem, of which technical expert of issuer who
contributed technical information for preparation of prospectus was aware, which might reasonably have been expected to have negative effect upon marketing
activities of issuer; fact that issuer had serious financial problems independent of marketing problems related to omission did not preclude liability for such omission;
it was not necessary that misrepresentation or omission be sole cause of loss complained of by person who purchased in reliance upon prospectus. Blakely v Lisac
(1972, DC Or) 357 F Supp 255, CCH Fed Secur L Rep P 93788.
It is violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for prospectus, relating to issuance of municipal bonds to obtain financing
for nursing home project, to fail to disclose existence and results of adverse feasibility reports and to refer only to favorable feasibility report prepared by firm
controlled by individual with financial interest in success of project, even though much evidence exists indicating that unfavorable reports are inaccurate or
inadequate; regardless of deficiencies, adverse reports represent difference of opinion among experts which should be disclosed. SEC v Senex Corp. (1975, ED Ky)
399 F Supp 497, CCH Fed Secur L Rep P 95001, affd (1976, CA6 Ky) 534 F2d 1240.
Corporate officers were not obligated to volunteer information about negotiations, which they presumed to be non-public, concerning corporation's sale of technical
information and Japanese patents to Japanese company, and Japanese company's purchase of one million shares of corporation's common stock; defendant officers'
statements during period of negotiations that they were unable to attribute unusually heavy trading in corporation's stock to any corporate developments were not
"untrue" or "misleading" under Rule 10b-5, since undisclosed events cannot affect market, and no rumors or even knowledge of rumors could be attributed to
defendants. Zuckerman v Harnischfeger Corp. (1984, SD NY) 591 F Supp 112, CCH Fed Secur L Rep P 91470.
Assuming failure to disclose was accompanied by requisite mental state, investor stated claim under 15 USCS § 78j(b) when it alleged that corporation had failed to
disclose that 80 percent equity owner of borrowers on loan that was corporation's principal asset had rejected corporation's overture to restructure loan or acquire
corporation, so as to avoid borrowers' default on loan, whose deficits had been funded in part by owner for several years. L.L. Capital Partners, L.P. v Rockefeller Ctr.
Props. (1996, SD NY) 939 F Supp 294, CCH Fed Secur L Rep P 99363.
Prospectus statements regarding Phase II funding are not actionable in casino investors' securities fraud case, where internal projections placed construction costs
between $ 67 and $ 108 million, and prospectus set budget for second phase at $ 87.9 million, because subsequent cost overruns cannot, alone, indicate that
defendants intentionally misstated projected costs at time of prospectus. In re Stratosphere Corp. Sec. Litig. (1999, DC Nev) 66 F Supp 2d 1182, CCH Fed Secur L
Rep P 90669.
Transferee corporation's allegedly false claim of promised outside investment, contained in proxy statement and allegedly falsely inflating corporation's value, failed
to satisfy misrepresentation element of securities fraud claim brought by transferor corporation's shareholder under 15 USCS § 78j, where proxy statement was
issued at least week after stock transfer that formed basis of fraud action. Integrated Tech. & Dev., Inc. v Rosenfield (2000, ED NY) 103 F Supp 2d 574, CCH Fed
Secur L Rep P 91013, CCH Fed Secur L Rep P 91038.
Broker-dealer and investment company violated SEC Rule 10b-5, in connection with purchase and sale of investment contracts in limited partnership interests, where
they misrepresented their ability to guarantee certain obligations of the limited partnership, and failed to state that other limited partnerships organized by them had
serious cash flow problems. In re Tacoma Securities, Inc. (1984) 1984 SEC LEXIS 1211.
154. Imminent business expansion
Representations made to sole shareholders of acquired corporation prior to merger to effect that acquiring corporation would invest substantial sums for purpose of
expanding operations of acquired corporation were not material in that no reasonable investor would attach importance to them in light of subsequent refusal of
acquiring corporation, during latter phases of negotiation, formally to commit itself as to extent of such contemplated investment. Robinson v Cupples Container Co.
(1975, CA9 Cal) 513 F2d 1274.
Stockholder fails to show material nondisclosure and scienter in complaint against corporation and its controlling stockholder for violating § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) by failing to tell stockholder, at time of stock redemption, that corporation had plans to introduce new line of sportswear, that
corporation had entered repurchase agreements with various stockholders and had made repurchases which would have increased value of plaintiff stockholder's
holdings, and that corporation was on verge of making substantial turnaround in its financial condition, where corporation had no plans to market new line until year
after redemption, stockholder sold his stock voluntarily, and there was no evidence whatsoever that corporation's repurchase of stock from various stockholders
either did or could increase value of stockholder's holdings. Harkavy v Apparel Industries, Inc. (1978, CA2 NY) 571 F2d 737, CCH Fed Secur L Rep P 96315.
For publicly traded stock, shareholders' right to know outweighs need to protect them from potentially misleading disclosures of pending negotiations only when
negotiating parties have reached agreement on price and structure; "price and structure" threshold, however, does not preclude finding of materiality where
corporation is closely held because reasons for that standard of materiality disappear when there is no public market for shareholder's stock; therefore, minority
shareholders have right to know of developments in negotiations for sale of corporation and there is no offsetting need to protect other shareholders from potentially
misleading disclosures. Michaels v Michaels (1985, CA7 Ill) 767 F2d 1185, 19 Fed Rules Evid Serv 176, amd (1985, CA7 Ill) 767 F2d 1185, CCH Fed Secur L Rep P
92203, 19 Fed Rules Evid Serv 176 and cert den (1986) 474 US 1057, 88 L Ed 2d 774, 106 S Ct 797.
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It is violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 for seller of securities to make untrue assertion that issuer is about to
merge with second corporation. Blasdel v Mullenix (1971, WD Okla) 356 F Supp 924, CCH Fed Secur L Rep P 94047.
It is material misrepresentation of fact, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, for corporate defendant, who
entered into agreement to purchase securities in return for payment of cash and granting of option to buy its securities, to state, without reasonable basis, that its
business, in terms of renting equipment to others, would double in one year period, and that its net earnings after taxes would exceed $ 2,000,000 for current year
and $ 4,000,000 for following year. REA Express, Inc. v Interway Corp. (1976, SD NY) 410 F Supp 192, CCH Fed Secur L Rep P 95421, revd on other grounds (1976,
CA2 NY) 538 F2d 953.
Sellers of investment contracts, in form of franchises to food distribution operation, violate fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
and SEC Rule 10b-5 by misrepresenting that: (1) franchisor would accumulate and distribute 8000-10,000 retail customers to its franchisees; (2) franchisor was
already operating in number of major cities in United States and Canada; and (3) franchisor would begin retail operations in vicinity in which franchises were being
sold within short period of time. SEC v Galaxy Foods, Inc. (1976, ED NY) 417 F Supp 1225, CCH Fed Secur L Rep P 95684, affd without op (1977, CA2 NY) 556 F2d
False representations to effect that issuer had received franchise to build hotel under name of major hotel chain is violation of fraud provisions of § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, where statement was known untruth calculated to induce earlier and larger investments. Malik v
Universal Resources Corp. (1976, SD Cal) 425 F Supp 350, CCH Fed Secur L Rep P 96055.
Words of computer corporation product marketing manager drawn from Wall Street Journal article of April 13, 1983 may have comprised misleading statement of
material fact on which 15 USCS § 78j liability could hinge, where statement is compilation of assertions of facts giving impression that many companies had paid $
10,000 and made binding commitments to purchase corporation's newest computer system, when fact was that many orders did not involve any binding financial
commitment, because assuming knowledge of this "softness" of corporation's backlog of orders was not available on market, very positive statements about new
product sales needed to be clarified by further information in order to negate misleading effect. In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp
Taken as whole and considered in historical context, statements by 2 highest officials of computer corporation in 1982 Annual Report were not misstatements of
material fact nor statements creating need for disclosure of additional information in order not to be misleading, where gist of statements (1) expressed opinion that
corporation possessed unequalled strength, experience and expertise in personal computer systems market, and (2) announced significant breakthrough in personal
office systems, because bulk of statements involved unactionable, plain business hype, while suggested development of specific product had sound factual basis in
that company had created new system incorporating several innovations that significantly facilitated its use. In re Apple Computer Sec. Litigation (1987, ND Cal) 672
Investors' 15 USCS § 78j(b) claims against bankrupt corporation's officers and directors will not be dismissed, even though failure accurately to predict future
business developments is generally not actionable, because investors allege not only bad business judgment but also series of very positive predictions as to
corporation's future when circumstances suggested future was, at best, unclear, and point to specific improper accounting practice and misleading statements. Klein
v Goetzmann (1990, ND NY) 745 F Supp 107, CCH Fed Secur L Rep P 95740.
Securities fraud class action case against underwriter of public offering for personal computer retailer will not be dismissed, where retailer began operations with one
computer center in March 1981, was operating 41 centers in 15 states in July 1984, prospectus issued with public stock offering at that time predicted opening of 49
more new centers in 1984 and 90 more in 1985, but performance fell well short of representations with reduced prices and profits prevailing throughout 1985,
because complaint states arguable claim that prospectus misrepresented personal computer market shake-out and its likely effect on retailer. Phillips v Kidder,
Peabody & Co. (1991, SD NY) 782 F Supp 854, CCH Fed Secur L Rep P 96591.
Investors' claim against bank for violating 15 USCS § 78j(b) is dismissed, where investors alleged that bank officers initially announced agreement to merge with
another bank then failed to disclose renegotiation of merger between it and another bank, leading investors to purchase overly inflated stock before merger
agreement was terminated, because bank has no duty to disclose renegotiations when they began since issue of renegotiations was not within scope of initial
disclosure. Evanowski v Bankworcester Corp. (1991, DC Mass) 788 F Supp 611, CCH Fed Secur L Rep P 97223.
Bankruptcy trustee's 15 USCS § 78j(b) claim against former directors of bankrupt corporation is dismissed, where he challenges press release statements that "we
look forward to higher revenues and loan volumes for remainder of fiscal 1998" and that corporation has "aggressive growth plans . . . to become major player,"
because these statements are merely vague and optimistic and cannot support securities fraud action. Lain v Evans (2000, ND Tex) 123 F Supp 2d 344, CCH Fed
Plaintiffs' § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5, claims were plead with sufficient particularity,
where complaint specified that press release from corporation was misleading because corporation had not completed "transaction" with large retailer, as press
release termed it, and complaint also specified that defendant corporate officers reviewed and approved press release and knew that it was false on basis of their
attempt to sell their product to retailer. Sawant v Ramsey (2008, DC Conn) 570 F Supp 2d 336.
Plaintiffs' § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 CFR § 240.10b-5, survived motion to dismiss because court was
not persuaded by argument that plaintiffs unreasonably relied on allegedly misleading press release, as officers had not cited any authority suggesting that plaintiffs
were required to seek out specific article on specific website and compare it to press release before purchasing corporation stock. Sawant v Ramsey (2008, DC Conn)
570 F Supp 2d 336.
Securities broker, in selling securities of corporation, violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where he made untrue and unfounded
statement to effect that issuer was about to obtain large contract and certain valuable franchises whereas issuer had in fact recently been organized, machine which
was basis of expected business was still in prototype stage, its commercial feasibility being untested, and company had no sales force, no substantial backlog, and
only start in arranging franchises for distribution. In re Schmidt, Sharp, McCabe & Co. (1965) 42 SEC 745.
Broker-dealer violates § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) when, in sales campaign relating to stock of lock manufacturing corporation, salesman
advised prospective buyers, with no justification, that company had large domestic contract for sale of locks lined up, and highly favorable prospects for foreign sales
of that product, that the lock was being manufactured and company was making money where in fact only 300 locks had been sold over 3 year period. In re Elkind
(1976) 46 SEC 361.
Investment advisory publication violates 15 USCS § 78j(b) by nationally distributing newsletter recommending purchase of company's common stock and call options
based upon false report of company's acquisition of process allegedly promising potential profitability. In re National Counselor Reports, Inc. (1981) 1981 SEC LEXIS
1681.
Unpublished: Where investors alleged defendants knew loss of contract was definite and made company's earnings guidance impossible to achieve, statements
forecasting continued high growth in relevant segment were properly alleged to be false and/or misleading. In re Cambrex Corp. Secs. Litig. (2005, DC NJ) CCH Fed
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155. Imminent loss of business
In negotiating for sale of substantial block of corporation's stock, corporation president, who also is principal shareholder, is not required to disclose knowledge of
internal memorandum of principal supplier, wherein employee of that supplier recommended discontinuation of use of corporation as distributor of its products, where
history of relations between corporation and supplier provide justification for president to believe that relationship would probably continue. Pittsburgh Coke &
Chemical Co. v Bollo (1976, ED NY) 421 F Supp 908, CCH Fed Secur L Rep P 95746, affd (1977, CA2 NY) 560 F2d 1089, CCH Fed Secur L Rep P 96130.
Securities fraud claim against pet supplies retailer is denied summarily, where investors allege that corporate principals knew but failed to disclose that new drug
therapies would make its inventory of flea and tick products obsolete, because information about new therapies was available to public, and mere allegations that
principals failed to accurately predict or warn of their impact do not amount to viable claim of fraud. In re PETsMART, Inc. Secs. Litig. (1999, DC Ariz) 61 F Supp 2d
982.
156. Increases in overhead
Where director of corporation was aware of increasing costs of corporation, his acquiescence to report which effectively concealed deteriorating business condition of
company constituted violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Blakely v Lisac (1972, DC Or) 357 F Supp 255, CCH Fed Secur L Rep P
93788.
Additional overriding royalty burdens in drilling of oil wells are not material, within meaning of § 10(b) of the Securities Exchange Act (15 USCS § 78j(b)) where
royalties are necessary in order for sellers of interests in oil drilling venture to acquire necessary tracts for program, and it was after buyers had acquired their
interests in program that seller discovered necessity. Mason v Marshall (1974, ND Tex) 412 F Supp 294, 54 OGR 329, affd (1976, CA5 Tex) 531 F2d 1274, 54 OGR
342.
It is not necessary, to avoid violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, for issuer of securities to state in prospectus
every fact about issuer's industry which could in any way pertain to or affect financial outlook of that industry; Act and Rule are not violated by prospectus which
stated that, historically, theatrical motion pictures had fared well in periods of recession, and that efforts to improve license fees as well as cost controls should result
in improved profit margins since, even if untrue, such statements were not material, and it was not necessary for issuer to state in proxy statement that costs had
been increasing, and that performers appearing in motion pictures had great bargaining power because they were nearly indispensable to continued success of
programs. Ash v G. P. Putnam's Sons (1976, ED Pa) 410 F Supp 1129.
157. Nature and size of operation
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for corporation to issue misleading press release belittling importance of corporation's ore
strike. Mitchell v Texas Gulf Sulphur Co. (1971, CA10 Utah) 446 F2d 90, CCH Fed Secur L Rep P 93019, 14 FR Serv 2d 1544, 29 ALR Fed 620, cert den (1971) 404
US 1004, 30 L Ed 2d 558, 92 S Ct 564, reh den (1972) 404 US 1064, 30 L Ed 2d 754, 92 S Ct 734 and cert den (1972) 405 US 918, 30 L Ed 2d 788, 92 S Ct 943.
Representations, in sale of stock, that corporation was engaged in extracting minerals from Great Salt Lake, when corporation actually was defunct, violated SEC
Rule 10b-5. SEC v International Chem. Dev. Corp. (1972, CA10 Utah) 469 F2d 20, CCH Fed Secur L Rep P 93658.
Statement, contained in material distributed in promotion of limited partnership, that property consisted of 20 unit apartment building rather than representing that
20 apartment units were located at 2 different locations was not material misrepresentation within meaning of § 10(b) of Securities Exchange Act (15 USCS §
78j(b)), since investors would not likely be influenced in their investment decision by fact that units were at different, although proximate, locations. Hickman v
Groesbeck (1974, DC Utah) 389 F Supp 769.
Where tax assessor does not have unlimited discretion to alter assessments, it is not violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC rule
10b-5 for prospectus to fail to state that issuing corporation was incurring special risk of having its tax assessments increased. Guarantee Ins. Agency Co. v
Mid-Continental Realty Corp. (1976, ND Ill) 414 F Supp 1331, affd without op (1977, CA7 Ill) 559 F2d 1226.
Misrepresentations as to nature or size of issuer's operations are unlawful under Securities Exchange Act. Hill v Equitable Bank, Nat'l Asso. (1984, DC Del) 599 F
Stockholder states valid securities fraud claim against metals corporation, stock value of which dropped 11 percent in 4 days following sudden public recognition of
loss of $ 35 million at refining facilities, because it cannot be said as matter of law that corporation did not mislead investors by attempts to conceal prior decision to
write down refining facilities and to misrepresent facts regarding decline in operations and profitability. Jaroslawicz v Engelhard Corp. (1989, DC NJ) 704 F Supp
Securities fraud claim is dismissed to extent it is based on statements regarding casino complex's business performance, where investors never allege that
announcement that first week of business had matched expectations was false, and never deny that casino announced that results from its first 5 weeks of
operations fell below estimates, because any alleged omission regarding casino's income or number or type of visitors was immaterial. In re Grand Casinos, Secs.
Litig. (1997, DC Minn) 988 F Supp 1273, CCH Fed Secur L Rep P 90137.
158. Product information
Reference in proxy statement to as yet unmarketed new invention, in conjunction with certain misleading financial information, constituted violation of § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)). Republic Technology Fund, Inc. v Lionel Corp. (1973, CA2 NY) 483 F2d 540, CCH Fed Secur L Rep P 94069, cert den
(1974) 415 US 918, 39 L Ed 2d 472, 94 S Ct 1416.
Defendants violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where confidential memorandum issued in connection with offering of debentures
contained statements intended to deceive putative investors as to production stage of company's 2 products, whole thrust of memorandum was intended to impress
investors with fact that they could expect market production of products within reasonably prompt time, and memorandum was deliberately pitched to impressing
investors with fact that production and sales were part of immediate future; it was well within district court's discretion to determine that "working prototype" meant
most advanced stage of development when compared with laboratory and engineering prototypes. Hoffman v Estabrook & Co. (1978, CA1 Mass) 587 F2d 509, CCH
If corporation's direct statements created impression that product was already commercially available on large scale, company may then have had duty to revise that
impression if later developments substantially undermined accuracy of earlier statements; seen in this light, complaint established reasonable inference of material
omission which, if borne out by evidence, would present question of fact for jury. Bielski v Cabletron Sys. (In re Cabletron Sys.) (2002, CA1 NH) 311 F3d 11, CCH
Where investors alleged fraud-on-the-market claim--specifically, that defendants had previously issued allegedly false "positive" statements regarding corporation's
product (storage routers)--although subsequent negative statement revealed problems corporation was having with its routers, statement included other unrelated
negative information in addition to information regarding routers; thus, allegedly false "positive" statements regarding routers could not form basis for fraud-on-the-
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market claim, and district court properly granted summary judgment as to these statements. Greenberg v Crossroads Sys. (2004, CA5 Tex) 364 F3d 657, CCH Fed
Corporation's representation that objective date reinforced its belief that its tires were safe was actionable, where corporation did not point to record evidence
showing statement was supported and that representation could have been deemed material misrepresentation by reasonable factfinder; reasonable juror could have
concluded that statement carried representation that there was reasonable basis for that belief and that corporation was not aware of undisclosed facts tending to
seriously undermine statement's accuracy. City of Monroe Emples. Ret. Sys. v Bridgestone Corp. (2004, CA6 Tenn) 387 F3d 468.
Corporation's statements such as that it sold best tires in world, that it had no reason to believe there was anything wrong with its tires, and that rigorous testing
under diverse conditions at its proving grounds around world helped ensure reliable quality for original equipment customers were not actionable under § 10(b) of
Securities and Exchange Act of 1934; statements were best characterized as loosely optimistic statements insufficiently specific for reasonable investor to find them
important to total mix of information. City of Monroe Emples. Ret. Sys. v Bridgestone Corp. (2004, CA6 Tenn) 387 F3d 468.
Corporation's representation in its annual report to investing public that no impairment of its corporate assets was substantially certain to occur through problems
arising from customers or regulators' actions was not immaterial and reasonable juror could have concluded that statement was actionable; at minimum, probability
or reasonably possibility of brand name experiencing significant asset impairment was not information so obviously unimportant to reasonable investor that
reasonable minds could not differ on question of its unimportance. City of Monroe Emples. Ret. Sys. v Bridgestone Corp. (2004, CA6 Tenn) 387 F3d 468.
Reasonable juror could have concluded that manufacturer's statement that "the objective data clearly reinforces our belief that these are high-quality, safe tires"
carried with it representation that there was reasonable basis for that belief, and that it was not aware of any undisclosed facts tending to seriously undermine
accuracy of statement; juror could thus have found that statement concerning objective data was actionable. City of Monroe Emples. Ret. Sys. v Bridgestone Corp.
(2005, CA6 Tenn) 399 F3d 651, CCH Fed Secur L Rep P 93097, 2005 FED App 52P, reh den, reh, en banc, den (2005, CA6) 2005 US App LEXIS 8053.
Misrepresentations as to allegedly demonstrated demand for issuer's product violates § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Securities & Exchange
Com. v Broadwall Secur., Inc. (1965, SD NY) 240 F Supp 962.
Misleading representations or omissions in general regarding principal product of issuer violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Securities &
Exchange Com. v Electrogen Industries, Inc. (1968, ED NY) CCH Fed Secur L Rep P 92156.
Failure to disclose information reasonably necessary to understanding of severe marketing problems which face issuing corporation contemplating marketing quick
frozen meat, such as fact that all meat turns gray when exposed to light with result that frozen meat with longer intended shelf life than fresh meat would be likely
to encounter customer resistance, is omission of material fact and constitutes violation of SEC Rule 10b-5. Blakely v Lisac (1972, DC Or) 357 F Supp 255, CCH Fed
Corporation which announced in press release filing of "investigational new drug application" with Food and Drug Administration, relating to development of water
absorbing, plastic material for use in manufacturing soft contact lenses, did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by failing to disclose
that it might take several years from time application was filed until product was approved for sale in public market; under circumstances, where means of
determining fact was as available to public as to company and where public could make evaluation of how beneficial certain corporate action would be to earning
picture of corporation, omission of information about decision making process of governmental agency was not violation of Act or Rule. Zucker v Sable (1976, SD NY)
Alleged failure of seller of corporation which markets fragrance products throughout North America under franchise agreement to disclose that he had purchased
ingredients for his products from source prohibited under franchise agreement, thus giving franchisor grounds to vitiate agreement, does not constitute violation
under 15 USCS § 78j(b), where omitted information was not material to purchasers' investment decision. Rorer International Cosmetics, Ltd. v Halpern (1980, ED
Pa) 502 F Supp 137, CCH Fed Secur L Rep P 97928.
Misrepresentations and omissions by corporation's president and board chairman to potential purchasers of 38 percent of corporation's outstanding stock, involving
false quarterly reports distorting true earnings of corporation, condition of major division of corporation, antitrust litigation against that division, performance of new
product, and denial of patent for such product, were material within meaning of 15 USCS § 78j and SEC Rule 10b-5, since reasonable investor would consider facts
important in deciding whether to invest in corporation's stock. Alna Capital Associates v Wagner (1982, SD Fla) 532 F Supp 591, CCH Fed Secur L Rep P 99037, affd
in part and revd in part (1985, CA11 Fla) 758 F2d 562.
Class action claim by Union Carbide investors, under 15 USCS § 78j(b), is dismissed, where investors alleged omission of information in registration statements,
prospectuses and corporate reports concerning safety defects at Bhopal, India, chemical plant and potential for catastrophic accident and effects of insecticide
product methyl isocyanate (MIC) made misleading statement in 1982 Annual Shareholder's Report that "Union Carbide's expertise in carbamate chemistry gives it . .
. exceptional qualifications for meeting rough environmental and safety standards associated with agricultural chemicals," because there is no conceivable
interpretation of report statement that is made misleading by alleged omissions which are immaterial as matter of law, and, although alleged omissions are
interesting in retrospect, to permit them to constitute securities action would allow "materiality through hindsight" cause of action. In re Union Carbide Class Action
Sec. Litigation (1986, SD NY) 648 F Supp 1322, CCH Fed Secur L Rep P 93021.
Summary judgment in favor of securities fraud defendant is granted on claim based on July 27, 1983 Third Quarter Report to Shareholders statement by computer
corporation top executives about outlook on new computer system, because (1) assertion that new product shipments began on schedule is factually correct, (2)
expression of pleasure with market acceptance, order rate and dealer enthusiasm was opinion with rational basis in fact since bottom of new product market did not
fall out until mid-August 1983, and (3) statement that new product "is clearly being recognized as important force in office market" was mere puffing or puffery
which reasonable investor would have understood as such. In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
January 1983 computer corporation press release introducing new personal computer system to public was not misleading so as to require disclosure of further
information, where release stated that (1) new computer incorporates latest software and hardware technology, (2) new product functions as IBM-compatible
terminal using telecommunication software package "being developed," and (3) new computer makes it possible for users to share peripherals and exchange
information and files when linked to "newly announced" local area network, because new computer system was innovative, IBM-compatibility was developed by late
1983 as announced, and area network was approximately on schedule until after close of plaintiff investors' class period on September 23, 1983, when it was
scrubbed. In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
Materiality of arguably misleading press release is close jury question inappropriate for resolution by summary judgment, where release states new disk drive
product "represents three years of research and development and has undergone extensive testing and design verification during past year" from which reasonable
investor would infer that computer corporation's new product was ready to perform, because internal memo 2 weeks prior to press release reflected extreme concern
over high failure rate of production units, and this type of information, necessary to provide accurate picture of status of new product, would have altered total mix of
information available at time of press release. In re Apple Computer Sec. Litigation (1987, ND Cal) 672 F Supp 1552, CCH Fed Secur L Rep P 93616.
Investors' securities fraud action against corporation and its chairman, underwriter and its manager is summarily dismissed as to all claims save one, where investors
allege misrepresentations and omissions regarding underwriter's investment package and subscription status, as well as corporation's backlog of orders, financial
condition and product, because proof of scienter and loss causation is weak so that only asserted omissions as to status of corporation's product raise genuine issues
of material fact sufficient to withstand summary judgment. Handelsman v Gilford Secur., Inc. (1989, ND Ill) 726 F Supp 673, CCH Fed Secur L Rep P 95222, dismd
(1990, ND Ill) 1990 US Dist LEXIS 467.
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Securities fraud claim of investors in computer software developer must fail, even though corporation projected release of upgrade of software program for late in
second quarter in 1988 and then one month later announced release would not be available until fourth quarter of 1988, because inference that initial announcement
was false when made is nothing more than "fraud by hindsight," which is insufficient for purposes of stating claim under 15 USCS § 78j(b). Berliner v Lotus Dev.
Corp. (1992, DC Mass) 783 F Supp 708, CCH Fed Secur L Rep P 96551.
Securities fraud complaint is dismissed with leave to amend within 30 days, where complaint sketches outline of claim based on alleged misrepresentation of efficacy
and prospective success of new antibiotics which, ultimately, were voluntarily and immediately withdrawn from worldwide market due to revelation of serious side
effects upon additional investigation and review, because complaint needs more particulars concerning circumstances allegedly constituting fraud. In re Abbott Lab.
Sec. Litig. (1992, ND Ill) 813 F Supp 1315.
Class action for lost stock value damages against information services corporation will not be dismissed preliminarily, where complaint paints picture from which it
may be inferred that officials had knowledge of defects in new foreign exchange transaction product, yet continued to promote it as product which would produce
revenue in late 1990 and early 1991, because complaint states sufficiently specific 15 USCS § 78j(b) cause of action for false forecasting of profits from new product.
Bharucha v Reuters Holdings PLC (1993, ED NY) 810 F Supp 37, CCH Fed Secur L Rep P 97325.
Class action securities fraud claims against pharmaceutical company are dismissed, even though investors claim, inter alia, that company made material
misrepresentation when it stated in October 1991 and January 1992 that it was successfully developing over-counter version of Naprosyn which would be introduced
before its patent on prescription Naprosyn expired, where Naprosyn patent expired December 21, 1993, and FDA approved over-counter Naprosyn on January 11,
1994, because facts rendered company's prediction substantially accurate and not actionable. In re Syntex Corp. Sec. Litig. (1994, ND Cal) 855 F Supp 1086, CCH
Fed Secur L Rep P 98242, affd (1996, CA9 Cal) 95 F3d 922, 96 CDOS 6865, CCH Fed Secur L Rep P 99310.
Action by stock purchasers against corporation and officers, alleging violation of 15 USCS § 78j, will not be dismissed, where vice-president stated in investor report,
during pendency of FDA investigation, that there was "absolutely no question about efficacy" of drug corporation manufactured, because reasonable investor reading
statement might conclude that FDA had raised no questions about efficacy, so statement stated cause of action for fraud. In re Medimmune, Inc., Sec. Litig. (1995,
DC Md) 873 F Supp 953, CCH Fed Secur L Rep P 98715 (criticized in In re Amylin Pharms., Inc. Secs. Litig. (2003, SD Cal) CCH Fed Secur L Rep P 92502) and
(criticized in In re Sepracor, Inc., Sec. Litig. (2004, DC Mass) 308 F Supp 2d 20, CCH Fed Secur L Rep P 92718).
Company is not entitled to dismissal of securities fraud class action, where company announced rosy future based on record sales of oriented strand board siding it
created, saying nothing about impending problems because product absorbed moisture and deteriorated rapidly, because reasonable jury could find that company
misrepresented its income and financial health by reporting record earnings without adequately accounting for future liabilities from defective siding. Freedman v
Louisiana-Pacific Corp. (1996, DC Or) 922 F Supp 377, CCH Fed Secur L Rep P 99073.
Investors have sufficiently pled securities fraud cause of action against company that makes noninvasive glucose sensor, where complaint cites numerous statements
by company officials expressing optimism about and touting effectiveness of company's only product, some made in direct response to public skepticism, even
though there was publicly available information which warned of investment risks, because alleged failure to disclose negative test results or details of
correspondence with FDA, which had to approve product, could have made difference to reasonable investor. Walsingham v Biocontrol Tech. (1998, WD Pa) 66 F
Securities fraud class action against major producer of telephone switching systems and related products is denied summarily, where investors cite statements "Our
product lines have never been stronger--nor more diverse" and "we will continue to deliver best of new technologies," because neither of these statements is
sufficiently "concrete" or "specific" to be material, and no reasonable investor could have read either as altering "total mix" of available information, especially since
they were included in news releases containing much more specific, concrete, and significant information. Fecht v Northern Telecom Ltd. (In re Northern Telecom Ltd.
Sec. Litig.) (2000, SD NY) 116 F Supp 2d 446, CCH Fed Secur L Rep P 91228.
Securities fraud complaint against software company must be dismissed, where, inter alia, shareholders complain that (1) company's products were plagued by
technical problems, (2) company lacked global cost reporting system, and (3) its acquisitions encountered integration problems, because such allegations are more
assertion of mismanagement than proper pleading of fraud. Van Ormer v Aspen Tech., Inc. (2000, DC Mass) 145 F Supp 2d 101.
Investors' securities fraud claim against pharmaceutical company based on statements regarding DepoFoam and DepoCyt is dismissed with prejudice, where they
have done nothing more than establish via hindsight-driven reassessment that, as with almost any experimental drug designed to treat serious cancer, DepoCyt has
its advantages and disadvantages, because investors have failed to establish that optimistic statements were false or misleading when made. DeMarco v Depotech
Corp. (2001, SD Cal) 149 F Supp 2d 1212, CCH Fed Secur L Rep P 91438, affd, motion den (2002, CA9 Cal) 32 Fed Appx 260, CCH Fed Secur L Rep P 91713.
Second amended securities fraud complaint against color server manufacturer is dismissed, to extent it accuses manufacturer of shipping excessive quantities of
product to distributors between April and July 1997 in order to make it appear that demand was stronger than it actually was, because this "channel stuffing" claim is
nothing more than speculation made in hindsight since chart of quarterly revenues relied upon is equally susceptible of many different interpretations. In re Splash
Tech. Holdings Secs. Litig. (2001, ND Cal) 160 F Supp 2d 1059, CCH Fed Secur L Rep P 91524.
Allegations that defendants violated Securities Exchange Act of 1934 did not establish strong inference of scienter; it could not be concluded that defendants had
reason to know on dates of press releases that product launches would not occur on schedule; statements concerning product launch date were at most unduly
optimistic. In re Focus Enhancements, Inc. Secs. Litig. (2001, DC Mass) 309 F Supp 2d 134.
Objections to "fraud by hindsight" theory of liability were inapplicable, where evidence offered to prove that web-design product did not work at time "x" was that
product did not work at time "x + 1,"; as this was not deteriorating product, e.g., car, it was highly unlikely--though not inconceivable--that product worked properly
in December, but did not in January. In re Allaire Corp. Secs. Litig. (2002, DC Mass) 224 F Supp 2d 319, CCH Fed Secur L Rep P 92006.
Shareholders stated claim under 15 USCS § 78j(b) and SEC Rule 10b-5, 17 CFR § 240.10b-5, by identifying numerous statements they contended were false or
misleading; according to complaint defendants (1) falsely reported that demand was accelerating when demand was falling for company and its competitors, (2)
propped up demand with undisclosed channel stuffing, and (3) improperly recognized revenue in violation of generally accepted accounting principles. In re Sci.
Atlanta, Inc. (2002, ND Ga) 239 F Supp 2d 1351, affd (2004, CA11 Ga) 374 F3d 1015, CCH Fed Secur L Rep P 92846, 17 FLW Fed C 689.
In suit alleging false and misleading statements concerning projected earnings of software company and product viability, investors failed to sufficiently plead that
defendants had actual knowledge that challenged statements were false when made. Nursing Home Pension Fund v Oracle Corp. (2002, ND Cal) 242 F Supp 2d 671.
Company's representations that it could provide and was providing certain services were representations of present and verifiable fact and, if it could not or was not
providing those services when it issued statements, it may have committed actionable fraud and statements were actionable as matter of law. Scritchfield v Paolo
(2003, DC RI) 274 F Supp 2d 163, CCH Fed Secur L Rep P 92476.
Dismissal was not warranted where common law "bespeaks caution" doctrine did not apply to shareholders' securities fraud claim because although defendant
biopharmaceutical company repeated warning concerning neutralizing antibodies at least 13 times in disclosure documents during three-year class period, these
warnings did not adequately disclose problems with drug that company allegedly knew to exist at time. In re Regeneron Pharms., Inc. Sec. Litig. (2005, SD NY) CCH
Fed Secur L Rep 93099 (criticized in In re NYSE Specialists Sec. Litig. (2005, SD NY) 405 F Supp 2d 281).
Share purchasers adequately stated claim under 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5 against drug manufacturer and its representatives where purchasers
explicitly identified material misstatements and omissions, stated grounds for finding them misleading, presented factual allegations tending to contradict optimistic
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statements about drug's effect on secondary markets, complaint alleged facts supporting inference that manufacturer's more optimistic predictions about drug's
efficacy were known to be false or misleading. In re Immune Response Secs. Litig. (2005, SD Cal) 375 F Supp 2d 983.
In selling securities of corporation which intended to market oral contraceptive pills, broker violates fraud provisions of § 10(b) of Securities Exchange Act (15 USCS
§ 78j(b)) and SEC Rule 10b-5 by asserting, with no justification, that: (1) pill was tested and had no side effects; (2) that pill was being manufactured and that it
would be mass produced at very low cost; (3) that World Health Organization was extremely interested in pill and was putting $ 250 million into project involving
process; (4) that agency of United Nations had received Ford Foundation funds for distribution of pills; (5) that it was intended that pills would be marketed in terms
of "billions"; (6) there was hope that pill would prevent or cure cancer and that it was panacea for tuberculosis; (7) that prominent manufacturer of oral
contraceptives was buying 20 percent of stock in order to get patent rights to slow-release formula allegedly used in pill, without which that manufacturer's own pill
would become obsolete; and (8) that shipments of pills to Central or South American countries were imminent and that existing contract provided for shipment of 10
million pills to Far East "momentarily", with 50 million pills to be shipped per month thereafter. In re Richard C. Spangler, Inc. (1976) 46 SEC 238.
Securities salesman who, in attempting to sell stock of corporation, represented, inter alia, that corporation was manufacturing or marketing snowmobiles, violate
fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 where snowmobile manufacturing operation of corporation never got
beyond production of prototypes. In re Tuffli (1976) 46 SEC 401.
Unpublished: Investors stated valid claim for relief under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5(b), 17 C.F.R. §
240.10b-5(b), against drug manufacturer because it could reasonably be inferred that manufacturer's 10-K statement contained false or misleading statements
about side effects of new cancer drug, that 10-K statement was known by manufacturer to be false or misleading when it was made, and that statements about side
effects were material to investors. In re Genta, Inc. Secs. Litig. (2005, DC NJ) CCH Fed Secur L Rep P 93513.
159. Violations of law
Corporation's failure to disclose violation of Anti-Kickback Act (41 USCS § 51) could be material for purposes of action under SEC Rule 10b-5 (17 CFR § 240.10b-5),
promulgated under § 10b of Securities Exchange Act of 1934 (15 USCS § 78j(b)), even before corporation and its officers and directors learned that they would be
subject of criminal indictment, and action under Rule 10b-5 therefore should not have been dismissed upon finding that corporation had disclosed impending
indictment as soon as it became probable. Roeder v Alpha Industries, Inc. (1987, CA1 Mass) 814 F2d 22, CCH Fed Secur L Rep P 93187.
Failure of corporation to disclose its alleged participation in violation of foreign tax and exchange laws, in connection with transactions with certain foreign
corporations described as affiliates, is material omission within meaning of § 17(a) of Securities Act (15 USCS § 77q(a)) and § 10(b) of Securities Exchange Act (15
USCS § 78j(b)), since information has direct bearing on integrity of management, allegedly improper transactions are material from economic standpoint, and
practices engaged in by corporation and its customers pose substantial threat to their licenses upon which many of operations of corporation and its customers
depend. SEC v Jos. Schlitz Brewing Co. (1978, ED Wis) 452 F Supp 824, CCH Fed Secur L Rep P 96464.
Corporate president violated 15 USCS §§ 77q(a), 78j(b), and 78m(a) by filing corporate registration statements which were misleading in failing to disclose actual
financial condition, misappropriation, falsification of records, and systematic paybacks and unearned commissions. SEC v Benson (1987, SD NY) 657 F Supp 1122,
Shareholder states viable securities fraud claim against educational corporation, where corporation disclosed in subtle fashion fact that it was being investigated and
indicted for fraudulent participation in government loan/financial aid programs, because corporation may not suppress information about its employees' illegal acts,
and complaint at least raises question of whether material facts were withheld. Ballan v Wilfred American Educational Corp. (1989, ED NY) 720 F Supp 241, CCH Fed
Investors' securities fraud claim against pharmaceutical company will go to jury on main complaint that company's public statements about obtaining expeditious
FDA approvals for drug products were misleading to reasonable investor, because statements may have conveyed to reasonable investor false impression that
company had particular expertise and legitimate competitive advantage in obtaining FDA approvals when in fact it was succeeding through bribery. In re Par Pharm.,
Sec. Litig. (1990, SD NY) 733 F Supp 668, CCH Fed Secur L Rep P 95253 (criticized in Duncan v Pencer (1996, SD NY) CCH Fed Secur L Rep P 99043) and (criticized
in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505) and (criticized in In re Fine Host Corp. Sec. Litig. (1998, DC
Conn) 25 F Supp 2d 61, CCH Fed Secur L Rep P 90334).
To extent that cited statements did not constitute immaterial puffery, defendants' alleged omissions were not sufficiently connected to defendants' existing
disclosures to make those public statements misleading; it appeared that plaintiffs' theory was that statements in press releases were sufficiently connected to
undisclosed activity at time statements were made because success of investment bank's ongoing operations and its financial condition might be harmed if insider
trading scheme came to light and company or its executives were sanctioned; however, courts in Second Circuit required connection between illegal conduct and
allegedly misleading statements beyond simple fact that criminal conviction would have adverse impact upon corporation's operations in general or bottom line. In re
FBR Inc. Sec. Litig. (2008, SD NY) 544 F Supp 2d 346.
Defendants' boilerplate description of its regulatory risks could not have been misleading to reasonable investor as description said nothing company-specific, and no
reasonable investor would infer anything about state of company's regulatory compliance; rather all of information in warnings could be gleaned from Code of Federal
Regulations; significantly, (1) defendants never claimed that company was in full compliance with all regulations, or that it had no outstanding regulatory issues, (2)
of equal importance, defendants did not imply such full compliance by touting their compliance policies, or special corporate culture regarding compliance, and (3) in
addition, alleged regulatory violation related to single, isolated event, which did not involve significant percentage of investment bank's revenue. In re FBR Inc. Sec.
Litig. (2008, SD NY) 544 F Supp 2d 346.
Unpublished: Where stock purchasers asserted securities fraud claims based upon defendants' failure to disclose illegal activities engaged in by corporate officers,
claims were dismissed because: (1) remarks attributing corporation's success to its unique business model and convenience were immaterial puffery under Rule
10b-5, 17 C.F.R. § 240.10b-5; (2) failure to disclose risks inherent in unsustainable illegal practices was not material; and (3) defendants had no preexisting duty to
reveal information. Galati v Commerce Bancorp, Inc. (2005, DC NJ) CCH Fed Secur L Rep P 93610.
2.Issuer's Financial Condition

160. Generally
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for seller of corporation's stock to fail to disclose adverse information about corporation's
financial condition and prospects. Hanly v Securities & Exchange Com. (1969, CA2) 415 F2d 589, CCH Fed Secur L Rep P 92453.
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Sellers of securities who represented that financial condition of corporation was good when corporation actually was defunct violated SEC Rule 10b-5. SEC v
International Chem. Dev. Corp. (1972, CA10 Utah) 469 F2d 20, CCH Fed Secur L Rep P 93658.
Complaint states claim under 15 USCS § 78j(b) where it alleges that company knowingly misrepresented financial condition when it undertook to issue its stock to
person who, in reliance thereon, had become employee and also had transferred assets as part of transaction. Yoder v Orthomolecular Nutrition Inst., Inc. (1985,
Federally justiciable issue is raised, under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), by allegation that sale of all of stock of 2 separate corporations was
induced by direct specific representations as to combined net worth of 2 companies which was false. Special Transp. Services, Inc. v Balto (1971, DC Minn) 325 F
Supp 1185, CCH Fed Secur L Rep P 93121, 26 ALR Fed 491.
Failure of issuer of securities to disclose, in prospectus, problem which might reasonably be expected to have negative effect upon marketing activities violated §
10(b) of Securities Exchange Act (15 USCS § 78j(b)); fact that issuer had serious financial problems independent of marketing problem related to omission did not
render omission immaterial since it is not necessary that misrepresentation or omission be sole cause of loss complained of by person who purchased in reliance
upon prospectus, so long as problem which should have been revealed contributes to downfall of issuer. Blakely v Lisac (1972, DC Or) 357 F Supp 255, CCH Fed
Although person charged with violation of antifraud provisions of 15 USCS § 78j(b) was found to have represented to prospective securities buyers that issue of
securities had "turned its corner" and would show profit in near future, misrepresentation was not established since plaintiff offered no evidence of financial condition
of issuing corporation. Gordon v Burr (1973, SD NY) 366 F Supp 156, CCH Fed Secur L Rep P 94221, 18 FR Serv 2d 1112, affd in part and revd in part on other
grounds (1974, CA2 NY) 506 F2d 1080, CCH Fed Secur L Rep P 94874 (criticized in In re Leslie Fay Cos., Sec. Litig. (1996, SD NY) 918 F Supp 749, CCH Fed Secur L
Rep P 99242) and (criticized in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505) and (criticized in In re
MicroStrategy Inc. Secs. Litig. (2000, ED Va) 115 F Supp 2d 620, CCH Fed Secur L Rep P 91213).
Where transaction involves closely held stock, SEC Rule 10b-5 requires disclosure of such factors as corporation's original capital, profit or loss in business, and
assets and liabilities of corporation. Rude v Cambell Square, Inc. (1976, DC SD) 411 F Supp 1040, CCH Fed Secur L Rep P 95691.
Fact that security is redeemable at will does not necessarily excuse defendant from providing purchaser of security with long term information concerning financial
health of issuer. Re North American Acceptance Corp. Secur. In re North American Acceptance Corp. Sec. Cases (1981, ND Ga) 513 F Supp 608, CCH Fed Secur L Rep
P 97961.
As against motion to dismiss, plaintiffs' claim that defendants, investment advisor, stock brokerage firm, agent and account executive, failed to disclose substantial
losses incurred in active and continuous option trading over period of almost one year, states cause of action and satisfies non-disclosure and scienter requirements
under 15 USCS § 78j(b), as defendants are presumed to have had knowledge, considering magnitude of plaintiff's losses occurring over long period of time. Kaufman
v Magid (1982, DC Mass) 539 F Supp 1088, CCH Fed Secur L Rep P 98713.
Stock sellers did not make material omission of fact by informing buyer that sellers had lost major account before sale but did not disclose exact percentage of lost
sales, because sellers provided all relevant financial records to buyer and such records clearly show percentage information. Wollins v Antman (1986, ED NY) 638 F
Supp 989, CCH Fed Secur L Rep P 92895, affd (1987, CA2 NY) 814 F2d 654.
Investors in bonds for construction of 2 nuclear power plants state securities fraud claims under 15 USCS 78j(b) against utility companies where complaint alleges
companies' projections regarding their ability to pay bonds were fraudulent and companies had, or should have had, reason to doubt accuracy of projections. In re
Washington Public Power Supply System Sec. Litigation (1986, WD Wash) 650 F Supp 1346, CCH Fed Secur L Rep P 93202, affd (1987, CA9 Wash) 823 F2d 1349,
Former partners in casino venture have claim dismissed to extent they allege breach of fiduciary duty involving federal securities law, where partners argue that
defendants failed to disclose their own "incompetent, foolish and inefficient decisions" which led to construction cost overruns, because claims essentially grounded
on corporate mismanagement are not cognizable under 15 USCS § 78j(b). Walter v Holiday Inns, Inc. (1992, DC NJ) 784 F Supp 1159, affd (1993, CA3 NJ) 985 F2d
Investors' 15 USCS § 78j(b) claim against issuer relating to issuer's statements concerning its financial strength does not survive summary judgment, where reports
were correct when issued, were couched in cautionary language and recognized need for additional investment, since no reasonable investor would have been
misled. Rand v M/A-Com, Inc. (1992, DC Mass) 824 F Supp 242, CCH Fed Secur L Rep P 97794.
Shareholders satisfied Private Securities Litigation Reform Act pleading requirements as set forth in 15 USCS § 78u-4(b)(2) and Fed. R. Civ. P. 9(b) in pleading claim
for violation of § 10(b) of Securities Exchange Act of 1934, codified at 15 USCS § 78j(b), as complaint detailed several meetings giving rise to inference that
directors knew of possibility of company's bankruptcy and resignation of president, which would give rise to large severance package, when it issued annual report.
Arnlund v Smith (2002, ED Va) 210 F Supp 2d 755.
Where stock purchasers alleged that defendants made material misrepresentations regarding product's quality, product's demand, recognition of revenues, and
accounting for inventory, stock purchasers failed to adequately plead that defendants' sales of product were consignment sales and that there were actual transaction
that led to overstatements of revenue. In re Metawave Communs. Corp. Secs. Litig. (2003, WD Wash) 298 F Supp 2d 1056.
Investors failed to state claim against two individual defendants under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 for three reasons: (1)
investors failed to prove that defendants made false statements, as all of statements attributed to them, in regards to all of allegedly fraudulent actions at company,
were innocuous business puffery; (2) investors failed to prove either direct action or recklessness of defendants to constitute scienter, required state of mind for
securities fraud liability under Act; and (3) investors failed to plead their allegations against them with proper degree of particularity; specifically, investors engaged
in group pleading, instead of setting out with particularity each defendant's culpable conduct. In re Cable & Wireless, PLC (2004, ED Va) 321 F Supp 2d 749.
Press releases and Securities and Exchange Commission filings quoting comments by former chief executive officer were not actionable under 15 USCS § 78j(b)
where comments about company's industry leading growth, measurable progress, continuing improvements, and other similar comments were vague, unspecific
assertions of corporate optimism, and statements addressing company's expected resilience in face of mounting debt qualified as opinion or spin on potential to
survive financial slide, and and where common stock purchasers did not allege particularized grounds for disbelieving former officer's belief in what he was asserting
nor for questioning reasonableness of those projections based on information available to former officer. In re CornerStone Propane Partners, L.P. Sec. Litig. (2005,
ND Cal) 355 F Supp 2d 1069, CCH Fed Secur L Rep P 93103.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and SEC rule 10b-5, for broker to disclose nonpublic information regarding corporation's
financial status to selected clients; fact that cosmetics firm expected first quarterly loss in many years was material. In re Faberge, Inc. (1973) 45 SEC 249.
Broker-dealer, which sold stock of lock manufacturing corporation by informing prospective customers, inter alia, that corporation was in good financial condition and
was making money, whereas corporation in fact was in poor financial condition, had lost money for 2 preceding years, and was dependent upon subsidiary office
supply companies for most of its income, violated § 10(b) of Securities Exchange Act, 15 USCS § 78j(b)) and SEC Rule 10b-5. In re Elkind (1976) 46 SEC 361.
There is presumption of materiality for information concerning financial condition of company. In re Albert Glenn Yesner, CPA (2001) 2001 SEC LEXIS 978.
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161. Ability to pay dividends
Misrepresentation by purchaser of stock that company was not apt to pay dividends in future was material, and therefore violation of § 10(b) of Securities Exchange
Act (15 USCS § 78j(b)) and SEC Rule 10b-5, where thrust of fraud was to convince seller that neither company nor its stock had worth, that it was too poor to pay
dividends, and where that false statement persuaded seller to sell stock for pittance. Holdsworth v Strong (1976, CA10 Utah) 545 F2d 687, CCH Fed Secur L Rep P
In determining whether statements that stock was entitled to or likely to generate dividends were untrue or whether omission of dividend restriction was misleading,
standard to be used is whether, in light of facts existing at time reports were made, reasonable investor would have been misled by them. Shofstall v Allied Van
Lines, Inc. (1978, ND Ill) 455 F Supp 351.
Shingle theory, imposing liability under 15 USCS § 78j(b) on broker-dealer who sold security without disclosing that price at which he was selling was not reasonably
related to then-current fair market price of security, did not apply to common-law fraud actions brought under state law. Granite Partners, L.P. v Bear, Stearns & Co.
(1999, SD NY) 58 F Supp 2d 228, 1999-2 CCH Trade Cases P 72604, motion den sub nom ABF Capital Mgmt. v Askin Capital Mgmt. (2000, SD NY) 2000 US Dist
LEXIS 3633 (criticized in Hays v Equitex, Inc. (In re Rdm Sports Group, Inc.) (2002, BC ND Ga) 277 BR 415).
162. Availability of financial statement
Statement in offering circular relating to shares in unlimited partnership to effect that certain financial information would be distributed to shareholders within 180
days following close of each fiscal year did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 because such information was not
distributed until 260 days after close of given fiscal year where it was not shown that defendants knew or should have known, at time they prepared offering circular,
that they would fail to comply with representation. SEC v Geotek (1976, ND Cal) 426 F Supp 715, CCH Fed Secur L Rep P 95756, affd (1979, CA9 Cal) 590 F2d 785,
Dealer in "repurchase agreements", who leads lender to believe that dealer's financial statement is forthcoming when in fact dealer keeps no financial statements,
commits deceptive practice by nondisclosure of material facts; notwithstanding lender's assertion that he would have continued to do business with dealer in any
event, dealer's nondisclosure is material since lender would have viewed it as significantly altering total mix of information available. SEC v Miller (1980, SD NY) 495
163. Corporation's credit rating
Insiders violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 by failing to disclose proven ability of corporation to borrow from
reputable banking house and fact that corporation's sales far exceeded expectations; they further violated § 78j(b) and rule by use of report, distributed to
stockholders, which was not entirely accurate because method of accounting employed did not note potential profits. Baumel v Rosen (1969, CA4 Md) 412 F2d 571,
CCH Fed Secur L Rep P 92418, cert den (1970) 396 US 1037, 24 L Ed 2d 681, 90 S Ct 681 and cert den (1970) 396 US 1037, 24 L Ed 2d 681, 90 S Ct 688.
Representation by representative of bank, which had lent money to corporation, that bank would have lent additional money to corporation had shareholders not
decided to sell was one of fact rather than opinion for purposes of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, since
representative was in effect stating how bank's lending policies applied to present situation; similarly, representative's statements that relationship between bank and
corporation had always been satisfactory and that management of corporation ran above-average operation, and always met their obligations promptly, were
statements of facts; such statements were akin to representations as to financial condition and were clearly actionable under Act and Rule. First Virginia Bankshares
v Benson (1977, CA5 Ala) 559 F2d 1307, CCH Fed Secur L Rep P 96189, reh den (1977, CA5 Ala) 564 F2d 416 and cert den (1978) 435 US 952, 55 L Ed 2d 802, 98
S Ct 1580.
164. Earnings and profits
Earnings' picture of acquiring corporation in merger has to be of real significance to stockholders of corporation proposed to be acquired, and most current earnings
are of highest importance; accordingly, failure to convey such earnings accurately, if discrepancy is at all substantial, has to be material, within meaning of § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)), to person being misled. Republic Technology Fund, Inc. v Lionel Corp. (1973, CA2 NY) 483 F2d 540, CCH Fed Secur L
Forecast of corporate earnings constitutes material fact, under SEC Rule 10b-5, in that earnings constitute prime factor in estimating worth of corporation's stock,
especially when made close to end of fiscal year. Marx v Computer Sciences Corp. (1974, CA9 Cal) 507 F2d 485, CCH Fed Secur L Rep P 94904.
Economic prognostication, though faulty, does not, without more, amount to fraud within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC
Rule 10b-5; issuer of proxy statement did not violate Act and Rule by failing to disclose loss position where financial data presented in report conformed with system
employed by issuer's accountants under which initial nonrecurring costs were allocated pro-rata over life of program, rather than being charged off in their entirety at
beginning of program, particularly where statement gave fair warning that development and other start-up costs would depend for recovery upon future contracts.
Polin v Conductron Corp. (1977, CA8 Mo) 552 F2d 797, CCH Fed Secur L Rep P 95916, cert den (1977) 434 US 857, 54 L Ed 2d 129, 98 S Ct 178.
Where party to contemplated merger was primarily concerned that proposed merger would not result in earnings dilution, reliability of earnings projections of other
party was important, and it was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 to fail to disclose that earning estimates
might have been significantly overstated due to accounting gimmickry. Sundstrand Corp. v Sun Chemical Corp. (1977, CA7 Ill) 553 F2d 1033, CCH Fed Secur L Rep P
95887, cert den (1977) 434 US 875, 54 L Ed 2d 155, 98 S Ct 224, 98 S Ct 225.
Under standards applicable in 1976, time at which tender offer was made, tender offerer and management of target corporation do not violate 15 USCS §§ 78j,
78n(e) by failing to disclose with tender offer (1) assessments of value of target's stock that another firm interested in purchasing stock had prepared for tender
offerer and that had not been prepared by experts, had no adequately demonstrated basis in fact and had been prepared to encourage financing for other firm's
purchase of target's stock, (2) internal valuation by tender offerer of target's worth that had on bottom handwritten notations stating "Have expert appraise farm
land and equipment." and "Done--values confirmed," (3) valuation of target's stock prepared by its vice president, who testified that he had employed inflated or
optimistic land values and had had no expertise with regard to land appraisal, and (4) valuations of target's land holdings. Flynn v Bass Bros. Enters. (1984, CA3 Pa)
Individual who was chief executive officer, chairman of board, and principal shareholder of corporation violated antifraud (15 USCS §§ 77q(a), 78j(b)) and reporting
(15 USCS § 78m(a)) provisions of federal securities laws in connection with issuance of financial statements which included revenues calculated on prebilling
accounting method whereby income from sales not yet completed was recognized as current revenue, since individual had acted with scienter with respect to false
financial statements where accounting firm had told corporate officers that prebilling accounting method was improper but practice was continued, and even after
individual admittedly learned of impropriety of accounting practice, he still failed to purge subsequently issued financial statements of prebilled revenues. SEC v
Burns (1987, CA9 Cal) 816 F2d 471, CCH Fed Secur L Rep P 93235.
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Fact that controlling shareholders, in making tender for stock held by other shareholders, stated in tender statement that earnings for quarter would be excellent, as
opposed to saying that earnings were in fact excellent, was not material misstatement as required to form cause of action under SEC Rule 10b-5, given that tender
statement was issued before end of quarter, and thus properly characterized quarter's earnings. Ward v Succession of Freeman (1988, CA5 La) 854 F2d 780, CCH
Fed Secur L Rep P 94019, reh den, en banc (1988, CA5 La) 863 F2d 882 and cert den (1989) 490 US 1065, 104 L Ed 2d 629, 109 S Ct 2064.
Where nature of much of alleged inaccuracy in earnings derived from systematic fraud, described in detail, that extended to completely fictitious sales, this
distinguished it from cases where alleged Generally Accepted Accounting Principles (GAAP) violation consisted merely of questionable bookkeeping practices; it was
adequately pled that fraudulent revenue recognition rendered Securities and Exchange Commission (SEC) filings materially misleading. Bielski v Cabletron Sys. (In re
Cabletron Sys.) (2002, CA1 NH) 311 F3d 11, CCH Fed Secur L Rep P 92202.
In securities fraud suit, investors sufficiently alleged materiality and loss causation based upon corporation's subsidiary overstating earnings and corporation's press
statements. Gebhardt v ConAgra Foods, Inc. (2003, CA8 Neb) 335 F3d 824, CCH Fed Secur L Rep P 92445, reh den, reh, en banc, den (2003, CA8) 2003 US App
LEXIS 17920.
Where investors alleged fraud-on-the-market claim--specifically, that defendants had previously issued allegedly false "positive" statements regarding allegedly false
statements that concerned corporation's third-quarter earnings--those statements properly formed basis for fraud-on-the-market claim where subsequent negative
statement concerned significant revenue shortfall for third quarter that was 66 percent below estimates; accordingly, grant of summary judgment in favor of
defendants as to these statements was reversed. Greenberg v Crossroads Sys. (2004, CA5 Tex) 364 F3d 657, CCH Fed Secur L Rep P 92738.
Although overstatement of revenues in violation of Generally Accepted Accounting Principles may support plaintiff's claim of fraud, plaintiff must show with
particularity how adjustments affected company's financial statements and whether they were material in light of company's overall financial position; Plaintiffs
adequately pleaded fraud as to defendants' alleged misuse of Generally Accepted Accounting Principles protocols and alleged misstatements regarding employee
training and turnover to survive motion to dismiss for failure to state claim. Sparling v Daou (In re Daou Sys.) (2005, CA9 Cal) 411 F3d 1006.
Investors relied on sheer number of violations of Generally Accepted Accounting Practices and magnitude of financial restatements and claimed that company and its
officers were at least severely reckless; however, without more, court held that opposing inference of non-fraudulent intent--that these were mistakes by accounting
personnel undetected because of faulty accounting controls--was more compelling and investors complaint was properly dismissed for failure to state claim under 15
USCS § 78u-4(b)(2). W. Pa. Elec. Emples. Benefits Funds v Ceridian Corp. (In re Ceridian Corp. Secs. Litig.) (2008, CA8 Minn) 542 F3d 240, CCH Fed Secur L Rep P
94837.
Misrepresentations with regard to earnings of corporation, made for purpose of inflating market price of corporation's securities in connection with attempt to
purchase another corporation by exchange of stock, was misrepresentation of material fact in violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)).
Butler Aviation International, Inc. v Comprehensive Designers, Inc. (1969, SD NY) 307 F Supp 910, CCH Fed Secur L Rep P 92543, affd (1970, CA2 NY) 425 F2d 842,
Errors in accounting by defendants regarding financial status of plaintiff corporation do not constitute violation of 15 USCS § 78j(b), where correction of errors only
reduces size of corporation's losses, but does not affect in any way right of defendants to exercise their right to purchase stock of corporation in event of operation of
corporation at loss. Deaktor v Fox Grocery Co. (1971, WD Pa) 332 F Supp 536, 1971 CCH Trade Cases P 73736, affd (1973, CA3 Pa) 475 F2d 1112, CCH Fed Secur L
Rep P 93928, 1973-1 CCH Trade Cases P 74427, 17 FR Serv 2d 258, cert den (1973) 414 US 867, 38 L Ed 2d 86, 94 S Ct 65.
Annual report containing unaudited financial statement dated more than 6 months prior to date of its issuance and showing minor net loss violated Rule 10b-5 where
it failed to disclose that substantial operating losses were incurred between date of financial statement and date of issuance of report. Blakely v Lisac (1972, DC Or)
Mere speculations or opinions as to present value or future earnings did not constitute violations of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); mere
expectations or hopes were not material facts even if they materialized later. Rochez Bros., Inc. v Rhoades (1973, WD Pa) 353 F Supp 795, CCH Fed Secur L Rep P
93932, vacated on other grounds (1973, CA3 Pa) 491 F2d 402, CCH Fed Secur L Rep P 94339, CCH Fed Secur L Rep P 94386.
Where change in accounting procedure had significant effect upon such material information as income and earnings per share of corporation, proxy statement
containing financial statements compiled before and after change violated proxy provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), where it failed
to disclose accounting change made and effect thereof. Pierre J. Le Landais & Co. v MDS-ATRON, Inc. (1974, DC NY) 387 F Supp 1310, CCH Fed Secur L Rep P
94930, affd in part and revd in part on other grounds (1976, CA2 NY) 543 F2d 421, CCH Fed Secur L Rep P 95539, cert den (1977) 429 US 1062, 50 L Ed 2d 777, 97
S Ct 786.
In sale of corporation, alleged misrepresentation by seller that corporation was at or near break-even rate and in process of "turning around" from its financial
difficulties is not material misrepresentation where purchaser was relying on its own expertise to swing corporation into profitability, task at which it succeeded.
Pritchard Services Group, Inc. v International Tel. & Tel. Corp. (1985, SD NY) 612 F Supp 495, CCH Fed Secur L Rep P 91993.
In securities fraud action arising out of sale of all capital stock of small cosmetics company, where defendant-owners disclosed fact that previous year's gross sales
figure included account which had stopped doing business with company, identified account by name, described it as either "large" or "major" account, disclosed
circumstances surrounding account's departure, informed plaintiff purchaser of approximate monthly sales figure being achieved by company since departure of
account, and permitted plaintiff's accountant to review general ledger and cash book, defendants' failure to indicate precise amount of business attributable to lost
account did not constitute material omission of fact or breach of duty of disclosure. Wollins v Antman (1986, ED NY) 638 F Supp 989, CCH Fed Secur L Rep P 92895,
affd (1987, CA2 NY) 814 F2d 654.
Class of persons who purchased computer stock over 5-month span and then lost money when value of stock dropped is not entitled to relief under 15 USCS §
78j(b), where stock purchasers complain about vague expressions of optimism as to future performance, because there are sound historical and factual bases for
corporation's public statements of financial results and no facts support allegations that omissions by corporate insiders made misleading statements or that
statements were made other than in good faith. Alfus v Pyramid Technology Corp. (1990, ND Cal) 745 F Supp 1511, CCH Fed Secur L Rep P 95207.
Shareholders in pharmaceutical company may maintain action for violation of 15 USCS § 78j(b) against company arising from losses company sustained relating to
its acquisition, operation, and resale of generic drug company, where shareholders allege that (1) company failed to list subsidiary as significant impediment to its
profitability in SEC documents and public pronouncements, thus creating false perception and (2) company made optimistic statements concerning subsidiary's
profitability inconsistent with company's knowledge of subsidiary's poor performance, because combination of nondisclosure of problems and false statements of
optimism could work fraud cognizable under § 78j(b). Robbins v Moore Medical Corp. (1992, SD NY) 788 F Supp 179, CCH Fed Secur L Rep P 96588 (criticized in
Duncan v Pencer (1996, SD NY) CCH Fed Secur L Rep P 99043) and (criticized in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L
Rep P 99505) and (criticized in In re Gaming Lottery Sec. Litig. (1998, SD NY) CCH Fed Secur L Rep P 90236).
Investors' securities fraud action against corporation's controlling persons, alleging commission of securities fraud by making materially false and misleading
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projections about corporation's expected profitability, is dismissed, where through disclosures in 1993, corporation chronicled its performance since 1991 in effort to
understand origin of company's financial difficulties and where disclosures highlighted company's liquidity problems and strained relations with suppliers, all of which
led company to operate in "crisis mode" throughout 1991, because there is no indication that defendants were aware of, and concealed, problems in 1991, when
corporation made erroneous predictions now at issue. In re Crystal Brands Sec. Litig. (1994, DC Conn) 862 F Supp 745, CCH Fed Secur L Rep P 98726.
Shareholders' securities fraud action against corporation and its chairman is dismissed, where claim is based on chairman's statement that corporation was
"comfortable with" analysts' earnings estimates for third quarter and entire year, because purely predictive statement of comfort with analysts' projections lacks
materiality necessary to support action under 15 USCS § 78j(b). Pitten v Jacobs (1995, DC SC) 903 F Supp 937, CCH Fed Secur L Rep P 99023.
SEC's insider trading claim against corporation's general counsel is denied summarily, where counsel learned that corporation was revising its year-end earnings
estimate downward by zero to 2 percentage points, and where it had publicly downgraded earnings estimate 4 times during fiscal year, implied 8 period decline in
estimated fourth quarter earnings, and predicted continuation of negative factors, because information of zero to 2 percentage point decrease in year-end estimated
earnings would not have been viewed by reasonable investor as having significantly altered total mix of information available. SEC v Hoover (1995, SD Tex) 903 F
Shareholders satisfied requirement for stating securities fraud cause of action under 15 USCS § 78j with particularity, where shareholders claimed management of
corporation knew predictions of high revenue for balance of year were false, and alleged that during month after prediction was made officer sold his stock. McCarthy
v C-COR Elecs. (1995, ED Pa) 909 F Supp 970, CCH Fed Secur L Rep P 99054.
Securities fraud action against pharmaceutical company is not dismissed, where complaint alleges that company omitted to state that it had employed extraordinary
measures called "channel stuffing" to unusually inflate sales and earnings regarding its most profitable product in short term, because complaint adequately pleads
cause of action under 15 USCS § 78j. Harvey M. Jasper Retirement Trust v Ivax Corp. (1995, SD Fla) 920 F Supp 1260, CCH Fed Secur L Rep P 99015.
Investor's federal securities fraud complaint against pharmaceutical company will not be dismissed, where investor alleges that authorized accounting methods did
not permit company to immediately recognize sales revenues from consignment sales, and that unauthorized accounting overstated revenues for fiscal year by
approximately $ 3 million, and for subsequent quarter by at least $ 10 million, causing false inflation of price of stock, because court cannot say as matter of law that
alleged misrepresentation was not material. Marksman Partners, L.P. v Chantal Pharm. Corp. (1996, CD Cal) 927 F Supp 1297, CCH Fed Secur L Rep P 99265
(criticized in Epstein v Itron, Inc. (1998, ED Wash) 993 F Supp 1314, CCH Fed Secur L Rep P 90157).
Securities fraud claim based on computer security company's repeated statements that it was "on track" to meet analysts' revenue estimates for first quarter of 1999
must be repleaded or fail, even though such statements can be considered as statements of current business conditions not covered by any safe harbor for forward-
looking statements, because investors have so far failed to allege further facts explaining why these statements were false or misleading when made. In re Secure
Computing Corp. Sec. Litig. (2000, ND Cal) 120 F Supp 2d 810, CCH Fed Secur L Rep P 90999 (criticized in In re DDi Corp. Sec. Litig. (2005, CD Cal) 2005 US Dist
LEXIS 1056).
Restatement of earnings, without more, does not support strong inference of fraud or, for that matter, weak one; nevertheless, given magnitude of reported loss
reported and instances of manipulation in violation of generally accepted accounting principles asserted by named informants, complaint alleged with requisite
particularity facts to support strong inference of scienter sufficient to move ahead with discovery. In re Focus Enhancements, Inc. Secs. Litig. (2001, DC Mass) 309 F
Supp 2d 134.
Court did not hold that plaintiff must always allege specific amount of displaced revenues in order to state claim that undisclosed channel stuffing activities were
fraudulent; rather, court considered all circumstances, including lack of allegations of improperly recorded contingent sales and found that complaint resting on
allegations of channel stuffing alone must fail, especially when complaint fails to set forth actual extent that those sales practices affected net revenues. In re Trex
Co., Inc. Sec. Litig. (2002, WD Va) 212 F Supp 2d 596, CCH Fed Secur L Rep P 91921.
Trial court certified lawsuit--that was filed by several mutual funds, alleging that officers of corporation and corporation's wholly-owned subsidiaries violated 15 USCS
§ 78j(b) and 17 C.F.R. § 240.10b-5 when they misstated earnings--as class action where it found that parties proposal to establish settlement fund to compensate
shareholders who purchased stock in corporation was fair and it awarded plaintiffs 28 percent of value of settlement fund as attorneys' fees. In re IBP, Inc. Sec. Litig.
(2004, DC SD) 328 F Supp 2d 1056.
Statement that "Despite continued weak IT spending environment, we met third quarter targets we set in April" was actionable because in theory, securities
purchasers could empirically disprove statement by demonstrating that company did not actually meet financial targets that were set in April under Generally
Accepted Accounting Principles and under company's own accounting policies; similarly, statement that "In face of continued economic weakness, we were able to
achieve our targets this quarter due to solid execution of our key business initiatives" was also actionable. Orton v Parametric Tech. Corp. (2004, DC Mass) 344 F
Stock purchaser's claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), was dismissed as to chairman and two other directors where
accounting errors, though violations of Generally Accepted Accounting Principles (GAAP), were errors in accrual of income and expenses, not attempts to fabricate
revenue or conceal expenses; neither size nor type of errors entitled inference of fraud based on GAAP violations alone as to chairman and two other directors;
further, neither timing of stock sales, receipt of incentives (monetary bonuses and stock options), nor these defendants' positions supported inference of scienter. In
re AFC Enters. Sec. Litig. (2004, ND Ga) 348 F Supp 2d 1363.
Stock purchaser claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), was adequately pled as to chief financial officer (CFO) and company;
number and magnitude of Generally Accepted Accounting Principles violations suggested extreme departure from ordinary care by CFO with training as certified
public accountant and significant accounting, auditing, and reporting experience; purchasers alleged facts that supported strong inference that CFO knew or should
have known that company was improperly recording immediate gains on sales of company-owned stores to franchisees. In re AFC Enters. Sec. Litig. (2004, ND Ga)
348 F Supp 2d 1363.
Stock purchasers' claim against company under 15 USCS § 78j(b) failed, where they alleged that annual and quarterly financial statements issued by second
company (50 percent of common stock of which was owned by first company) during class period should have reported potential liability on breast implant claims of
$ 1,000,000,000 and should have recorded charge to second company earnings in that amount to cover potential liability exposure; to extent complaint reflected
theory that there was $ 1,000,000,000 liability exposure because implants had been sold to 800,000 women, it was not grounded on any real analysis of factual
record; further, during class period, facts about breast implant suits and claims were highly favorable to companies. In re Corning, Inc., Sec. Litig. (2004, SD NY) 349
F Supp 2d 698, CCH Fed Secur L Rep P 93056.
Securities purchasers could proceed with respect to misrepresentation concerning educational background of management official and post-initial public offering
(IPO) omissions concerning company's revenues and e-mail system; remaining alleged misrepresentations made after IPO consisted of representations of historical
facts and opinions by company's officers and as such, were not actionable. In re Initial Pub. Offering Sec. Litig. (2004, SD NY) 358 F Supp 2d 189, CCH Fed Secur L
Rep P 93001.
District court found that Colorado corporation, which claimed that Delaware corporation reported income it did not earn after its employees manipulated two
transactions, stated claims for relief under 15 USCS § 78j(b) and Colo. Rev. Stat. § 11-51-604(3) against Delaware corporation, but not its employees, where there
was no showing that employees were aware that their actions would materially alter overall financial picture Delaware corporation presented to public; court
dismissed Colorado corporation's claims under 15 USCS §§ 78r(a) and 78t(a) where it failed to show reliance on statements Delaware corporation made in
documents it filed with SEC, or that employees exercised management authority over Delaware corporation's reports; however, court refused to dismiss Colorado
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corporation's negligent misrepresentation claim. Shriners Hosps. for Children v Qwest Communs. Int'l, Inc. (2005, DC Colo) CCH Fed Secur L Rep P 93529 (criticized
in In re Alstom SA Sec. Litig. (2005, SD NY) 406 F Supp 2d 402).
Where plaintiff investors pleaded that statements were made by defendants, corporation and its executives, that warned of declining sales and worsening market
conditions, those allegations contradicted any inference that other statements were fraudulent or reckless, and claims under §§ 10(b), 20, of Securities Exchange Act
of 1934, 15 USCS §§ 78j(b), 78t, were dismissed. In re Sawtek, Inc. Secs. Litig. (2005, MD Fla) 19 FLW Fed D 238.
Where fraud alleged by Securities and Exchange Commission was in recognizing $ 53 million as revenue when defendant corporation's president knew, or was
reckless in not knowing, that amount was not realizable or fixed and determinable because of oral side agreement with telecommunications company, this was not
same as unactionable fraud claim predicated on future event; SEC's 15 USCS § 78j(b) and S.E.C. Rule 10b-5 claims against one insider, corporation's president, was
sufficiently pled because it claimed president authorized agreement that violated generally accepted accounting procedures and instructed his subordinates to obtain
purchase order for equipment sent to telecommunications company while knowing that price of equipment was uncertain because of side agreement, causing
corporation to improperly overstate its pre-tax income. SEC v Lucent Techs., Inc. (2005, DC NJ) 363 F Supp 2d 708, CCH Fed Secur L Rep P 93213.
Where financial officer was alleged to have responsibility for ensuring that financial statements for transactions occurring within customer business unit complied with
generally accepted accounting procedures (GAAP), she was made aware of oral side agreement with telecommunications customer that violated GAAP, and she
drafted or assisted in drafting two letters to chief accountant which indicated that there was no such oral side agreement, these allegations failed to meet pleading
requirements under "bright line" test for obvious reason that misstatement of $ 53 million as revenue was not alleged to have been made by and was not directly
attributed to her. SEC v Lucent Techs., Inc. (2005, DC NJ) 363 F Supp 2d 708, CCH Fed Secur L Rep P 93213.
Court declined to dismiss investor's § 10(b) of Securities Act of 1934 claim, where, viewing complaint's allegations in light most favorable to investors, complaint
alleged more than mere corporate mismanagement claims; gravamen of count rested upon corporate officers' and company's alleged failure to disclose material
information concerning company's financial situation by misrepresenting and falsifying company's earnings releases and periodic reports in attempt to mislead
potential investors. Marrari v Medical Staffing Network Holdings, Inc. (2005, SD Fla) 395 F Supp 2d 1169.
Where plaintiff investors' complaint identified several filings as overstating earnings and mischaracterizing pension obligations and which artificially inflated stock
price, allowing defendant chief executive officer (CEO) to profit by selling his shares, and alleged that CEO certified each filing, aggregation of alleged facts gave rise
to sufficient inference of severe recklessness for scienter under 15 USCS § 78u-4(b)(2) on investors' claims under § 10(b) of Securities Exchange Act of 1934, 15
USCS § 78j(b). In re Spear & Jackson Secs. Litig. (2005, SD Fla) 399 F Supp 2d 1350.
It was reasonable to infer that subsidiary's financial data were incorporated directly into parent company's public statements regarding specialist operations'
earnings, so even where parent company failed to explicitly identify information source misrepresentations were constructively attributed to subsidiary. In re Van Der
Moolen Holding N.V. Sec. Litig. (2005, SD NY) 405 F Supp 2d 388.
Where chief financial officer of corporation made public statements that first quarter would be low-water mark for corporation's performance for year and that
corporation would not have to worry about financing, statements were mere generalized expressions of puffery and optimism which were not actionable under
securities laws. Leykin v AT&T Corp. (2006, SD NY) 423 F Supp 2d 229.
Investor who alleged that corporation, its officers, and its directors misled investors by omitting statements showing corporation's significant reliance on
non-standard commissions in reporting its revenue and earnings failed to state claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and under
SEC Rule 10b-5, 17 CFR § 240.10b-5; investor failed to plead actionable omission where information was available through analyst reports, and defendants did not
have duty to disclose non-standard commissions on line item basis; also, alleged facts did not support investor's conclusion that adequate disclosure would have put
end to non-standard commissions. Iron Workers Local 16 Pension Fund v Hilb Rogal & Hobbs Co. (2006, ED Va) 432 F Supp 2d 571, CCH Fed Secur L Rep P 93853.
In marketing materials and newsletters, three investment companies and their chief operating officer issued materially false statements about performance of hedge
fund, which falsely inflated fund's assets and performance, in violation of § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and Rule 10b-5, 17 CFR §
240.10b-5(2005). SEC v Haligiannis (2007, SD NY) 470 F Supp 2d 373, CCH Fed Secur L Rep P 94146.
Where defendants were convicted of conspiracy, securities fraud, making false statements to U.S. SEC, and mail fraud, evidence was sufficient to show that
defendants made material misrepresentations for purposes of 15 USCS § 78j(b)because evidence was sufficient to establish that they were involved in two
transactions, which falsely boosted reinsurer's reported loss revenue, in that after reinsurer announced decrease in its loss reserves, defendants arranged two deals
whereby one reinsurer appeared to reinsure other, which created false impression to investors of reinsurer's financial health. United States v Ferguson (2008, DC
Conn) 553 F Supp 2d 145.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), for corporation, in course of acquiring assets of another corporation in exchange for its
stock, to omit from financial statement, used in respect to such acquisition, fact that corporation had executed promissory notes in excess of $ 750,000 to third
corporation, omission constituting misrepresentation of true value of corporation and its stock; where statement purported to be consolidated financial statement of
subsidiary as well as parent corporation, failure to list subsidiary liability was misrepresentation of true value of stock of parent corporation and violated § 10(b).
Gottlieb v Sandia American Corp. (1971, CA3 Pa) 452 F2d 510, CCH Fed Secur L Rep P 92971, cert den (1971) 404 US 938, 30 L Ed 2d 250, 92 S Ct 274.
Reasonable jury could have found actionable corporation's representation that there were no actual, material losses connected to lawsuits and responses to
regulatory scrutiny of corporation's tires; assuming truth of facts set forth in complaint, by time annual report was issued, over 2000 rollover accidents, 700 serious
injuries, and 170 fatalities had occurred yielding thousands of claims for and complaints concerning tire failures and corporation incurred numerous categories of
financial losses, including those affiliated with entering into numerous settlement agreements with injured parties involving compensation, absorbing cost of replacing
tires, and absorbing cost of adding nylon layer to its tires. City of Monroe Emples. Ret. Sys. v Bridgestone Corp. (2004, CA6 Tenn) 387 F3d 468.
Second representation from company's 1999 annual report that reasonable jury could have concluded was actionable was its effective representation that there were
no actual, material losses connected to lawsuits and responses to regulatory scrutiny of certain line of tires; losses already sustained as of March 2000, when annual
report was issued, were clearly facts reasonably (and actually) available to company in amount calculable with precision or near-precision as of March 2000. City of
Monroe Emples. Ret. Sys. v Bridgestone Corp. (2005, CA6 Tenn) 399 F3d 651, CCH Fed Secur L Rep P 93097, 2005 FED App 52P, reh den, reh, en banc, den (2005,
CA6) 2005 US App LEXIS 8053.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) was violated by seller of securities who failed to disclose certain negative information with respect to
financial condition of issuing company, such as fact that liabilities of company were substantially in excess of assets. Blasdel v Mullenix (1971, WD Okla) 356 F Supp
It was omission of material fact, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for seller of securities to fail to disclose existence of
liability not contained in balance sheet. Lane v Midwest Bancshares Corp. (1972, ED Ark) 337 F Supp 1200, CCH Fed Secur L Rep P 93466, 10 UCCRS 1114.
Failure of press release to disclose that corporation was in default of certain bank loan agreements was not omission of material fact, within meaning of § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)), where loan agreements had been amended to cure any event of default then existing; it was not materially misleading,
within meaning of § 10(b), for corporation to present cash flow status in release which was based upon data which excluded debts in litigation from working capital,
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those debts being treated as contingent rather than current liability, where that decision was in accordance with generally accepted accounting principles; letter to
shareholders which characterized foreign operations of corporation as contributing two-thirds of corporation's pre-tax operating earnings without disclosing
restrictions enveloping those earnings imposed by settlement agreement with bank did not violate § 10(b) since those restrictions were collateral to issue of earnings
and omission did not in any way cause statement to be misleading. United States v Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
In touting sale of securities, it was material omission, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, for defendants
to fail to advise potential purchaser of extent to which person controlling issuing corporation was in debt to defendants. Wassel v Eglowsky (1975, DC Md) 399 F
Supp 1330, affd (1976, CA4 Md) 542 F2d 1235 (ovrld in part by Baker, Watts & Co. v Miles & Stockbridge (1989, CA4 Md) 876 F2d 1101, CCH Fed Secur L Rep P
94454, 110 ALR Fed 83).
Failure to disclose that corporation had obligation amounting to $ 500,000 and did not have funds to meet that obligation if called upon to do so was omission of
material fact within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. IIT v Vencap, Ltd. (1975, SD NY) 411 F Supp 1094, CCH
Financial statement for limited partnership formed for purpose of conducting one of group of oil and gas exploration programs did not violate provisions of § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 in failing to state that certain property of partnership had been pledged for loans to be used for other
programs and for which partnership received no benefit where: (1) as to all but one such loan, pledges were inadvertently made, and loans were discharged prior to
date of distribution of financial statement to shareholders; and (2) partnership did receive benefit from remaining loan. SEC v Geotek (1976, ND Cal) 426 F Supp
715, CCH Fed Secur L Rep P 95756, affd (1979, CA9 Cal) 590 F2d 785, CCH Fed Secur L Rep P 96766.
Securities fraud complaint against bank and its managers alleging mismanagement will not be dismissed summarily, where pleadings claim failure to disclose
imprudent lending practices, to report loan repayments accurately, and to report bad business ventures, because complaint adequately points to specific facts either
inadequately or misleadingly disclosed, and actions of bank and its officers can amount to both breaches of fiduciary duty and violations of 15 USCS § 78j(b). First
American Bank & Trust v Frogel (1989, SD Fla) 726 F Supp 1292, CCH Fed Secur L Rep P 94788.
Investors in underwear manufacturer state viable securities fraud claim based on company's failure to disclose adequately its tax obligations and material impact
payment of those obligations would have on company, even though company stated publicly that (1) it was contesting statutory notices of deficiencies totalling more
than $ 100 million, (2) it believed its ultimate deficiency, before interest, would be substantially less than amounts asserted by IRS, and (3) it had adequately
provided for any additional taxes and interest, because facts may prove company's statements to have been materially misleading since it is alleged that company
knew that tax plus interest due IRS would total more than $ 100 million and require borrowing of funds. Endo v Albertine (1993, ND Ill) 812 F Supp 1479.
Shareholder's securities fraud claim under 15 USCS § 78j against insurance company is dismissed, where claim was based on company's failure to state in its annual
reports that it had not set aside reserves for incurred, but not reported, asbestos-related, other toxic tort, and environmental pollution losses, because in order to
state claim under § 78j, plaintiff must charge omissions which render misleading certain statements which were made, rather than, as here, simply omissions.
Gannon v Continental Ins. Co. (1996, DC NJ) 920 F Supp 566, CCH Fed Secur L Rep P 99238, RICO Bus Disp Guide (CCH) P 9223, 137 ALR Fed 667 (criticized in
Joseph v Wiles (2000, CA10 Colo) 223 F3d 1155, CCH Fed Secur L Rep P 91036) and (criticized in Rosenzweig v Azurix Corp. (2003, CA5 Tex) 332 F3d 854, CCH Fed
Jury properly convicted former CEO of world's third largest retailer of violating 15 USCS § 78j(b), and S.E.C. Rule 10b-5(b) because his making material omissions in
fulfilling Management's Discussion and Analysis requirements of S.E.C. Reg. S-K, Item 303, 17 CFR § 229.303, amounted to making false and misleading statements
in order to conceal cash liquidity crisis caused by corporate overbuy, which affected retailer's ability to timely pay vendors; however, even if omissions did not count,
adequate evidence of other false and misleading statements was introduced at trial to convict CEO of primary liability, as well as aiding and abetting liability pursuant
to 15 USCS § 78m, and neither judgment as matter of law under Fed. R. Civ. P. 50(b) nor new trial under Fed. R. CIv. P. 59 were warranted. SEC v Conaway (2010,
ED Mich) 698 F Supp 2d 771, CCH Fed Secur L Rep P 95580, findings of fact/conclusions of law, motion gr, in part, motion to strike den, injunction den (2010, ED
Mich) 695 F Supp 2d 534, CCH Fed Secur L Rep P 95622.
Investment company manager's heavy borrowings from banks in which he caused his investment company clients to keep their cash was material to investors, within
meaning of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. In re Steadman Secur. Corp. (1977) 46 SEC 896.
166. Reduction in minimum capital
Fact that repurchase of other subscribers' stock reduced capitalization of corporation to $ 165,000, which was only $ 10,000 below $ 175,000 minimum set forth in
letter to all subscribers as that considered to be necessary to initiate operations of corporation, did not render failure to disclose repurchase immaterial in light of fact
that estimated necessary minimum capital, as estimated by issuer, had already undergone significant reduction from original estimate of $ 500,000; under
circumstances further decrease would have been material to reasonable man. Hidell v International Diversified Inv. (1975, CA7 Ill) 520 F2d 529, CCH Fed Secur L
Rep P 95243.
167. Value of assets
Holder of securities taken in exchange for sale of business, which securities were later admitted to be overvalued at time of exchange but subsequently increased
beyond claimed price, will not be permitted to amend claim for damages for unjust enrichment or specific performance to obtain number of shares seller of business
would have received at time of sale had value not been misrepresented where such remedy would result in windfall to plaintiff and would unfairly prejudice defendant
by substantially altering theories of relief and expanding scope of discovery. Barrows v Forest Laboratories, Inc. (1984, CA2 NY) 742 F2d 54, CCH Fed Secur L Rep P
91614, 39 FR Serv 2d 1055.
Under standards applicable in 1976, time at which tender offer was made, tender offerer and management of target corporation do not violate 15 USCS §§ 78j,
78n(e) by failing to disclose with tender offer (1) assessments of value of target's stock that another firm interested in purchasing stock had prepared for tender
offerer and that had not been prepared by experts, had no adequately demonstrated basis in fact and had been prepared to encourage financing for other firm's
purchase of target's stock, (2) internal valuation by tender offerer of target's worth that had on bottom handwritten notations stating "Have expert appraise farm
land and equipment." and "Done--values confirmed," (3) valuation of target's stock prepared by its vice president, who testified that he had employed inflated or
optimistic land values and had had no expertise with regard to land appraisal, and (4) valuations of target's land holdings. Flynn v Bass Bros. Enters. (1984, CA3 Pa)
Claim that proxy statement, which resulted in merger of plaintiff minority shareholder's corporation with another, contained material omissions will be upheld where
proxy's omission of number of tons of coal reserves and amount of standing board feet of timber were two most valuable assets owned by corporation. Lockspeiser v
Western Maryland Co. (1985, CA4 Md) 768 F2d 558, CCH Fed Secur L Rep P 92208.
Corporation had no duty to rework inventory valuation with alternative accounting methods for proxy issued in connection with corporate merger. Kademian v Ladish
Co. (1986, CA7 Wis) 792 F2d 614, CCH Fed Secur L Rep P 92764.
District court did not abuse its discretion in admitting evidence concerning bogus account statements that were generated and disseminated several years after
victims had been induced to invest because § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), violations that were charged stemmed from defendant's
larger schemes to induce his clients to purchase securities or to use his clients' funds to purchase securities without their authorization, and bogus account
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statements were relevant evidence, under Fed. R. Evid. 401, with respect to charged securities law violations because statements provided jury with evidence both
that defendant had intended to defraud his clients and that he continued efforts to avoid detection by deceiving his clients about value of investments, and account
statements also indicated that defendant's actions in defrauding his clients were not simple mistakes but were instead part of larger, intentional scheme to defraud.
United States v Kelley (2009, CA2 NY) 551 F3d 171, CCH Fed Secur L Rep P 95031.
Parent corporation was liable in damages where it made written offer to minority stockholders to purchase their stock, without disclosing true value of inventory.
Speed v Transamerica Corp. (1951, DC Del) 99 F Supp 808.
Financial statement contained in prospectus contained material omissions of material fact in violation of SEC Rule 10b-5 where it set forth money judgment obtained
by issuing corporation but failed to disclose that judgment was probably uncollectible and where it described particular debts relating to certain assets in footnotes
without pointing out that certain of assets were worthless or that manufacturing had not been completed on others. Blakely v Lisac (1972, DC Or) 357 F Supp 255,
Failure of indenture trustee to reveal to investors that issuer had submitted false asset valuations to issuer's accountants in order to satisfy asset-liability ratio
stipulated in indenture, violation of which would bring about mandatory recall of debentures, was omission in connection with purchase and sale of securities since it
had effect of artificially inflating market price of debentures, it not being possible to characterize attendant bond transactions as incidental or ancillary to primary
alleged fraudulent scheme. Lewis v Marine Midland Grace Trust Co. (1973, SD NY) 63 FRD 39, CCH Fed Secur L Rep P 94206, 17 FR Serv 2d 1517.
Not only was it not improper, under 15 USCS § 78j(b) for corporation to fail to comment in proxy statement upon possibility that certain real estate included in its
assets may have had greater actual value than book value carried by corporation, but presentation of such different valuation would have been permissible only
when company (1) intended to dispose of such assets, and (2) had in its possession either offer to purchase such assets or reliable outside appraisal of value of such
assets. In re Brown Co. Sec. Litigation (1973, SD NY) 355 F Supp 574, CCH Fed Secur L Rep P 93803.
Seller of securities violated antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by using, in connection with sale, balance sheet which did
not reveal that legal title had not been transferred with respect to certain property listed, and which seriously inflated true worth of company. Smith v Manausa
(1974, ED Ky) 385 F Supp 443, mod on other grounds (1976, CA6 Ky) 535 F2d 353, CCH Fed Secur L Rep P 95556.
Nature and value of assets of privately held land development corporation, amount of land as yet unrented and development potential of that land, were material
facts, within meaning of SEC Rule 10b-5, since they clearly involved facts which would reasonably affect both value of shares and shareholder's decision to sell them.
Rude v Cambell Square, Inc. (1976, DC SD) 411 F Supp 1040, CCH Fed Secur L Rep P 95691.
Internal asset valuation by target company and its financial advisor in takeover attempt are not "material facts" where they contain facts and conclusions based on
speculation, assumptions and calculations that are imprecise and inaccurate. Radol v Thomas (1982, SD Ohio) 534 F Supp 1302, CCH Fed Secur L Rep P 98693.
In sale of corporation, value of good will represented on balance sheet provided by seller to purchaser, which good will had in fact been written off books of
corporation prior to negotiations, did not constitute material misrepresentation or omission where purchaser testified that he knew good will had been written off at
time of closing and was not at issue, and where alleged good will premium was negotiating device representing part and parcel of negotiated price for corporation.
Pritchard Services Group, Inc. v International Tel. & Tel. Corp. (1985, SD NY) 612 F Supp 495, CCH Fed Secur L Rep P 91993.
Securities fraud complaint against bank holding corporation survives motion to dismiss, where essence of claim is that corporation and several of its officers
deliberately understated loan loss reserves in order to artificially inflate profits and hence price of stock, because complaint at least minimally outlines specifics of
alleged fraud, and ties failure to provide adequate loan loss reserves to allegation that officers fraudulently failed to comply with banking practices they assured
investors they were following. Lerch v Citizens First Bancorp., Inc. (1992, DC NJ) 805 F Supp 1142, CCH Fed Secur L Rep P 97258.
Managed health-care company's listing of $ 4.5 million receivable as asset was not fraudulent attempt to post inflated financial results to mask its insolvency with
intent of misleading shareholders about company's financial worth, and, thus, did not amount to securities fraud under 15 USCS § 78j(b) and Rule 10b-5, where
consulting firm did not acknowledge its uncertainty about allowability of $ 4.5 million receivable until 2 months after it was booked. Vincelli v Nat'l Home Health Care
Corp. (In re Sunstar Sec. Healthcare Litig.) (2001, MD Fla) 173 F Supp 2d 1315.
Plaintiff stock investors' allegations made clear that need to write-down was so apparent to bottling company and its executives that failure to take earlier
write-downs amounted to fraud; in other words, plaintiffs had not merely seized figures used in subsequent financial statements to show that information should
have been disclosed earlier. Carpenters Health & Welfare Fund v Coca-Cola Co. (2004, ND Ga) 321 F Supp 2d 1342, CCH Fed Secur L Rep P 92822.
Allegations that audited financial statements and performance reports overstated net asset values (NAVs) of hedge funds stated claim under § 10(b) of Securities
Exchange Act of 1934, 15 USCS §§ 78a et seq., but only during period from April through fall 2002; disparity in calculation of NAVs and alleged self-dealing by
individual defendants during period justified inference that NAVs were overstated during that time. Fraternity Fund Ltd. v Beacon Hill Asset Mgmt. LLC (2005, SD NY)
Allegations that securities fraud defendants misrepresented in offering memoranda, audited financial statements, and meetings that they valued securities in hedge
funds using independent prices failed to state claim, as some of statements did not constitute promises to use independent prices and other statements were not
shown to have been false when made. However, claims that such misrepresentations appeared in due diligence questionnaires were alleged with sufficient
particularity to survive dismissal. Fraternity Fund Ltd. v Beacon Hill Asset Mgmt. LLC (2005, SD NY) 376 F Supp 2d 385, CCH Fed Secur L Rep P 93288.
SEC showed that there were material issues of fact as to whether engagement partner of audit firm acted with scienter for liability under 15 USCS § 78j where it
showed evidence in which jury could find that partner realized that abandonment of return on equity and margin normalization adjustments would have profound
effect on company's presentation of its financial condition; while evidence of partner's lack of motive to commit fraud was relevant and admissible at trial, SEC could
still sustain its burden at trial. SEC v KPMG LLP (2006, SD NY) 412 F Supp 2d 349.
As to claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), investors sufficiently pled, pursuant to Fed. R. Civ. P. 9(b) and Private Securities
Litigation Reform Act of 1995, that former directors and former administrator made materially false statement because investors (1) alleged that former
administrator actually prepared false statements, (2) alleged that former administrator knew that manager's valuations were false, but used those valuations
nonetheless to prepare false net asset value (NAV) statements, and distributed those statements directly to investors, (3) pled with sufficient particularity that
monthly NAV statements prepared by former administrator were misleading, and (4) alleged with particularity that monthly NAV statements published by former
administrator contained misstatements; further, allegations were sufficient to support inference that directors were insiders of former administrator who participated
in its misstatements of one of hedge funds' NAV because investors alleged that directors served on board on behalf of former administrator and participated in former
administrator's fund administration activities on behalf of that fund, including dissemination of monthly NAV statements. Pension Comm. of Univ. of Montreal Pension
Plan v Banc of Am. Sec., LLC (2006, SD NY) 446 F Supp 2d 163.
Where defendant corporation announced it needed to restate its earnings, it was admission that its public filings were false; given that no restatement had been filed
and there was no announcement of size of restatement, but plaintiff investors alleged planned write-down of nearly 22 percent as to total value for fixed assets,
investors had sufficiently pleaded falsity under § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), as required by Fed. R. Civ. P. 9(b) and 15 USCS §
78u-4(b)(2), part of Private Securities Litigation Reform Act. Kaltman v Key Energy Servs. (2006, WD Tex) 447 F Supp 2d 648.
Credit rating agency's motion to dismiss bank's 15 USCS § 78j(b) claim was denied where complaint did not allege that agency had come across information during
ratings review process that should have caused agency to refuse to give ratings it did regarding certain notes purchased by bank from company that later went
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bankrupt amid allegations of massive financial fraud. In re Nat'l Century Fin. Enters. (2008, SD Ohio) 580 F Supp 2d 630.
Misrepresentations as to issuer's assets are prohibited by Securities Exchange act. In re McClane & Co. (1963) 41 SEC 689.
Securities brokerage firm violated fraud provisions of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 where, in attempting to sell stock of
corporation to customers, it misrepresented assets of corporation; salesmen wrongfully represented that corporation had extensive land and buildings, and had
bought "the old FBI building" in Miami, and generally represented that corporation was very solid company with large assets. In re Tuffli (1976) 46 SEC 401.
Unpublished: Verdict that defendant violated § 17(a)(1) of Securities Act of 1933, 15 USCS § 77q(a), and § 10(b) of Securities Exchange Act of 1934, 15 USCS §
78j(b), was supported by ample evidence that defendant knowingly made materially misleading statements and knowingly withheld material facts about errors by
relevant funds' broker that affected valuation of funds' assets and materially harmed investors. SEC v Seghers (2008, CA5 Tex) CCH Fed Secur L Rep P 94889.
168. Value of contracts held by corporation
Accounting firm, which knowingly prepared financial statement which was misleading with regard to contracts under which issuer of securities purportedly was to
acquire property and resell it at substantial profit, was liable, in civil action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule
10b-5, to purchaser who acquired securities in part on basis of reliance upon financial statement. Herzfeld v Laventhol, Krekstein, Horwath & Horwath (1976, CA2
Securities fraud claim against manufacturer of focused-ion-beam (FIB) systems is denied summarily, even though investors allege manufacturer gave impression it
had order for more than $ 60 million of FIB equipment which ultimately became commitment for only about $ 21 million, because officer was not making actionable
misrepresentation in making his forward-looking statement of combined total of "order" for 75 FIB systems, 25 "firm" and 50 more as "booked." Geffon v Micrion
Corp. (1999, DC Mass) 76 F Supp 2d 134, CCH Fed Secur L Rep P 90727, affd (2001, CA1 Mass) 249 F3d 29, CCH Fed Secur L Rep P 91419.
169. Value of contributions to capital
Complaint which alleged that plaintiff was induced to make capital contributions to limited partnership by partners' misrepresentations concerning, inter alia, value of
their contributions and permanency of those contributions made out case for relief under SEC Rule 10b-5. McGreghar Land Co. v Meguiar (1975, CA9 Cal) 521 F2d
3.Others
170. Bonus agreements
Where terms of bonus agreement between corporation and certain large shareholders were clearly set forth in proxy statement, it was not violation of fraud provision
of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for statement to fail to state that agreement constituted reward for sale of corporation, since such
construction was one placed upon it by plaintiffs and did not constitute material fact which was required to be included in proxy statement; issuers of proxy
statement are not required to state true purpose of sale, or to set forth every possible construction that individuals could give agreement. Gollub v PPD Corp. (1977,
ED Mo) 435 F Supp 564, CCH Fed Secur L Rep P 96216, affd (1978, CA8 Mo) 576 F2d 759, CCH Fed Secur L Rep P 96450.
Investor cannot base securities fraud claim on undisclosed payment of $ 40,000 cash bonus to CEO of corporation which ultimately declared bankruptcy, even though
investor testified that knowledge of bonus would have prevented him from investing, because amount of cash paid out for bonus was so small in comparison to other
debts suddenly arising from major supplier's policy change, civil judgment, and back taxes assessment that payment of bonus could not have proximately caused
investment loss. Beltram v Shackleford, Farrior, Stallings & Evans (1989, MD Fla) 725 F Supp 499, CCH Fed Secur L Rep P 94888.
171. Control group plans
Failure of attorney of owners of stock in telephone company to disclose existence of control group, and of informal, long-range plan of control group to acquire
majority of stock and build company into marketable entity were material omissions within meaning of Rule 10b-5. Nelson v Serwold (1978, CA9 Wash) 576 F2d
Allegations that controlling shareholders of corporate bottling company had purchased shares of company from other shareholders so as to control 80 percent of
shares without disclosing that they had planned to acquire 80 percent of company's stock, that they wanted to form Subchapter S corporation, or that there was plan
to "freeze out" or "squeeze out" minority shareholders did not state causes of action under SEC Rule 10b-5 since these statements were not material within meaning
of Rule 10b-5 under principle that defendant's motive is not material "fact." Ward v Succession of Freeman (1988, CA5 La) 854 F2d 780, CCH Fed Secur L Rep P
94019, reh den, en banc (1988, CA5 La) 863 F2d 882 and cert den (1989) 490 US 1065, 104 L Ed 2d 629, 109 S Ct 2064.
Statement made by bank, during negotiations for acquisition of stock of another bank, that acquiring bank planned to run acquired bank as independent entity for at
least five years could not be considered materially misleading for purposes of action under § 78j(b) and Rule 10b-5, though acquired bank was merged into acquirer
two years after acquisition, since "agreement and plan of reorganization" entered into between banks and proxy statement and prospectus circulated by acquirer
made no time commitment for operating acquired bank as separate entity. Jackvony v Riht Financial Corp. (1989, CA1 RI) 873 F2d 411, CCH Fed Secur L Rep P
94361.
Assurances in prospectus that limited partnership investment trust would not purchase property from trustees or employees was material, under 15 USCS § 78j(b),
to investor of any experience because liquid and readily negotiable nature of assets of investment trust companies have traditionally offered many opportunities for
exploitation by unscrupulous management. Fox v Prudent Resources Trust (1974, ED Pa) 382 F Supp 81, CCH Fed Secur L Rep P 94826, 19 FR Serv 2d 447.
Bank officers and stockholders are not entitled to summary dismissal of 15 USCS § 78j(b) claims of sellers of bank stock, where defendants held positions of power
at 2 banks at time they negotiated purchase of plaintiffs' stock in closely held bank without disclosing future plans to merge banks, because extent to which merger
was planned and thus material at time of negotiation of sale of stock is close question of fact appropriately reserved for trial. Johnston v Wilbourn (1991, SD Miss)
172. Issuer's identity
In action under 15 USCS § 78j(b) alleging fraud in connection with offer and sale of coal leases, failure to disclose that person who signed preliminary geologist's
report as president of another company was not geologist is immaterial, since such fact is not so significant that reasonable investor would have attached importance
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to it. Freschi v Grand Coal Venture (1984, SD NY) 583 F Supp 780, CCH Fed Secur L Rep P 91404.
Where company owner hid fact that he controlled company in connection with having company stock publicly traded, SEC adequately pled claim for securities fraud
under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act, Rule 10b-5, and § 17(a) (15 USCS § 77q(a)) of Securities Act. SEC v C. Jones & Co. (2004, DC Colo)
312 F Supp 2d 1375.
It was violation of antifraud provisions of Securities Exchange Act for broker to make misrepresentations concerning actual identity of issuer. In re Lowenthal, Hale,
Jaffe, Inc., Securities Exchange Act of 1934, Release No. 10844, June 7, 1974, SEC Docket Vol 4, No. 11, p 383, 1974 SEC LEXIS 1150.
173.--"Silent" owners
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 for individual, who directly and indirectly through nominees owned or
controlled 17 percent of corporation's common stock, to conceal that fact from SEC, corporation's shareholders and investing public, to further conceal from those
parties extensive business dealings between corporation and individual and corporations controlled by him, and his representation on board of corporation; it was not
necessary to finding of violation of § 10(b) and Rule 10b-5 that business transactions had nexus with securities transactions; crux of violations was failure to disclose
transactions, stock holdings, and board of directors representations in annual reports, proxy materials, and required SEC reports relating to securities holdings. SEC
v General Refractories Co. (1975, DC Dist Col) 400 F Supp 1248, CCH Fed Secur L Rep P 95291, 1 Fed Rules Evid Serv 105.
174. Investment history
Failure of promoters to fully and completely disclose prior involvements in various, successive unsuccessful ventures is "material" in connection with new issue of
securities relating to start-up of similar venture; investors being called upon to invest their funds in new venture have right to know that individual promoters have
been associated with succession of unsuccessful ventures. Securities & Exchange Com. v Carriba Air, Inc. (1980, ND Ga) 516 F Supp 120, CCH Fed Secur L Rep P
97728, CCH Fed Secur L Rep P 97906, affd (1982, CA11 Ga) 681 F2d 1318, CCH Fed Secur L Rep P 98766, 10 Fed Rules Evid Serv 1636.
Securities analyst who was limited partner in underwriter of stock offering of corporation violated § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) in
failing to have prospectus amended to reflect fact that corporation had recently invested in stocks underwritten by underwriter. SEC v Scott (1983, SD NY) 565 F
Supp 1513, CCH Fed Secur L Rep P 99236, affd (1984, CA2 NY) 734 F2d 118, CCH Fed Secur L Rep P 91476.
175. Legality of corporate restructuring
In absence of suggestion that attorneys who gave opinion to company were incompetent, that they had failed to follow state decisions which were at variance with
their opinion, or that they were disqualified to give opinion because of interest or otherwise, claim in proxy statement, based upon opinion of properly qualified
outside counsel, which assert that corporation has power under state law to consumate merger, even if opinion is wrong, cannot be deemed to be misrepresentation
or concealment of material fact under SEC Rule 10b-5, inasmuch as statement is not manipulative or deceptive device. Voege v Magnavox Co. (1977, DC Del) 439 F
In investors' securities fraud action against issuer of corporate bonds in which jury deadlocked, issuer is granted judgment as matter of law, where issuer did not
disclose to investors before initial public offering that there was possibility that company would be split into 2 parts, but where no laws were violated in regard to
restructuring, because it was not reckless for issuer to fail to disclose and because investors failed to show that issuer acted with scienter. PPM Am. v Marriott Corp.
(1995, DC Md) 875 F Supp 289, CCH Fed Secur L Rep P 98671.
176. Maintenance of funds
Where offering circulars relating to number of separate oil and gas exploration programs each stated that money invested would be held in separate trust accounts,
and where, upon receipt, subscription funds were maintained in separate bank accounts but, upon disbursement to manager of programs, who managed all such
programs, funds were separately accounted for in manager's single bank account, issuer did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or
SEC Rule 10b-5, by failing to disclose that funds were not maintained in separate bank accounts after they were disbursed from program to manager. SEC v Geotek
(1976, ND Cal) 426 F Supp 715, CCH Fed Secur L Rep P 95756, affd (1979, CA9 Cal) 590 F2d 785, CCH Fed Secur L Rep P 96766.
177. Management interest in investments
Omission of management interest in corporate investments in connection with sale of securities was de minimis in that reasonable man, on objective contemplation,
would attach no significance to them in light of totality of corporation's activities, where corporation's 10 percent investment in mining company in which two officers
and directors owned 13.5 percent of outstanding stock, and corporation's interest in joint venture with company approximately 12.5 percent of whose stock was held
by directors, totaled less than 1 percent of corporation's total investments. Kin-Ark Corp. v Boyles (1979, CA10 Okla) 593 F2d 361, CCH Fed Secur L Rep P 96789.
Security fraud claim must be dismissed to extent it targets transactions involving acquisition of several factory outlet centers in December 1993, where gist of claim
is that centers were purchased at inflated prices from entities owned or controlled by certain corporate insiders, because only factual basis for allegation is
prospectus for those transactions, which states that "certain unnamed affiliated entities were part of group" owning centers but also discloses all relevant interests of
insiders without indicating any interest in centers. In re FAC Realty Sec. Litig. (1997, ED NC) 990 F Supp 416.
178. Modification of bylaws
Modification of bylaws of corporation so as to make it more difficult to call special shareholders' meeting was not such information as was likely to affect investment
decision of reasonable investor and therefore did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); and recapitalization which was mere change in
corporate form and did not result in changing of voting control of corporation was not change of substance so as to be material within meaning of § 10(b), such
change, even though complicated, could not reasonably be expected to affect investment decision of reasonable man, particularly where market in corporation's
securities was depressed, if not nonexistent. United States v Koenig (1974, SD NY) 388 F Supp 670, CCH Fed Secur L Rep P 94765.
179. Resignation of directors
Under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), it was fraudulent not to reveal that director had resigned, and that corporation had received letter
demanding payment of loan by lender who had refused to accept stock in corporation in payment thereof. Royal Air Properties, Inc. v Smith (1962, CA9 Wash) 312
F2d 210 (criticized in Go2net, Inc. v Freeyellow.Com, Inc. (2005, Wash App) 109 P3d 875).
180. Use of corporate funds
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Failure to reveal that officer of corporation intended to use substantial portion of funds being invested in corporation for own personal use was omission of material
fact within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. IIT v Vencap, Ltd. (1975, SD NY) 411 F Supp 1094, CCH Fed
Federal securities fraud claims by investors in oil and gas limited partnership will not be summarily dismissed, where investors allege promoters of partnership
represented that between 112 and 115 wells would be drilled when in fact partnership became involved in only 6 wells, because jury could infer that prediction as to
number of wells was not reasonably justified and was actionable under 15 USCS §§ 77l (2), 77q(a) and 78j(b). Fisher v Samuels (1988, ND Ill) 691 F Supp 63, CCH
Shareholder's amended securities fraud complaint against toy corporation and related officials and entities will not be dismissed, despite assertion that no material
information about corporate transactions was concealed or withheld, because allegations that press release and subsequent quarterly reports failed to disclose
transfer of funds from borrower from corporation to its financially troubled subsidiary, contemplated exchange of collateral securing corporate loan. Brickman v Tyco
Toys, Inc. (1990, SD NY) 731 F Supp 101, CCH Fed Secur L Rep P 94890.
Company president's general prediction of growth and his failure to discuss extent of problems in company's billing system were not material, and, thus, were not
actionable under 15 USCS § 78j(b) and Rule 10b-5, where any pejorative description of company's billing system would not have altered total mix of information
available to market. Krim v Coastal Physician Group, Inc. (1998, MD NC) 81 F Supp 2d 621, affd (1999, CA4 NC) 201 F3d 436, reported in full (1999, CA4 NC) 1999
US App LEXIS 29326.
Jury could have reasonably found that descriptions of primary uses in offering circulars were misleading, in violation of § 17(a) of Securities Act of 1933, 15 USCS §
77q(a), and § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), where circulars stated that note proceeds would be used primarily for loans to local
church congregations and in part for other purposes but where less than 25 percent of assets were held in form of loans to local church congregations and that
percentage continued to decline. United States SEC v Church Extension of Church of God (2005, SD Ind) 429 F Supp 2d 1045.
C.Particular Misstatements or Omissions As to Security or Transaction

181. Generally
Under antifraud provisions of Securities Exchange Act, statement contained in information designed to persuade investing public to purchase one security, but which
results in purchase of another security, as, for example, where information relates to common stock of given issuer, and, relying upon such information, investor
purchases preferred stock of same issuer, is nonetheless fraudulent with respect to such purchase. Fischman v Raytheon Mfg. Co. (1951, CA2 NY) 188 F2d 783.
Publication of story regarding compromise between banking organizations which would greatly improve passage of cross-county banking legislation did not relieve
banking company from disclosing compromise to shareholders during negotiations for sale of stock, where publication in two Indianapolis newspapers on one
occasion cannot reasonably be expected to have made Michigan shareholders aware of compromise. Powell v American Bank & Trust Co. (1986, ND Ind) 640 F Supp
Investors' purchase of Government National Mortgage Association (GNMA) certificates (GNMA) "forwards" was not extension of credit by securities firm without
disclosing terms in violation of 15 USCS § 78j(b) and Rule 10(b)(16), where there was no debt obligation for investors to pay purchase price due and owing on trade
date. Abeles v Oppenheimer & Co. (1986, ND Ill) 662 F Supp 290, CCH Fed Secur L Rep P 92517, affd (1987, CA7 Ill) 834 F2d 123, CCH Fed Secur L Rep P 93534.
182. Ability to redeem notes
Where underwriter makes implied representation that it has reasonable grounds for belief that notes sold will be paid at maturity, and it can be fairly inferred that no
purchaser would buy notes from underwriter if he knew, as underwriter could easily have discovered, that issuer's financial records were fraudulent, representation is
material. Sanders v John Nuveen & Co. (1975, CA7 Ill) 524 F2d 1064, CCH Fed Secur L Rep P 95347, vacated on other grounds (1976) 425 US 929, 48 L Ed 2d 172,
96 S Ct 1659.
183. Broker's qualifications
It is material misrepresentation significantly altering total mix of information to be considered by investor for broker trainee to represent himself as broker or
"specialist". Marbury Management, Inc. v Kohn (1980, CA2 NY) 629 F2d 705, CCH Fed Secur L Rep P 97357, cert den (1980) 449 US 1011, 66 L Ed 2d 469, 101 S Ct
566 and (criticized in Rieger v Drabinsky (In re Livent, Inc. Noteholders Sec. Litig.) (2001, SD NY) 151 F Supp 2d 371, CCH Fed Secur L Rep P 91495) and (criticized
in Lentell v Merrill Lynch & Co. (2005, CA2) 396 F3d 161, CCH Fed Secur L Rep P 93077).
Even presuming that securities exchange can be liable to customer of member for failing to reveal financial instability of member, liability cannot be based on fact
that exchange had censured member some time in past for inadequacy of accounting system because such censure would not establish that accounting procedures
were still insufficient at time of alleged violation or that exchange had knowledge of deficiencies, if any. New York Stock Exchange, Inc. v Sloan (1975, SD NY) 391 F
184. Broker's fees
Allegation that director failed to disclose that broker's or finder's fee to be paid to him for obtaining financing for corporation was grossly in excess of value of
services, and contrary to customary usage, stated cause of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Hoff v Sprayregen (1971, SD NY)
In investor's securities fraud suit regarding investment company's portfolio management program, investor sufficiently alleged claim under § 10(b) of Securities
Exchange Act of 1934, 15 USCS § 78j(b), based upon passing along Securities and Exchange Commission fees and rounding up of fees. Morris v Wachovia Secs., Inc.
(2003, ED Va) 277 F Supp 2d 622.
Mutual fund investors failed to state claim against broker-dealer and mutual fund distributor for securities fraud based on funds' use of shelf-space agreements,
under which broker sold only funds that entered into revenue-sharing agreements with broker-dealer, because possibility of such agreements was disclosed in
prospectus. Hoffman v UBS-AG (2008, SD NY) 591 F Supp 2d 522, CCH Fed Secur L Rep P 94882.
In suit arising from sale of private securities, selling agent's complaint met Fed. R. Civ. P. 9(b)'s pleading standards for fraud in inducement because such claims were
not based on scheme liability, and claims for violations of 15 USCS § 78j(b) and Fla. Stat. § 517.301--based on omissions of material fact, i.e., failure to disclose
amount of sales commissions payable to brokers--were not barred by Florida's economic loss rule. Sierra Equity Group, Inc. v White Oak Equity, LLC (2009, SD Fla)
650 F Supp 2d 1213.
185. Conversion rights
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Issuer of debentures is not liable under SEC Rule 10b-5 for failing to make specific reference in prospectus to provision of indenture affecting conversion rights upon
merger, where issuer's failure to disclose either provision or other sales materials is no more than simple negligence. Broad v Rockwell International Corp. (1981,
CA5 Tex) 642 F2d 929, CCH Fed Secur L Rep P 97956, cert den (1981) 454 US 965, 70 L Ed 2d 380, 102 S Ct 506.
SEC Rule 10b-5 by its terms proscribes omissions which are misleading, and it can make no difference whether defendants gained prohibited advantage by exercising
option to redeem convertible debentures, or by sitting back to wait for passage of time or until redemption date to accomplish same end, as in instant case. Green v
Hamilton Int'l Corp. (1977, SD NY) 437 F Supp 723, CCH Fed Secur L Rep P 96192.
186. Dividend and interest payments
Corporation, which accepted terms of stockholder's request that corporation repurchase stockholder's share in corporation, without bargaining as to those terms, and
whose role in transaction was entirely passive, did not have obligation, under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), to disclose impending stock
dividend. Hafner v Forest Laboratories, Inc. (1965, CA2 NY) 345 F2d 167.
It was not violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) to sell stock in corporation without disclosing likelihood that corporation would withhold
usual dividend. Christophides v Porco (1968, SD NY) 289 F Supp 403, CCH Fed Secur L Rep P 92253.
Information which is material, requiring disclosure under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), includes information about earnings and
distributions of stock being sold. Securities & Exchange Com. v Shapiro (1972, SD NY) 349 F Supp 46, CCH Fed Secur L Rep P 93623, affd (1974, CA2 NY) 494 F2d
It is misstatement of material fact, deceptive potential of which is clear, to state in advertisement for securities that interest on certificates being sold will be paid
every 3 months where such certificates state that beneficiaries shall receive from trust estate interest at given rate when, as, and if available. SEC v M. A. Lundy
Associates (1973, DC RI) 362 F Supp 226.
Seller of municipal bonds violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by falsely representing that payment of interest and principal on certain
bonds was guaranteed by state and federal governments; by failing to disclose that issuers of certain bonds were experiencing severe financial difficulties which
adversely affected likelihood of their continued payment of interest and principal; and by failing to disclose that rate of interest of certain bonds was negligible, being
only fraction of 1 percent. SEC v Charles A. Morris & Associates, Inc. (1973, WD Tenn) 386 F Supp 1327, CCH Fed Secur L Rep P 93756.
Security seller's omission in discussion with purchaser of restriction against dividends imposed by Interstate Commerce Commission was misleading in light of
defendant's affirmative representation that stock was entitled to dividends when declared by board of directors. Shofstall v Allied Van Lines, Inc. (1978, ND Ill) 455 F
Supp 351.
Seller of 50 percent interest in mining company may be liable to purchaser for failing to disclose that dividend of company was viewed unfavorably by banks and
rendered continuation of trading at current level impossible. Anschutz Corp. v Kay Corp. (1981, SD NY) 507 F Supp 72, CCH Fed Secur L Rep P 97849.
Summary judgment is improper on investors' securities fraud claim against corporation which denied their right to be paid quarterly cash dividend, where investors
are former holders of corporation's Series C Cumulative Convertible Exchangeable Preferred Shares who converted their shares after declaration of cumulative
quarterly cash dividend but before dividend's payment date, because claim that corporation breached obligation to truthfully represent material facts concerning
payment of dividends cannot be dismissed at this stage since meaning of corporation's disclosures regarding dividends must be determined. Lafer Amster & Co. v
Stone Container Corp. (1988, SD NY) 690 F Supp 1356, CCH Fed Secur L Rep P 93995.
Statements made by officials of owner and developer of outlet shopping malls to analysts that dividend was "sacred" and "sacrosanct," and that company considered
paying dividend akin to "contractual obligation" were not actionable under 15 USCS § 78j(b) when dividend was not paid, since statements were mere puffery or
projections, and owner did not control analysts to whom comments were made. Graff v Prime Retail, Inc. (2001, DC Md) 172 F Supp 2d 721, CCH Fed Secur L Rep P
91633.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for securities broker to sell substantial quantities of stock in customers' discretionary
accounts, and to make short sales on behalf of discretionary accounts, upon learning that corporation's upcoming dividend would be reduced below usual level where
such sales were made before that information had been made available to public. In re Cady Roberts & Co. (1961) 40 SEC 907.
187. Existence of options
Executor, who sued company hired to conduct post-merger cleanup (administrator), did not meet his burden of proving that administrator violated § 10(b) of
Securities Exchange Act of 1934, 15 USCS § 78j(b), or 17 CFR § 240.10b-5 because he failed to show he relied on information administrator provided and that he
was misled by it. Starr v Georgeson S'holder, Inc. (2005, CA2 NY) 412 F3d 103.
Where defendants held "options" to purchase corporation's stock, but "option" agreement provided that, when stock was sold to third persons found by defendants,
corporation would pay defendants difference between sale price and option price, it was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for
defendants to persuade plaintiffs to purchase stock of corporation through falsely representing that plaintiffs were to purchase as defendants' nominees and that
defendant would pay for shares; defendants also omitted to state material facts, within meaning of Act and Rule, in failing to disclose existence of "option", since
reasonable person would attach controlling significance to fact that person asking him to buy as his nominee actually holds option to purchase identical shares, for
substantially lower price. Weitzman v Stein (1977, SD NY) 436 F Supp 895, CCH Fed Secur L Rep P 96159.
Where administrator of post-merger clean-up offered to exchange shares for fee, administrator's failure to disclose free alternative means of post-merger share
exchanges was not actionable misrepresentation, especially since previous notices were sent by corporation advising of cost-free exchanges available to
shareholders, and minimal diligence would have discovered alternative cost-free exchange means. Starr v Georgeson S'holder, Inc. (2003, SD NY) 287 F Supp 2d
188. Factors affecting underlying capitalization
Failure of accountant, appointed by corporation to negotiate purchase of stock in corporation from former officer, to volunteer information in detail on matters
pertaining to company's pension plan or method of treating annuities funding on books was not improper even though, if annuities were otherwise treated, their
reflection on book value of each share would have given seller better bargaining position. Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486.
Statement, in connection with public distribution of stocks, that all shares would be sold only for cash, when in fact large blocks of stock were issued to attorney and
to brokers in payment for their services, constituted fraud in connection with sale of securities in violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
and SEC Rule 10b-5. SEC v Manor Nursing Centers, Inc. (1972, CA2 NY) 458 F2d 1082, CCH Fed Secur L Rep P 93344, 28 ALR Fed 781.
It was violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for underwriter of "all or none" best efforts public offering to declare
that required minimum amount was raised without disclosing that part of that amount was raised through short-term bank loans rather than bona fide sales to
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investors since that fact would reflect upon fair value of shares in open market and would thus be important matter to investors. A. J. White & Co. v SEC (1977, CA1)
Physician and others who formed corporation to market drug and engaged in telephone and writing campaign to sell stock in company, neglecting to tell potential
purchasers of stock that corporation had agreed to pay physician salary of $ 100,000 per year, had agreed to pay promoter of stock salary of $ 75,000 per year, and
had agreed to reimburse physician for research expenses of $ 100,000 plus paying him $ 100,000 and 10 percent of royalties for assignment of patent application on
drugs, violated SEC Rule 10b-5. Reube v Pharmacodynamics, Inc. (1972, ED Pa) 348 F Supp 900, CCH Fed Secur L Rep P 93704.
It is misleading misstatement of material fact for seller of securities to state, in letter sent to prospective investors, that securities being sold are secured by assigned
first mortgage where investors were to pay price of certificates to trustee of trust underlying such certificates, whereupon trustee would loan money received and
then obtain assignments of particular mortgages. SEC v M. A. Lundy Associates (1973, DC RI) 362 F Supp 226.
Fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) were not violated by failure of prospectus relating to municipal bonds issued to obtain
capital to construct nursing home project to reveal substantial difference in contract price to be paid to prime contractor, and price to be paid for substantially all
work by prime contractor to subcontractor; however, provisions were violated by failure of prospectus to disclose: (1) fact that firm which provided favorable
feasibility report was founded and controlled by individual who had strong financial interest in success of project; (2) that firm hired as fiscal adviser to corporation
formed to operate nursing home was not recognized expert in municipal finance as represented, and that firm also was owned by individual with strong financial
interest in success of project; and (3) underwriting firm for distribution was owned by person with strong financial interest in success of project. SEC v Senex Corp.
(1975, ED Ky) 399 F Supp 497, CCH Fed Secur L Rep P 95001, affd (1976, CA6 Ky) 534 F2d 1240.
Securities fraud claim cannot be premised on nondisclosure of plan to issue shares in lieu of compensation, where grievance is that nondisclosure of alleged intention
to give stock to comedians in exchange for pitching products on "infomercials" failed to alert investor to risk of substantial dilution, because private placement
memorandum did warn that 2 million shares were reserved for issuance to comedians at prices fixed at discretion of board, and to extent that is misleading it is not
materially so. Fisk v SuperAnnuities (1996, SD NY) 927 F Supp 718, CCH Fed Secur L Rep P 99261 (criticized in Vannest v Sage, Rutty & Co. (1997, WD NY) 960 F
Supp 651, CCH Fed Secur L Rep P 99479, 37 FR Serv 3d 1174) and (criticized in Goodwin Props., LLC v Acadia Group, Inc. (2001, DC Me) 2001 US Dist LEXIS 9975)
and (criticized in Laser Mortg. Mgmt. v Asset Securitization Corp. (2001, SD NY) CCH Fed Secur L Rep P 91535) and (criticized in Faye L. Roth Revocable Trust v UBS
Painewebber Inc. (2004, SD Fla) 323 F Supp 2d 1279, CCH Fed Secur L Rep P 92848, 17 FLW Fed D 720).
189. Financing of purchase
Complaint alleging that defendant, plaintiff's broker, with knowledge of discount corporation's questionable financial practices, did knowingly and falsely represent to
plaintiff that means of financing recommended by defendant for plaintiff's purchase of stock was usual and proper means of financing and represented no greater risk
to plaintiff than usual margin transaction stated claim for relief under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Glickman v Schweickart & Co. (1965,
SD NY) 242 F Supp 670.
Where investors alleged that company failed to disclose that it had extended loan guarantees to customers to purchase ships, omission was actionable because
omission affirmatively created impression of state of affairs that differed in material way from one that actually existed. In re Alstom SA Secs. Litig. (2005, SD NY)
406 F Supp 2d 433.
190. Identity of purchaser
Under certain circumstances, failure to disclose identity of true purchaser of stock may affect reasonable person's decision to sell, and may constitute violation of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Ehrler v Kellwood Co. (1975, CA8 Mo) 521 F2d 1347, CCH Fed Secur L Rep P 95271.
Where identity of purchaser of securities is material because purchaser is aware of some fact which is unknown to seller, disclosure of his identity becomes
necessary; however, SEC Rule 10b-5 is not violated by failure to disclose identity where sole reason for concealing identity is seller's dislike of purchaser rather than
purchaser's being privy to something unknown to seller which would materially enhance value of stock. Barnett v Kirshner (1975, CA2 NY) 527 F2d 781, CCH Fed
Identity of purchasers of corporate stock was not material fact requiring disclosure by corporate insider under § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
where sellers had been soliciting sales to insiders and other stockholders long before insiders had sold their stock and where sellers were required first to offer their
stock to other stockholders, including insiders, and where it further appeared that sellers did not care who bought their shares. Ross v Licht (1967, SD NY) 263 F
Supp 395.
In selling pledged securities of defaulting borrower, bank has no duty, under federal securities laws, to provide borrower with advance notice of identity of purchaser
since such information is not material, notwithstanding that information may be of interest to particular borrower insofar as it might affect balance of shareholder
voting strength. Dopp v Franklin Nat'l Bank (1974, SD NY) 374 F Supp 904, CCH Fed Secur L Rep P 94484, 14 UCCRS 866.
Financial columnist did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 by failing to reveal, in column regarding corporation,
that he purchased stock of corporation. Zweig v Hearst Corp. (1976, CD Cal) 407 F Supp 763.
There is no material deception practiced in violation of SEC Rule 10b-5 where purchasers conceal their identities merely because of seller's animosity, since personal
prejudice does not fall within protection of Rule. In re Cook & Co., Inc. (1980) 47 SEC 262.
191.--Insiders
Where seller of securities was experienced and successful investor who actively solicited sales to other persons, including director of company, seller did not ask
broker whether any insiders were bidding for stocks in corporation and only restriction placed upon broker related to price, broker, who knew that two directors were
bidding for stocks but did not think it necessary to inform seller, did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 by reason
of nondisclosure. List v Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR3d 782, cert den (1965) 382 US 811, 15 L Ed 2d 60, 86 S Ct 23, reh den (1965) 382
US 933, 15 L Ed 2d 344, 86 S Ct 305.
It was not violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for prospectus, relating to tender offer of corporation made to minority shareholders, to
fail to disclose that directors of corporation, who were not participating in offer, had purchased shares of corporation during past year where small percentage of
outstanding shares was purchased and purchases were made at prevailing market prices, and where aggregate total of shares held by directors and officers was set
forth in prospectus. Kaufmann v Lawrence (1974, SD NY) 386 F Supp 12, CCH Fed Secur L Rep P 94908, affd (1975, CA2 NY) 514 F2d 283.
192.--Purchaser's plans
It is not violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for purchaser of convertible debentures of corporation to fail to disclose that he is already
or intends to become shareholder of corporation. Frigitemp Corp. v Financial Dynamics Fund, Inc. (1975, CA2 NY) 524 F2d 275, CCH Fed Secur L Rep P 95323.
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Shareholders of acquired corporation who sought and obtained best price for their stock, receiving purchase price in excess of twice book value of corporation, did
not have cause of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 because of failure of purchaser to disclose that half of
stock acquired would immediately be sold to individual who previously had been president of acquired corporation where sellers were aware of fact that former
president was to get some rights to purchase stock and did not inquire how much stock he was to purchase. Ehrler v Kellwood Co. (1975, ED Mo) 391 F Supp 927,
affd (1975, CA8 Mo) 521 F2d 1347, CCH Fed Secur L Rep P 95271.
193. Identity of seller
Failure to inform prospective purchaser of stock that individual soliciting stock purchase had resigned as director of corporation was omission of material fact in
violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Royal Air Properties, Inc. v Smith (1962, CA9 Wash) 312 F2d 210 (criticized
in Go2net, Inc. v Freeyellow.Com, Inc. (2005, Wash App) 109 P3d 875).
Bank issuing its debentures through brokerage firm is liable to purchasers for concealing identity of owner of notes, where owner is insider selling his own notes and
removal of owner's name from notes conceals fact that notes are primary issue and require offering circular. United States v Duz-Mor Diagnostic Lab. (1981, CA9 Cal)
650 F2d 223 (criticized in United States v Chilingirian (2002, CA6 Mich) 280 F3d 704).
Insider violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 where he failed to disclose to purchaser of corporation's stock that
insider, not corporation, was owner of stock transferred to purchaser, and that insider's remaining stock was being sold to third person. Blasdel v Mullenix (1971, WD
Okla) 356 F Supp 924, CCH Fed Secur L Rep P 94047.
It is violation of 15 USCS § 78j(b) for brokerage salesmen to sell municipal bonds to customers without revealing that they are being sold for account of brokerage.
SEC v Charles A. Morris & Associates, Inc. (1973, WD Tenn) 386 F Supp 1327, CCH Fed Secur L Rep P 93756.
Neglect of brokerage firm to provide plaintiff with names of selling brokers, or sellers themselves, of securities as plaintiffs had requested up to and including day of
settlement was not manipulative or deceptive as to come within ambit of securities violation, and failure to provide names of selling brokers could not be treated as
material omission of facts. Pachter v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1978, ED NY) 444 F Supp 417, CCH Fed Secur L Rep P 96314, affd without op
(1978, CA2 NY) 594 F2d 852.
Sellers' failure to disclose their status as insiders and their prior securities law violations, criminal records and real names is material omission. SEC v Netelkos (1984,
194.--Seller in short position
Failure of seller to disclose his short position, that is, whether or not firm possessed stock it sold, would have assumed actual significance in deliberations of
reasonable purchaser and omission was therefore material within meaning of Rule 10b-5. Edwards & Hanly v Wells Fargo Sec. Clearance Corp. (1978, SD NY) 458 F
Supp 1110, CCH Fed Secur L Rep P 96573, 3 Fed Rules Evid Serv 1142, revd on other grounds (1979, CA2 NY) 602 F2d 478, CCH Fed Secur L Rep P 96916, cert den
(1980) 444 US 1045, 62 L Ed 2d 731, 100 S Ct 734.
Securities fraud complaint of buyers of stock of bankrupt steel producer must fail, even though broker allegedly sold at least 50 million more shares of producer's old
stock than it owned or intended to borrow, where complaint, inter alia, is devoid of facts that would indicate how words "short exempt" on trade tickets affected
anything, because court cannot conclude that notation either misled buyers or affected price they paid. In re Scattered Corp. Sec. Litig. (1994, ND Ill) 844 F Supp
416, CCH Fed Secur L Rep P 98207, affd (1995, CA7 Ill) 47 F3d 857, CCH Fed Secur L Rep P 98617, reh, en banc, den (1995, CA7 Ill) 1995 US App LEXIS 4944 and
195. Inability to timely pay for stock redemption
Registered investment adviser and individual partners will be censured for willfully violating 15 USCS §§ 77q, 77j, 80a-34 where they do not specifically disclose to
their shareholders computer and telephone malfunctions affecting their ability to make same day payments upon redemption of shares. In re Reserve Management
Corp., Invest. Co. Act of 1940, Release No. 11394, Invest. Advisers Act of 1940, Release No. 733, Oct. 10, 1980, SEC Docket Vol 21, No. 3 p 190, 1980 SEC LEXIS
562.
196. Inducing shareholder to retain stock
Purchaser of securities is liable, where, through fraudulent inducements, he persuaded sellers to withhold securities from sale to others until such time as purchaser
had acquired controlling interest in issue of securities and thereby controlled market for securities, and where purchaser thereafter effectively compelled sellers to
sell securities to purchaser at price substantially below that which sellers could have obtained had they sold securities during period that they withheld them from
sale by reason of fraudulent inducement. Travis v Anthes Imperial, Ltd. (1973, CA8 Mo) 473 F2d 515, CCH Fed Secur L Rep P 93718.
Purchaser of stock who was obligated to incur substantial legal expenses to defend against attempted rescission of such sale by reason of acts of issuing
corporation's president, whereby president misrepresented to sellers that stock had book value far in excess of agreed sale price and that negotiations for merger
involving corporation were underway which would result in sellers' realizing much greater compensation for their stock than they would through sales to which they
had agreed, had valid cause of action against president under antifraud provisions of § 10(b) Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5.
Lanning v Serwold (1973, CA9 Wash) 474 F2d 716, CCH Fed Secur L Rep P 93809, 17 FR Serv 2d 260.
197. Inducing stock agreement with no intent to perform
Complaint alleging placing of orders for stock under plan of deception, whereby if market value of stock has decreased by date payment is due stock will be refused,
states good cause of action under 15 USCS § 78j(b). A. T. Brod & Co. v Perlow (1967, CA2 NY) 375 F2d 393, 10 FR Serv 2d 101.
Company which makes exchange offer it has no intention to perform thereby violates § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Levine v Seilon, Inc.
Promise made with intention of not keeping it constitutes scheme or artifice to defraud within meaning of antifraud provisions of § 10(b) of Securities Exchange Act
(15 USCS § 78j(b)). Burns v Paddock (1974, CA7 Ill) 503 F2d 18, CCH Fed Secur L Rep P 94789.
Fraudulent promise to sell securities of one company to investor in future, in order to cause investor to purchase stock of another company immediately, would
constitute misleading and deceptive practice within meaning of SEC Rule 10b-5, since allegation that securities transaction was fraudulently induced by promise,
even unenforceable one, to perform future act, can be actionable if promise was part of consideration of sale. Pelletier v Stuart-James Co. (1989, CA11 Ga) 863 F2d
1550, CCH Fed Secur L Rep P 94180, 7 UCCRS2d 1607.
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Allegation that seller entered into agreement for sale of stock without intention of consummating agreement if better deal could be obtained from someone else was
sufficient to support claim under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Commerce Reporting Co. v Puretec, Inc. (1968, SD NY) 290 F Supp 715,
Allegations that buyer of securities never intended to pay entire purchase price was sufficient to state cause of action under § 10(b) of Securities Exchange Act (15
USCS § 78j(b)) and SEC Rule 10b-5. Richardson v Salinas (1972, ND Tex) 336 F Supp 997, CCH Fed Secur L Rep P 93353.
Promissory representation in action under SEC Rule 10b-5, should be considered misrepresentation of fact only where evidence shows that promise was made
without intent to perform. Ferland v Orange Groves of Florida, Inc. (1974, MD Fla) 377 F Supp 690, CCH Fed Secur L Rep P 94821.
Where plaintiff company alleged Ponzi-like scheme, with new investors in oil well interests being paid from early investors' funds, and it was alleged that defendant
former executive had duty to company or its investors to disclose information useful in evaluating company's true financial position, and complaint alleged his
omissions as primary violator under 15 USCS § 78j(b) and S.E.C. Rule 10b-5 with specificity, both Fed. R. Civ. P. 9(b) and Private Securities Litigation Reform Act of
1995 were satisfied and claim against executive survived dismissal. Energytec, Inc. v Proctor (2007, ND Tex) 516 F Supp 2d 660.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for employees of bank, charged with responsibility of handling securities transactions of
certain group of shareholders, to conduct such transactions without revealing to shareholders that employees were market makers in such securities. Affiliated Ute
Citizens v United States (1972) 406 US 128, 31 L Ed 2d 741, 92 S Ct 1456, CCH Fed Secur L Rep P 93443, reh den (1972) 407 US 916, 32 L Ed 2d 692, 92 S Ct
2430 and reh den (1972) 408 US 931, 33 L Ed 2d 345, 92 S Ct 2478 and (criticized in Sandwich Chef of Tex., Inc. v Reliance Nat'l Indem. Ins. Co. (2001, SD Tex)
202 FRD 484, RICO Bus Disp Guide (CCH) P 10139).
Defendants who went to extensive lengths to create market for corporation's securities, misrepresenting financial and business status of corporation, violated SEC
Rule 10b-5. SEC v International Chem. Dev. Corp. (1972, CA10 Utah) 469 F2d 20, CCH Fed Secur L Rep P 93658.
Statements during interviews by holder of 14 percent of outstanding shares of company's stock that merger offer of $ 15 per share from another company was "not
sufficient", and he would not accept it, did not constitute market manipulation, where his holdings of shares and desire to liquidate them were public knowledge, and
his responses to interviewer's questions were truthful and not misleading. Feldman v Simkins Industries, Inc. (1982, CA9 Cal) 679 F2d 1299, CCH Fed Secur L Rep P
98745 (ovrld in part by In re Washington Public Power Supply System Sec. Litigation (1987, CA9 Wash) 823 F2d 1349, CCH Fed Secur L Rep P 93330).
Executives of mutual fund's primary underwriter had legal duty to confirm accuracy and completeness of fund prospectuses that they used in sale of mutual fund's
securities, and as result of that duty, executives made implied statements to potential investors that they had reasonable basis to believe that statements in
prospectuses regarding market timing practices were accurate and complete; because certain statements in prospectuses regarding market timing were allegedly
false, executives' implied statements were also false; those implied statements fell within purview of § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934
and Rule 10b-5(b). SEC v Tambone (2008, CA1 Mass) 550 F3d 106, CCH Fed Secur L Rep P 95016.
Same allegations that Securities and Exchange Commission (SEC) made against executives in context of its claims under § 17(a)(2) (15 USCS § 77q(a)(2)) of
Securities Act of 1933 also applied to its claims under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934 and Rule 10b-5(b), and as SEC asserted, by
using prospectus statements to sell mutual funds, executives made their own implied, but false, representations to investors as to truthfulness and completeness of
statements made in prospectuses, and those implied statements were product of their duty to make investigation that would provide them reasonable basis for belief
that key representations in statements provided to investors were truthful and complete; if key representations about timing practices were false or misleading, as
SEC alleged, that implied statement about truthfulness and completeness of statements made in prospectus was also false; therefore, because SEC sufficiently
alleged that executives, either knowingly or highly recklessly, made multiple false statements, executives' motions to dismiss primary liability claims under § 10(b)
and Rule 10b-5(b) should have been denied. SEC v Tambone (2008, CA1 Mass) 550 F3d 106, CCH Fed Secur L Rep P 95016.
Bond purchasers may proceed with 15 USCS § 78j(b) claim against development company under "complex fraud" theory, where purchasers allege that company
manipulated market for 1986 bonds to create market for 1988 bonds by buying up 1986 bonds at prices near par value, with knowledge of failure to comply with
requirements of 1986 bonds, because company had duty to disclose default on 1986 bond covenants and declining value of collateral for 1986 bonds, and 1988
official statement made reference to 1986 bonds and failed to apprise purchasers of true status of those bonds. Alter v DBLKM, Inc. (1993, DC Colo) 840 F Supp 799,
CCH Fed Secur L Rep P 98093, RICO Bus Disp Guide (CCH) P 8494.
Underwriters' renewed motion for judgment on pleadings on shareholders' 15 USCS § 78j(b) claim of material misstatements and omissions was denied where
content of underwriters' misstatement was that market was unaffected by market manipulation, shareholders had sufficiently alleged that market was manipulated,
and misstatements that concealed that manipulation were cause of shareholders' losses. In re Initial Pub. Offering Sec. Litig. (2003, SD NY) 297 F Supp 2d 668.
FRCP 12(b)(6) motion to dismiss was denied because complaint sufficiently alleged that defendant was primarily responsible for portions of funds' prospectuses and
that he made material omissions by failing to use them to disclose market timing relationship and its potential detrimental effect on funds to state claim for primary
liability under 15 USCS § 78j(b). SEC v Treadway (2005, SD NY) 354 F Supp 2d 311, CCH Fed Secur L Rep P 93091.
Where investor alleged that defendants made misrepresentations regarding mutual fund pricing, investor could not state claim for misrepresentation based on
adoption of fair value price methodology, because mere implementation of fair value pricing was lawful and not actionable; however, investor sufficiently stated claim
based on allegation that defendants used investor's secret trading techniques to manipulate method by which values were calculated. DH2, Inc. v Athanassiades
(2005, ND Ill) 404 F Supp 2d 1083, CCH Fed Secur L Rep P 93630.
Trader and promoters were not entitled to summary judgment in Securities and Exchange Commission's (SEC) civil enforcement action alleging market manipulation
claims under 15 USCS §§ 78j(b), 78o(c), and 77q(a); SEC raised genuine issues as to whether trader and promoters engaged in pump-and-dump scheme that
artificially inflated market price of software company that was involved in reverse merger with shell company. United States SEC v Sierra Brokerage Servs. (2009, SD
Ohio) 608 F Supp 2d 923.
Corporation could not lawfully engage in program of purchasing its own stock in open market for purpose of creating investor interest and thereby driving up price,
without disclosing that purpose to public. Davis v Pennzoil Co. (1970) 438 Pa 194, 264 A2d 597, CCH Fed Secur L Rep P 92646.
199. Other investors
Misrepresentation as to participation of others in securities offering was material, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), to person
contemplating substantial investment in venture which was painted as simultaneous purchase by all members of group. Gordon v Burr (1974, CA2 NY) 506 F2d
1080, CCH Fed Secur L Rep P 94874 (criticized in In re Leslie Fay Cos., Sec. Litig. (1996, SD NY) 918 F Supp 749, CCH Fed Secur L Rep P 99242) and (criticized in In
re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505) and (criticized in In re MicroStrategy Inc. Secs. Litig. (2000, ED Va)
115 F Supp 2d 620, CCH Fed Secur L Rep P 91213).
No cause of action was stated under § 10(b) or under § 14(a) or (e) of Securities Exchange Act of 1934 (15 USCS § 78j(b) or § 78n(a) or (e)) based on allegations
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with respect to tender offer and proxy materials that while materials disclosed that target corporation had acquired another corporation owned by a dissident
shareholder in return for stock of target corporation, and stated total value of stock given in exchange, it did not state price share of target corporation's stock, since
investors could make calculation of price per share from information available in materials, while only possible relevance of per share value of stock issued to
dissidents would be to illuminate for investors possible motives of dissidents in demanding higher value per share for stock of target corporation, but these
circumstances were amply disclosed. Field v Trump (1988, CA2 NY) 850 F2d 938, CCH Fed Secur L Rep P 93905, 100 ALR Fed 421, cert den (1989) 489 US 1012,
103 L Ed 2d 185, 109 S Ct 1122.
It was material omission in violation of 15 USCS § 78j(b) to fail to disclose, to purchaser of shares, number of shareholders participating in offering, or to fail to
correct impression that another person had given him that there would only be 6 or 8 investors. Moerman v Zipco, Inc. (1969, ED NY) 302 F Supp 439, CCH Fed
Secur L Rep P 92478, affd (1970, CA2 NY) 422 F2d 871.
Misstatements regarding participation of other persons in stock offering may be material, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b));
inducement of stock purchaser to subscribe to stock offering by representations that corporation would have only small group of shareholders when, in actuality, over
200 people subscribed, violated statutory provisions. Gordon v Burr (1973, SD NY) 366 F Supp 156, CCH Fed Secur L Rep P 94221, 18 FR Serv 2d 1112, affd in part
and revd in part on other grounds (1974, CA2 NY) 506 F2d 1080, CCH Fed Secur L Rep P 94874 (criticized in In re Leslie Fay Cos., Sec. Litig. (1996, SD NY) 918 F
Supp 749, CCH Fed Secur L Rep P 99242) and (criticized in In re Health Mgmt. Inc. Sec. Litig. (1997, ED NY) 970 F Supp 192, CCH Fed Secur L Rep P 99505) and
(criticized in In re MicroStrategy Inc. Secs. Litig. (2000, ED Va) 115 F Supp 2d 620, CCH Fed Secur L Rep P 91213).
Statement that experienced and successful financial advisor to large numbers of professional people was personally investing funds in business venture as general
partner, when in fact general partner was to be corporation controlled by that individual, was material fact within meaning of § 10(b) of Securities Exchange Act (15
USCS § 78j(b)). Hickman v Groesbeck (1974, DC Utah) 389 F Supp 769.
Attorney for underwriter was reckless as matter of law and violated 15 USCS §§ 77q(a) and 78j(b) by not informing investors that company's chief executive officer
had been indicted for mail fraud, where attorney's only defense is that he was told indictment would be dropped, because attorney clearly knew indictment was not
dropped yet and breached his duty to investors by not giving notice that virtual alter ego of company they were investing in faced onerous criminal trial and possible
incarceration. SEC v Electronics Warehouse, Inc. (1988, DC Conn) 689 F Supp 53, CCH Fed Secur L Rep P 94704, affd (1989, CA2) 891 F2d 457, cert den (1990) 496
US 942, 110 L Ed 2d 674, 110 S Ct 3228.
200.--Rights granted other investors
Failure to advise one of 6 subscribers of stock issue, while attempting to persuade subscriber to agree to amendment to subscription agreement and to accept
issuance of shares notwithstanding failure of issuers to sell minimum quantity of stock, that one of remaining subscribers had requested concessions in order to enter
into such agreement, constituted violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5; it was also violation of Section and Rule to
fail to advise subscriber, after amendment had been executed, that other subscriber had demanded execution of repurchase agreement as condition of signing similar
amendment and to offer subscriber opportunity to rescind amendment agreement in light of such additional information; fact that repurchase agreement may have
been illegal and therefore unenforceable under state law did not affect materiality in light of fact that shares of other subscribers were in fact repurchased by issuing
corporation and, since regardless of legality of repurchase agreements, reasonable man might well have attached importance to agreement because of possibility of
such repurchase notwithstanding illegality, and because of very fact that one of other subscribers felt need to demand such buy-back option as condition to agreeing
to amendment. Hidell v International Diversified Inv. (1975, CA7 Ill) 520 F2d 529, CCH Fed Secur L Rep P 95243.
201. Possible legal problems
Because corporation was contractually obliged to disclose any material litigation threatened against it prior to closing, but it threatened to sue its former officer if he
sent any more correspondence to plaintiff, corporation's prospective purchaser, thus hindering purchaser from learning about lawsuit, dismissing purchaser's fraud
claims against defendants, corporation's two former shareholders, its president, and outside counsel, was reversed. Media Gen., Inc. v Tomlin (2008, App DC) 532
Nondisclosure of violation of negative covenant in trust indenture violated 15 USCS § 78j(b) since principal criterion of reasonable investor in evaluating trust
debenture purchase is viability of underlying trust indenture, and when serious doubt is cast on compliance by principals with indentures terms, investor would of
necessity attach considerable importance to that information. Lewis v Marine Midland Grace Trust Co. (1973, SD NY) 63 FRD 39, CCH Fed Secur L Rep P 94206, 17
FR Serv 2d 1517.
If tender offeror is aware of facts which raise serious and substantial questions about legality of tender offer by reason of possible violation of antitrust laws, and
such facts were omitted from tender offer materials under circumstances which made facts stated misleading, failure to disclose such facts would constitute violation
of SEC Rule 10b-5, where facts regarding position of tender offeror and target corporation in market of given industry raised serious and substantial questions about
legality of transaction, and where such facts had potential of affecting judgment of target corporation shareholders on whether and how much to tender, and such
basic facts could have been stated without speculation on future events; such nondisclosure made it probable that violation of Rule 10b-5 could be shown. Elco Corp.
v Microdot Inc. (1973, DC Del) 360 F Supp 741, CCH Fed Secur L Rep P 94157, 1973-2 CCH Trade Cases P 74655.
Failure to advise purchaser of securities who through purchase, acquired in excess of 10 percent of shares of corporation, thereby falling with purview of short swing
profits provisions of § 16(b) of Securities Exchange Act (15 USCS § 78p(b)), of potential liability under § 16(b) was not omission of material fact in violation of
antifraud provisions of § 10(b) of Act (15 USCS § 78j(b)); such possible liability was matter of law equally available to both parties. Champion Home Builders Co. v
Jeffress (1974, ED Mich) 385 F Supp 245, CCH Fed Secur L Rep P 94973.
Investors' action against corporation fails under 15 USCS § 78j(b), where corporation's failure to disclose that its subsidiary was illegally operating uranium
processing facility did not make any statements in annual report misleading; no false impression was conveyed. Levine v NL Industries, Inc. (1989, SD NY) 717 F
Supp 252, CCH Fed Secur L Rep P 94529, 20 ELR 20197.
Securities fraud action against wife is dismissed, where husband and wife were joint majority shareholders in asbestos-removal company, where purchasers of stock
claim that wife failed to inform them of likelihood of EPA investigation and sanctions against asbestos removal company, and wife did not participate in asbestos
removal program, had nothing to do with company's financial assessments, and did not participate in negotiations with purchasers, because she had no fiduciary
duty with respect to purchasers, and silence in absence of duty to disclose is not fraudulent. Professional Serv. Indus. v Kimbrell (1993, DC Kan) 834 F Supp 1289,
Investors' securities fraud claim against issuer for failure to disclose $ 22 million judgment against subsidiary for environmental liabilities may proceed, where issuer
justifies omission based on advice of counsel that judgment would be reversed on appeal, because court concludes that reasonable investor may have required
further information about judgment before making investment decision. Endo v Albertine (1994, ND Ill) 863 F Supp 708.
Issuer did not commit fraud under 15 USCS § 78j(b), where stock purchasers argue that 10-K filed with SEC by issuer, which developed cryoprobe for use in
minimally invasive surgery, failed to suggest that separate FDA approvals would be necessary for urethral heating device that was required for use of probe in
prostate surgery, because 10-K referred readers to "Governmental Regulation" section which stated that development and marketing of probe and related
instrumentation required regulatory review and/or approval by FDA, and that there could be no assurance that regulatory approvals or clearances would be obtained.
In re Cryomedical Sciences Sec. Litig. (1995, DC Md) 884 F Supp 1001 (criticized in In re MicroStrategy Inc. Secs. Litig. (2000, ED Va) 115 F Supp 2d 620, CCH Fed
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Where parent company's statements put sources of its subsidiary revenue at issue, alleged failure to disclose true sources of such revenue could give rise to 15 USCS
§ 78j(b) liability; thus, plaintiff investors adequately alleged that statements at issue were false and misleading. In re Van Der Moolen Holding N.V. Sec. Litig. (2005,
SD NY) 405 F Supp 2d 388.
Summary judgment was denied in consolidated securities-fraud class action brought under 15 USCS § 78j(b) and 17 C.F.R. § 240.10b-5, because there was disputed
issue of material fact as to each element concerning for-profit provider of higher education's alleged misrepresentation as to Department of Education program
review. In re Apollo Group, Inc. Secs. Litig. (2007, DC Ariz) 509 F Supp 2d 837, CCH Fed Secur L Rep P 94465.
202. Possible tax consequences
Sellers of whisky warehouse receipts violated antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 when they failed to
advise purchasers that receipt or sale of bulk whisky in form of whisky warehouse receipts might subject them or holder or vendor to certain permit and tax
provisions of United States Code. SEC v Haffenden-Rimar International, Inc. (1973, ED Va) 362 F Supp 323, CCH Fed Secur L Rep P 94101, affd (1974, CA4 Va) 496
There was no material omission from prospectus in its failure to disclose future, less favorable tax treatment which stock dividends would receive in later years.
Rubin v Long Island Lighting Co. (1984, ED NY) 576 F Supp 608, CCH Fed Secur L Rep P 99650.
Investors' claims of misrepresentation based on future expectations and performance of limited partnership contained in offering memo and attachments must be
dismissed, even though projections of future cash flow and expected tax benefits were substantially inaccurate, because extensive warnings and disclaimers in
offering documents clearly limited degree to which investors could reasonably rely on documents. Friedman v Arizona World Nurseries Ltd. Partnership (1990, SD NY)
730 F Supp 521, CCH Fed Secur L Rep P 94902, affd without op (1991, CA2 NY) 927 F2d 594 and affd without op (1991, CA2 NY) 927 F2d 594 and affd without op
(1991, CA2 NY) 927 F2d 594 and affd without op (1991, CA2 NY) 927 F2d 594 and affd without op (1991, CA2 NY) 927 F2d 594.
Allegations were insufficient to state claim under § 10(b) of Securities Exchange Act of 1934, 15 USCS 78j(b), regarding sales brochures for deferred annuity
contracts, where information in brochure regarding tax-deferral benefits was apparently accurate; in light of language included in promotional material, addition of
language regarding funding Individual Retirement Account (IRA) or similar account with annuity did not alter "total mix" of information include information
"reasonably available" to investor; reasonable investor, especially individual such as instant investor who at time in question had already accumulated at least $
100,000 in his IRA, should have been aware of inherent tax deferral benefits of his investment account. Malhotra v Equitable Life Assur. Soc'y of United States (2005,
ED NY) CCH Fed Secur L Rep P 93142, amd (2005, ED NY) 364 F Supp 2d 299.
203. Quality of stock
Buyer, who purchased substantial number of shares of corporation in reliance on false representation that purchase entitled buyer to voice in corporation's
management, had remedy under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Ellis v Carter (1961, CA9 Cal) 291 F2d 270.
Seller of municipal bonds violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by stating that certain bonds sold were general obligation bonds when, in
fact, they were revenue bonds; and by failing to disclose that other bonds sold were revenue bonds. SEC v Charles A. Morris & Associates, Inc. (1973, WD Tenn) 386
Proxy statement, soliciting proxies for vote on merger, did not create false impression, in violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), that
securities of acquiring corporation to be obtained in exchange for those of corporation to be acquired would be free of restrictions and readily tradable where
statement stated that common shares of corporation to be acquired should be exchanged for acquiring corporation's certificates prior to sale or disposition since
certificates of corporation to be acquired would not constitute good delivery of acquiring corporation's common stock on New York Stock Exchange, and where
statement, in pointing out that dissenters could obtain fair cash value of their shares, did not distinguish between restricted and unrestricted stock of corporation to
be acquired; conclusion that securities to be acquired would be freely marketable also was not justified from proxy statement reference to fact that condition
precedent to merger was that stock to be issued by acquiring corporation would be listed on New York Stock Exchange, it not being possible to infer from such fact
that each individual share certificate so issued would be freely marketable. Pierre J. Le Landais & Co. v MDS-ATRON, Inc. (1974, DC NY) 387 F Supp 1310, CCH Fed
Secur L Rep P 94930, affd in part and revd in part on other grounds (1976, CA2 NY) 543 F2d 421, CCH Fed Secur L Rep P 95539, cert den (1977) 429 US 1062, 50 L
Ed 2d 777, 97 S Ct 786.
There was violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 where defendants knowingly misrepresented
very nature of notes and mortgages which they marketed to plaintiffs. Hall v Security Planning Services, Inc. (1976, DC Ariz) 419 F Supp 405.
Undisclosed information dealing with preliminary negotiations for sale of corporate assets may be considered "material" where negotiations included substantial
overtures that, if known by plaintiffs, might have affected their willingness to sell their stock at price quoted. Paul v Berkman (1985, WD Pa) 620 F Supp 638, CCH
204. Quantity of stock
In selling municipal bonds, it was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for seller to allege that there was available only limited supply of
bonds sought to be sold when supply actually was abundant. SEC v Charles A. Morris & Associates, Inc. (1973, WD Tenn) 386 F Supp 1327, CCH Fed Secur L Rep P
93756.
205. Redemption rights
Summary judgment should not have been entered against holders of convertible subordinated debentures in their action under § 78j(b), based on contention that
offering materials indicated that holders were entitled to tender debentures to issuer in case of certain triggering event unless these events were approved or ratified
by "independent directors", but when debenture holders sought redemption upon merger of issuer in transaction which increased its debt and reduced value of
debentures (one of triggering events), issuer denied redemption because actions had been ratified by board of directors. McMahan & Co. v Wherehouse
Entertainment (1990, CA2 NY) 900 F2d 576, CCH Fed Secur L Rep P 95267, cert den (1991) 501 US 1249, 115 L Ed 2d 1052, 111 S Ct 2887 and (superseded by
statute as stated in In re Harmonic Inc. Secs. Litig. (2001, ND Cal) 163 F Supp 2d 1079, CCH Fed Secur L Rep P 91488).
Redemption provisions contained in prospectus and actions taken thereunder did not be materially mislead shareholders in violation of federal securities laws and
Rule 10b-5 where evidence (1) failed to support finding that defendant corporation either intentionally or recklessly failed to disclose material fact necessary to make
statements made not misleading, and (2) established that there was adequate disclosure of defendant company's belief that it could legally redeem securities and of
its intention to redeem when market conditions made it feasible. Franklin Life Ins. Co. v Commonwealth Edison Co. (1978, SD Ill) 451 F Supp 602, CCH Fed Secur L
Rep P 96542, affd (1979, CA7 Ill) 598 F2d 1109, CCH Fed Secur L Rep P 96890, cert den (1979) 444 US 900, 62 L Ed 2d 136, 100 S Ct 210.
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Nondisclosure of special redemption rights on mortgage bonds did not constitute scheme to defraud where disclosure would not have made bonds unmarketable.
Lucas v Florida Power & Light Co. (1983, SD Fla) 575 F Supp 552, CCH Fed Secur L Rep P 91417, affd (1985, CA11 Fla) 765 F2d 1039, CCH Fed Secur L Rep P
92235.
206. Registration of stock
It was not violation of SEC Rule 10b-5 for seller of stock, which had been issued to him in transaction not registered under Securities Act, to fail to advise purchaser
that stock must be purchased with nondistributive intent in order for purchaser to escape federal registration requirements upon subsequent sale since whether
purchaser took stock with nondistributive intent was not matter of fact but was matter of law and Rule cannot be construed to require prospective seller of securities
to give his prospective buyers legal advice on technical matters arising under federal securities law. Vohs v Dickson (1974, CA5 Ga) 495 F2d 607, CCH Fed Secur L
Rep P 94589.
Purchasers of stock failed to sufficiently allege fraud, manipulation, or deceit necessary to state claim under § 10(b) of Securities Exchange Act of 1934 or SEC Rule
10b-5 where they alleged that they were defrauded by failure of sellers of stock to disclose that securities were not registered for sale in Illinois, where purchasers
were residents, resulting in rescission of transaction, but it was not alleged that sellers intended to defraud purchasers by representing that shares were registered
for sale in Illinois with intention of rescinding transaction if shares later increased in value, since unilateral rescission by itself does not violate § 10(b) or Rule 10b-5
where it does not involve any fraud or deception as those terms are used in antifraud provisions of federal securities laws. Forkin v Rooney Pace, Inc. (1986, CA8 Mo)
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for seller of securities falsely to assert that issuer was about to merge with second
corporation, and that securities would then be listed on national securities exchange. Blasdel v Mullenix (1971, WD Okla) 356 F Supp 924, CCH Fed Secur L Rep P
94047.
It was violation of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for seller of securities to fail to disclose fact that stock was registered
under Securities Act where purchaser was market maker in that stock and might be in violation of securities laws by purchasing stock as part of distribution. Byrnes
v Faulkner, Dawkins & Sullivan (1976, SD NY) 413 F Supp 453, affd (1977, CA2 NY) 550 F2d 1303.
Failure of defendant to tell plaintiff that stock in proposed corporation would not be registered in accordance with Securities Act (15 USCS §§ 77a et seq.) and state
securities law was not omission constituting violation of Rule 10b-5 where plaintiff, defendant, and third party were original organizers of corporation, each was
generally familiar with fact that registration of securities is act required by law to facilitate public distribution of stock, at no time prior to organization of corporation
and ultimate distribution of shares to plaintiff did plaintiff discuss with defendant desirability of registering securities, plaintiff joined corporation without any intention
of selling his interest, and plaintiff's interest in corporation was basically one of employment and exploitation of his invention. Thiele v Davidson (1977, MD Fla) 440 F
Supp 585, affd without op (1980, CA5 Fla) 612 F2d 578.
Plaintiff seeking recourse against offeror who makes false statements in offering that is exempt from registration pursuant to Regulation D, 17 C.F.R. § 230.506, can
still bring action under § 10(b) (15 USCS § 78j(b)) of Securities Exchange Act of 1934. Faye L. Roth Revocable Trust v UBS Painewebber Inc. (2004, SD Fla) 323 F
Supp 2d 1279, CCH Fed Secur L Rep P 92848, 17 FLW Fed D 720.
207. Safety of investment
Misrepresentation of risk of buying securities on margin in declining market is fraud in connection with purchase of securities. Arrington v Merrill Lynch, Pierce,
Fenner & Smith, Inc. (1981, CA9 Cal) 651 F2d 615, CCH Fed Secur L Rep P 98237.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for broker knowingly and falsely to represent to customer that means of financing
recommended for customer's purchase of stock was usual and proper means of financing and represented no greater risk to customer than usual margin transaction.
Glickman v Schweickart & Co. (1965, SD NY) 242 F Supp 670.
Letter to prospective investors was materially misleading where it stated that repayment of purchase price of securities was guaranteed by parent corporation of
corporation, which was to be lent proceeds of offering, where prospective investors were not advised that guarantee ran only to trustee of trust underlying
certificates which were being offered, and not to certificate holders, and that trustee in her discretion would have to bring legal action against subsidiary corporation
in order to collect on guarantee, and where it was not disclosed to investors that parent corporation had no funds specifically segregated for purpose of guaranteeing
loans to subsidiary corporation. SEC v M. A. Lundy Associates (1973, DC RI) 362 F Supp 226.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 for sellers of whisky warehouse receipts to tell prospective purchaser
that investment was safe when sellers knew that it was highly speculative, and for sellers to advise investors that purchasers were fully insured against all risks of
physical loss and excess ullage, when they knew that insurance did not cover all such losses; it was also violation of those provisions for sellers not fully to advise
investors of risks involved in market fluctuations for whisky, or of source or basis for market price quotations used in making marketing projections for profits. SEC v
Haffenden-Rimar International, Inc. (1973, ED Va) 362 F Supp 323, CCH Fed Secur L Rep P 94101, affd (1974, CA4 Va) 496 F2d 1192, CCH Fed Secur L Rep P
94577.
Seller of municipal bonds violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) by falsely representing that payment of interest and principal on certain
bonds was guaranteed by state and federal governments and by representing that bonds offered would be safe investment when in fact investment was highly
speculative. SEC v Charles A. Morris & Associates, Inc. (1973, WD Tenn) 386 F Supp 1327, CCH Fed Secur L Rep P 93756.
Sellers who, in selling whisky warehouse receipts, made no attempt to apprise investor, prior to sale, of risks and obligations he was assuming, engaged in scheme to
defraud investors by untrue and misleading statements in violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. SEC v Glen-Arden
Commodities, Inc. (1974, ED NY) 368 F Supp 1386, CCH Fed Secur L Rep P 94372, affd (1974, CA2 NY) 493 F2d 1027, CCH Fed Secur L Rep P 94436.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for securities brokerage, in its sale of high risk, speculative industrial development bonds,
to represent to unsophisticated purchaser that securities were safe, secure, and liquid investments, and it was violation for securities broker to instruct salesmen to
falsely tell customers that interest and principal payments on bonds sold were insured. SEC v R. J. Allen & Associates, Inc. (1974, SD Fla) 386 F Supp 866.
Statement that oil drilling program, in which partnership interest had been sold, was conservative and safe was not actionable under fraud provisions of SEC Rule
10b-5 where comments were confined solely to comparison of program with other oil and gas drilling programs. Eichen v E. F. Hutton & Co. (1975, SD Cal) 402 F
Supp 823, CCH Fed Secur L Rep P 95316, 54 OGR 1.
Representation by promoter that partnership interests in exploratory oil drilling venture was sure investment guaranteed to return minimum of amount of investment
was not violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)); it is common knowledge that no investment, particularly an oil and gas venture, is
without risk and plaintiffs, who lived in oil-oriented geographic environment, must have been familiar with risks involved in oil and gas drilling business and were not
entitled to rely on such representations. Bayoud v Ballard (1975, ND Tex) 404 F Supp 417, CCH Fed Secur L Rep P 95457, 54 OGR 187.
Misrepresentation to effect that investment, in form of purchase of franchise in food distribution operation, was guaranteed was violation of fraud provisions of §
10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. SEC v Galaxy Foods, Inc. (1976, ED NY) 417 F Supp 1225, CCH Fed Secur L Rep P 95684,
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affd without op (1977, CA2 NY) 556 F2d 559, cert den (1977) 434 US 855, 54 L Ed 2d 127, 98 S Ct 175.
Pension fund states claim against securities brokerage firm under 15 USCS § 78j(b), where complaint alleges parties had fiduciary relationship and firm failed to
disclose to other officers of fund unsuitable and speculative nature of investments ordered by fund's treasurer. Board of Trustees v Poder (1989, ND Ill) 712 F Supp
135.
Investor's securities fraud claim against financial adviser must be denied, even though adviser convinced investor to put huge sums in long-term municipal bonds
which declined in value significantly, because advice for investor seeking tax-free income with minimal risk was not unreasonable, though unspectacular, and adviser
did not defraud investor nor even breach fiduciary relationship with him. John v Shearson/American Express, Inc. (1989, ED Mich) 732 F Supp 728, CCH Fed Secur L
Rep P 94877.
Limited partnership investors' "standard misrepresentation" securities fraud claim cannot withstand summary judgment motion, where complaint asserts that risk
involved in oil and gas development venture was understated or misrepresented, because exaggerated oral representations by selling agents were properly balanced
by numerous cautionary statements in written offering materials. Brown v E.F. Hutton Group (1990, SD NY) 735 F Supp 1196, CCH Fed Secur L Rep P 94968, affd
(1993, CA2 NY) 991 F2d 1020, CCH Fed Secur L Rep P 97420 (superseded by statute as stated in Louros v Kreicas (2005, SD NY) CCH Fed Secur L Rep P 93233).
Purchasers of units in oil and gas limited partnership programs organized, underwritten, distributed, sold, and managed by defendant brokerage have their federal
securities law claims dismissed with prejudice, where investors allege they were told that programs were insured, low risk or no risk, and would return 100 percent
on capital in 4 years, and rely heavily on extracted parts of internal memorandum used by brokerage only to inform broker-dealers about programs, because reliance
on oral statements which are directly contradicted by clear language of offering memorandum cannot be basis for 15 USCS § 78j(b) claim. Porter v Shearson Lehman
Bros., Inc. (1992, SD Tex) 802 F Supp 41, CCH Fed Secur L Rep P 97434.
Investors plead securities fraud claim against securities broker sufficiently under 15 USCS § 78j(b) and FRCP 9(b), where complaint alleges that broker knowingly
made untrue statements to investors, by telephone, immediately prior to purchases and sales made on behalf of investors from 1988 through 1991, inducing
investors to buy/sell securities not in keeping with their communicated conservative investment objectives, because claim of recommendation of unsuitable securities
and particularization of fraudulent aspects are stated. Wyman v Prime Discount Sec. (1993, DC Me) 819 F Supp 79, CCH Fed Secur L Rep P 97686.
It is violation of antifraud provisions of Securities Exchange Act for seller of security to make misrepresentations as to safety of investment. In re Bruns, Nordeman &
Co. (1961) 40 SEC 652.
It was material representation, within meaning of fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, for underwriter of
best-efforts Regulation A offering to issue offering circular which stated that proceeds of offering would be held in escrow by named bank and, in event that specified
number of shares were not sold within stated time, all amounts paid by purchasers would be promptly refunded, where such funds in actuality were not maintained
in separate escrow account. In re Midland Securities Corp. (1977) 46 SEC 755.
It was violation of antifraud provisions of Securities Exchange Act for broker to make misrepresentations concerning issuer's willingness to guarantee purchasers of
securities against any losses. In re Lowenthal, Hale, Jaffe, Inc. Securities Exchange Act of 1934, Release No. 10844, June 7, 1974, SEC Docket Vol 4, No. 11, p 383,
1974 SEC LEXIS 1150.
208. Suspension of trading
Failure of prospectus, issued with respect to sale of stock options, to point out difficulty which might be experienced upon exercise of options if trading in underlying
securities were suspended at time of exercise was not misleading omission within meaning of SEC Rule 10b-5 where prospectus as whole made risks clear; to state
that stocks approved for option trading are registered under Securities Exchange Act is not to represent that they will be traded on national exchange every business
day during life of option. Piemonte v Chicago Board Options Exchange, Inc. (1975, SD NY) 405 F Supp 711, CCH Fed Secur L Rep P 95381.
209. Takeovers and mergers
Any matter or information, which may affect desire of investors to buy, sell, or hold company's securities, requires full disclosure when such company is proposed to
be merged with second company. Metro--Goldwyn--Mayer, Inc. v Ross (1973, SD NY) 363 F Supp 23, CCH Fed Secur L Rep P 94080, revd on other grounds (1975,
210.--Conflict of interest
Failure of target company's counsel to disclose to acquiring company beneficial ownership in trust which objected to merger was material omission, even though
whatever real injury resulted from violation was to shareholders of target company and not acquiring company, where disclosure to acquiring company would have
triggered duty on its part to pass along information to target company's minority shareholders in which they had vital interest. SEC v Blatt (1978, CA5 Fla) 583 F2d
1325, CCH Fed Secur L Rep P 96610 (criticized in SEC v First Pac. Bancorp (1998, CA9 Cal) 142 F3d 1186, 98 CDOS 3143, 98 Daily Journal DAR 4343, CCH Fed
Omission from disclosure of dual role of attorneys representing acquiring corporation who were also officers and directors of target corporation was material because
dual role would have assumed actual significance in deliberations of reasonable shareholder. Kas v Financial General Bankshares, Inc. (1986, App DC) 254 US App DC
217, 796 F2d 508, CCH Fed Secur L Rep P 92834.
Where stock purchasers alleged that analyst, who owned stock in target companies, and employer broker-dealer committed securities fraud by providing false
opinions about effect of announced mergers, dismissal was appropriate because stock purchasers failed to adequately plead falsity of opinions based upon (1)
reasonableness of opinions, (2) defendants' motive to lie, and (3) allegation that defendants engaged in similar schemes regarding other issuers. Podany v Robertson
Stephens, Inc. (2004, SD NY) 318 F Supp 2d 146, CCH Fed Secur L Rep P 92689.
211.--Financial statement or condition
Failure of interim financial statement used in proxy statement relating to merger of corporations to include balance sheet but only consolidated statements of income,
therefore containing no reference to diminution of goodwill found to be necessary in year end statement, and to refer to substantial interim loss, was misleading as
matter of law, within meaning of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), when coupled with mention of as yet unmarketed new invention, it being
highly important to shareholders that interim statements issued for merger approval purposes accurately reflect corporate status. Republic Technology Fund, Inc. v
Lionel Corp. (1973, CA2 NY) 483 F2d 540, CCH Fed Secur L Rep P 94069, cert den (1974) 415 US 918, 39 L Ed 2d 472, 94 S Ct 1416.
Officers and directors of acquiring corporation violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 where they failed to disclose to
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stockholders and debenture holders of acquired corporation, material facts relating to acquiring corporation's financial statements and to its general financial
condition and that of its subsidiaries and owners, by failing to advise of uncertainty and remoteness of profits under contemplated method of operation. Gottlieb v
Sandia American Corp. (1969, ED Pa) 304 F Supp 980, CCH Fed Secur L Rep P 92577, affd in part and revd in part on other grounds (1971, CA3 Pa) 452 F2d 510,
CCH Fed Secur L Rep P 92971, cert den (1971) 404 US 938, 30 L Ed 2d 250, 92 S Ct 274.
Company was granted summary judgment on individuals' 15 USCS § 78j(b) claim that company made series of misrepresentations regarding merger with another
business where individuals failed to offer any evidence supporting allegations that company made statements at conference regarding temporary nature of inventory
problem and health of acquired business and transcript of conference call supported company's contention that it had not made any representations about health of
business during call. In re Clorox Co. Secs. Litig. (2002, ND Cal) 238 F Supp 2d 1139, affd (2004, CA9 Cal) 353 F3d 1125.
Even if company had made statements during conference and conference call about temporary nature of inventory problem and health of business that it had
acquired, company was entitled to summary judgment on individual's 15 USCS § 78j(b) claim where statements were forward looking and accompanied by
meaningful disclaimers; thus, statements were protected under 15 USCS § 78u-5(c) and bespeaks caution doctrine. In re Clorox Co. Secs. Litig. (2002, ND Cal) 238
F Supp 2d 1139, affd (2004, CA9 Cal) 353 F3d 1125.
District court denied individuals' Fed. R. Civ. P. 56(f) motion where requested discovery was on matters unrelated to their 15 USCS § 78j(b) claim that company
made misleading statements about merger and individuals failed to identify any material that would have supplemented information already provided about what
was said at conference and during subsequent conference call. In re Clorox Co. Secs. Litig. (2002, ND Cal) 238 F Supp 2d 1139, affd (2004, CA9 Cal) 353 F3d 1125.
Target corporation conducting discussions with both hostile suitor corporation and friendly suitor corporation is under no duty under 15 USCS §§ 78j(b), 78n(e) to
disclose, to target's shareholders, merger discussions with friendly suitor until 2 corporations agree on price and structure of merger; nor is target under duty to
disclose preliminary "anti-takeover" discussions with hostile suitor, whose percentage of ownership of target's stock does not materially change throughout period of
discussion; nor is target's statement, that it was aware of no reason for increased activity of its stock on certain day, materially misleading, though target knows that
activity was due to hostile suitor's open market acquisitions of target's stock, if (1) this privileged information has not leaked to public, (2) target has not started or
encouraged public speculation regarding possible mergers and takeovers, and (3) hostile suitor's open market purchases are matter of public record; nor is target,
though conducting parallel discussions with hostile and friendly suitors, under duty to later correct statement; therefore, target is not liable to stockholder who sells
his stock subsequent to target's announcing statement but prior to target's reaching agreement to merge with friendly suitor. Greenfield v Heublein, Inc. (1984, CA3
Pa) 742 F2d 751, CCH Fed Secur L Rep P 91642, cert den (1985) 469 US 1215, 84 L Ed 2d 336, 105 S Ct 1189.
Although initial duty to disclose material merger negotiations exists only in limited circumstances such as where corporation is trading in its own stock or where it is
responsible for rumors of discussions leaking into market, once publicly traded corporation spoke, they could not be patently untruthful, and this company had duty
to clarify and disclose merger discussions because it had issued statement denying knowledge of present or pending corporate developments when in fact merger
discussions were occurring. Levinson v Basic, Inc. (1986, CA6 Ohio) 786 F2d 741, CCH Fed Secur L Rep P 92529, 5 FR Serv 3d 118, vacated, remanded (1988) 485
US 224, 99 L Ed 2d 194, 108 S Ct 978, CCH Fed Secur L Rep P 93645, 24 Fed Rules Evid Serv 961, 10 FR Serv 3d 308.
Former shareholder failed to establish securities laws violations by corporation, where corporate officials initially expressed opposition to proposed sales or merger in
proxy statement and later negotiated merger, which caused increase in stock price after shareholder had sold his shares, because (1) officials were in fact opposed to
sale or merger at time of proxy issuance, (2) no authorized negotiations took place before quarterly report was issued, and (3) repetition in quarterly report of
shareholders' rejection of proposed sale did not imply continuing corporate opposition to sale or merger, and thus no actionable misrepresentations or omissions were
made. Kennedy v Chomerics, Inc. (1987, DC Mass) 669 F Supp 1157, CCH Fed Secur L Rep P 93313.
Corporations and class members alleged that both orally and in proxy/prospectus, company and other defendants represented that transaction involving two huge
automobile manufacturers would be "merger of equals, "a combined company of "equal halves" with "joint leadership," and not "sale of control" or take-over of one
company by other; these allegations, coupled with others, sufficiently alleged actionable misstatements by company and other defendants to support corporations'
and class members' federal securities laws claims. Tracinda Corp. v DaimlerChrysler AG (In re DaimlerChrysler AG Sec. Litig.) (2002, DC Del) 197 F Supp 2d 42, CCH
Claim under 15 USCS § 78j(b) for defendant fund's violation of 15 USCS § 78m(d) failed, because plaintiffs did not set forth adequate allegations that fund had plan
or purpose to change control of defendant company, and exercise of fixed-price warrants did not require fund to disclose merger discussions on its Schedule 13D.
Vladimir v Bioenvision, Inc. (2009, SD NY) 606 F Supp 2d 473.
213.--Special rights given target's officers
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, for tender offeror to fail to reveal that officers and directors of target
corporation had given support to tender offer in return for offeror's agreement to purchase securities in third corporation from those insiders at premium price.
Boggess v Hogan (1971, ND Ill) 328 F Supp 1048, CCH Fed Secur L Rep P 93075.
214.--Tender offers
Purchaser of securities, who fraudulently induced sellers thereof to refrain from selling their shares during effective period of tender offer made by purchaser to class
of shareholders which excluded sellers, upon false promises that upon expiration of such tender offer, second tender offer on terms equally favorable to sellers would
be made to sellers, and who through such tender offer gained ownership of over 90 percent of shares of issuer and thereby controlled market for securities, and who
thereupon effectively forced sellers to sell their securities to purchaser upon terms substantially less favorable to sellers than those received by those who had
previously sold to purchaser pursuant to tender offer and at price substantially lower than sellers could have received had they sold during period in which they had
been induced not to sell by purchaser, violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 thereunder. Travis v Anthes Imperial, Ltd.
(1973, CA8 Mo) 473 F2d 515, CCH Fed Secur L Rep P 93718.
Tender offer materials must disclose asset appraisals based on predictions regarding pure economic and corporate events only if predictions underlying appraisals are
substantially certain to hold because test for materiality is whether there is substantial likelihood that, under all circumstances, omitted fact would have assumed
actual significance in deliberations of reasonable shareholder. Radol v Thomas (1985, CA6 Ohio) 772 F2d 244, CCH Fed Secur L Rep P 92289, cert den (1986) 477 US
903, 91 L Ed 2d 562, 106 S Ct 3272.
District Court, in action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5, did not err in concluding that stock purchaser's
misrepresentation upon purchase of stock that it did not intend to make tender offer for stock of company was material and that sellers of stock relied thereon in
selling stock at price well below purchaser's ultimate tender offer, notwithstanding that sellers' attorney had not put "no tender offer" provision in sales contract and
that there was some delay in sellers' seeking rescission of sales contract, where District Court had made conclusions about reliance as materiality from her
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observation and judgment as to witnesses' credibility. Rowe v Maremont Corp. (1988, CA7 Ill) 850 F2d 1226, CCH Fed Secur L Rep P 93906.
Whether tender offer is fair or unfair or is good or bad transaction does not raise federal question; antifraud provisions of § 10(b) of Securities Exchange Act (15
USCS § 78j(b)) are not violated where adequate information is presented to offerees. Kaufmann v Lawrence (1974, SD NY) 386 F Supp 12, CCH Fed Secur L Rep P
94908, affd (1975, CA2 NY) 514 F2d 283.
Failure to disclose, prior to self-tender, struggle over control of corporation, plans to thwart takeover and details regarding eventual acquisition of control are not
material where defendant's position as controlling majority stockholder is fully disclosed in tender offer materials and where there is no substantial likelihood that
detailed history of how defendant acquired control would assume actual significance in deliberations of reasonable shareholder considering whether to tender his
shares; similarly, corporate officer's thoughts about majority stockholder, possible acquisition of corporation by another company when there are no firm offers for
acquisition, and future earnings prospects are tentative and speculative and not required to be disclosed. Staffin v Greenberg (1981, ED Pa) 509 F Supp 825, CCH
Fed Secur L Rep P 97895, affd (1982, CA3 Pa) 672 F2d 1196, CCH Fed Secur L Rep P 98465.
Allegation that corporate directors intentionally misstated likelihood of more favorable tender offer while knowing competing offer to be unlikely is sufficient to state
claim. Kumpis v Wetterau (1983, ED Mo) 586 F Supp 152, CCH Fed Secur L Rep P 91648.
Under circumstances where corporation made tender offer to minority shareholders pursuant to merger plan without disclosing intent to "go private," relationship
between corporation's alleged deception and ultimate forced sale of minority stock was too attenuated to permit inference that defendants' failure to disclose their
intent was responsible for plaintiffs' injuries. Nutis v Penn Merchandising Corp. (1985, ED Pa) 610 F Supp 1573, CCH Fed Secur L Rep P 92253, affd without op
(1986, CA3 Pa) 791 F2d 919 and affd without op (1986, CA3 Pa) 791 F2d 919.
Shareholders failed to allege that defendants' failure to file Schedule 13D was omission upon which they relied when they tendered their shares; because they did
not make such allegation, given that Schedule 13D was included as exhibit to tender offer, shareholders' claim under § 10(b) of Securities Exchange Act of 1934 was
dismissed without leave to amend. In re Luxottica Group S.p.A. Sec. Litig. (2003, ED NY) 293 F Supp 2d 224.
215.--Value of stock or corporation
Allegation that parent corporation, in seeking short form merger of subsidiary corporation, misrepresented value of subsidiary corporation and attempted to establish
unconscionably low value for subsidiary's stock, it being asserted that parent corporation thus engaged in fraudulent scheme to freeze out public stockholders and to
eliminate subsidiary corporation as independent entity, was within purview of 15 USCS § 78j(b). Grace v Ludwig (1973, CA2 NY) 484 F2d 1262, CCH Fed Secur L Rep
P 94150, cert den (1974) 416 US 905, 40 L Ed 2d 110, 94 S Ct 1610.
In action under 15 USCS § 78j(b), minority stockholders challenging corporate merger fail to establish that company misrepresented value of stock or purpose of
merger, where company establishes that price offered for stock of minority holders was same as that given in recent arm's-length transaction, timing of merger was
related to planned expansion of company, and merger would enable company to secure loan for such expansion. Dower v Mosser Industries, Inc. (1981, CA3 Pa) 648
216.--Appraisal alternatives
In merger, reasonable shareholder would consider right to appraisal alternative important in deciding whether or not to tender his shares, and failure to inform
minority shareholders in tender materials that they would have appraisal rights under state law at time of subsequent merger was material omission within meaning
of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Valente v Pepsico, Inc. (1978, DC Del) 454 F Supp 1228, CCH Fed Secur L Rep P 96496.
Nontendering shareholders' federal securities fraud claims survive summary judgment, where shareholders argue tender offeror misrepresented intentions
concerning availability of appraisal rights by stating in tender offer and proxy statement that they would not assert jurisdictional defense to shareholders' appraisal
action in state court, but then in fact did raise such defense, because even though tender offeror did not technically object or assert defense to state court
jurisdiction, it did bring adverse precedent to court's attention and court dismissed appraisal action for lack of subject matter jurisdiction, after prior statements may
have led nontendering shareholders to believe state court would likely entertain appraisal proceeding. Bruno v Cook (1987, SD NY) 660 F Supp 306, CCH Fed Secur L
Rep P 93258.
Securities fraud claim by investors against principals of bankrupt corporation for acquisition must fail, where investors insist corporation should have accounted for
acquisition as "troubled debt restructuring" instead of "purchase" which overstated acquired company's worth, but fail to offer competent evidence of company's
"correct" valuation, because investors failed to establish that corporation's method of accounting for acquisition was fraudulent. Brogren v Pohlad (1997, DC Minn)
Allegation of unfairness in merger terms, standing alone, does not state claim for relief under Rule 10b-5. Nash v Farmers New World Life Ins. Co. (1978, CA6 Ohio)
In action under 15 USCS § 78j(b), minority stockholders challenging corporate merger fail to establish that company misrepresented value of stock or purpose of
merger, where company establishes that price offered for stock of minority holders was same as that given in recent arm's-length transaction, timing of merger was
related to planned expansion of company, and merger would enable company to secure loan for such expansion. Dower v Mosser Industries, Inc. (1981, CA3 Pa) 648
SEC does not require disclosure of internal asset appraisals, earnings projections, and appraisals done by outside consultants of "white knight", and such "soft
information" such as asset appraisals and projections must be disclosed only if reported values are virtually as certain as hard facts. Starkman v Marathon Oil Co.
(1985, CA6 Ohio) 772 F2d 231, CCH Fed Secur L Rep P 92290, cert den (1986) 475 US 1015, 89 L Ed 2d 310, 106 S Ct 1195, reh den (1988) 486 US 1018, 100 L Ed
2d 221, 108 S Ct 1759 and (ovrld in part as stated in Pittiglio v Michigan Nat'l Corp. (1995, ED Mich) 906 F Supp 1145, CCH Fed Secur L Rep P 99089).
Disclosure of information by tender offer target which would simply reinforce, rather that correct or modify, statements made is not required by Rule 10(b)(5); thus
company which informed shareholders that hostile takeover offer was "grossly inadequate" and that company was exploring other possibilities had no duty to disclose
"soft" information such as speculative asset appraisals and details of search for and preliminary negotiations with "white knight". Starkman v Marathon Oil Co. (1985,
CA6 Ohio) 772 F2d 231, CCH Fed Secur L Rep P 92290, cert den (1986) 475 US 1015, 89 L Ed 2d 310, 106 S Ct 1195, reh den (1988) 486 US 1018, 100 L Ed 2d
221, 108 S Ct 1759 and (ovrld in part as stated in Pittiglio v Michigan Nat'l Corp. (1995, ED Mich) 906 F Supp 1145, CCH Fed Secur L Rep P 99089).
Shareholder in investment company did not have cause of action under §§ 10(b) and 14(a) of Securities Exchange Act of 1934 (15 USCS §§ 78j(b) and 78n(a)) or,
SEC Rules 10b-5 and 14a-9, based on proxy statement concerning purchase of investment company by another company where claim was based on allegation that
proxy statement was false and misleading in that it characterized contract between management company which had provided investment advise to investment
company and purchaser of investment company as legitimate investment advisory contract rather than as "guise" and "sham" to conceal true fact that management
company, and individual defendants, were diverting to themselves assets of investment company that belonged to all shareholders, since proxy statement did
disclose all of relevant factual details concerning sale, including now-disputed contingent fee to be paid by purchaser to management company, and through this
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disclosure reasonably intelligent shareholders were made aware of substance of proposed transaction, and shareholder had no grounds under 1934 Act for
complaining about management's choice of words. Lessler v Little (1988, CA1 RI) 857 F2d 866, CCH Fed Secur L Rep P 94020, cert den (1989) 489 US 1016, 103 L
Ed 2d 192, 109 S Ct 1130.
Where corporation announced potential statutory violations casting doubt on merger, shareholders satisfied pleading requirements with respect to issue of falsity
because corporation warranted in merger agreement that it was in compliance with all laws and shareholders pled facts demonstrating that corporation was not in
compliance with § 13(b) (15 USCS § 78m(b)) of Securities Exchange Act of 1934. Glazer Capital Mgmt., LP v Magistri (2008, CA9 Cal) 549 F3d 736, CCH Fed Secur L
Rep P 95008.
District court properly held defendant responsible for multiple violations of 10 USCS §§ 78j, 78m and 78t arising from failure to file and filing of false and misleading
documents with Securities and Exchange Commission, American Stock Exchange and stockholders of target company in takeover bid, where failures to file and
omissions from filings were for purpose of concealing defendant's connection with takeover group controlled by him, formed to take over one company controlled by
him, to then be used to take over another company, notwithstanding that defendant was not actually member of takeover group or of first target company. SEC v
Savoy Industries, Inc. (1981, App DC) 215 US App DC 7, 665 F2d 1310, CCH Fed Secur L Rep P 98295.
In action brought by allegedly defrauded seller of stock against companies and individuals, claim of direct violation of Rule 10b-5 by broker would be dismissed,
where broker was not officer or director of companies and did not deal directly with plaintiff; however, count alleging conspiracy to violate Rule 10b-5 on part of all
defendants, alleging that defendants aided-and-abetted scheme to defraud plaintiff by reacquiring stock from her without informing her of pending sale of companies
to third party, was sufficient to support aiding and abetting claim against broker. Martin v Pepsi-Cola Bottling Co. (1986, DC Md) 639 F Supp 931, CCH Fed Secur L
Rep P 92786.
Securities fraud claim is not stated under 15 USCS § 78j(b), where claim is based on argument that investment company had obligation to inform client investors of
merger information, because brokers may not disclose inside information to clients for their benefit in trading securities. Cotton v Merrill Lynch, Pierce, Fenner &
Smith, Inc. (1988, ND Okla) 699 F Supp 251, CCH Fed Secur L Rep P 93985.
Securities fraud class action against parties involved in merger of bank holding companies must fail, where representative plaintiff, who made profit of $ 4,620.91 on
his $ 23,249.91 investment in little over 4 months, complains that merger was not achieved in time for him to receive first quarter dividend of parent company,
which would have given him additional $ 207, because even if announcements regarding timing of merger were misleading--which they were not--plaintiff's decision
to invest and vote in favor of merger would not reasonably have changed on basis that his overall profit would be 20 percent instead of 21 percent. Kas v First Union
Corp. (1994, ED Va) 857 F Supp 481, CCH Fed Secur L Rep P 98434.
Parent corporation's statements to subsidiary's shareholder, in requesting stock transfer from shareholder to help consummate subsidiary's merger, that "everyone is
giving up something" and that all shareholders were being treated alike, were not fraudulent, as required to support claim under 15 USCS § 78j(b), Rule 10(b) and
10b-5, and state fraud law, where other shareholders sacrificed reduction in book value. Hecker v Micron Tech., Inc. (1997, DC Idaho) 32 F Supp 2d 1193, affd
(1998, CA9 Idaho) 1998 US App LEXIS 29037.
Plaintiff's §§ 10(b), 14(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j, 78n, failed where plaintiff did not establish that defendants made actionable written
misrepresentations in stockholder or business combination agreements, or proxy/prospectus; plaintiff did not establish that proxy/prospectus was false and
misleading with respect to selection of German AG form of business entity in connection with merger, and proxy/prospectus did not disclose, as plaintiff contended,
that parties believed German AG form was relevant to "merger of equals" concept. Tracinda Corp. v DaimlerChrysler AG (2005, DC Del) 364 F Supp 2d 362, CCH Fed
Secur L Rep P 93236, request gr, costs/fees proceeding (2005, DC Del) 2005 US Dist LEXIS 6741.
Plaintiff's §§ 10(b), 14(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j, 78n, failed where plaintiff did not establish that defendants made actionable written
misrepresentations in stockholder or business combination agreements, or proxy/prospectus; sufficient information was provided in proxy/prospectus in reasonable
format so as to enable investors to draw their own conclusions as to risks of transaction, including risk of corporate governance changes. Tracinda Corp. v
DaimlerChrysler AG (2005, DC Del) 364 F Supp 2d 362, CCH Fed Secur L Rep P 93236, request gr, costs/fees proceeding (2005, DC Del) 2005 US Dist LEXIS 6741.
Plaintiff's §§ 10(b), 14(a) of Securities Exchange Act of 1934, 15 USCS §§ 78j, 78n, failed, where plaintiff did not establish that defendants made actionable written
misrepresentations in stockholder or business combination agreements, or proxy/ prospectus; plaintiff did not establish misrepresentation based on use of term
"merger of equals"; although business combination agreement and proxy/prospectus set forth proposals concerning numbers of individuals on management board
and supervisory board from each side of transaction, those documents did not require proposed compositions to last for any specific period of time, reiterated that
proposed compositions were initial compositions, stated that proposed compositions were recommendations subject to rights and approval of shareholders and
supervisory board, and made clear that changes to corporate governance structure were not barred after consummation of transaction. Tracinda Corp. v
DaimlerChrysler AG (2005, DC Del) 364 F Supp 2d 362, CCH Fed Secur L Rep P 93236, request gr, costs/fees proceeding (2005, DC Del) 2005 US Dist LEXIS 6741.
218. Value and price of stock
With respect to sale of Indians' shares of stock in development corporation managing Indians' mineral rights and unadjudicated claims against United States,
employees of bank in which certificates for stock were deposited violated SEC Rule 10b-5, where employees misstated that prevailing market price for shares was
figure at which their purchases were made. Affiliated Ute Citizens v United States (1972) 406 US 128, 31 L Ed 2d 741, 92 S Ct 1456, CCH Fed Secur L Rep P 93443,
reh den (1972) 407 US 916, 32 L Ed 2d 692, 92 S Ct 2430 and reh den (1972) 408 US 931, 33 L Ed 2d 345, 92 S Ct 2478 and (criticized in Sandwich Chef of Tex.,
Inc. v Reliance Nat'l Indem. Ins. Co. (2001, SD Tex) 202 FRD 484, RICO Bus Disp Guide (CCH) P 10139).
Trial court did not err, in civil action alleging violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), by instructing jury to find defendant liable for
material misrepresentation if they found that defendant, in merger negotiations, had intentionally or negligently misrepresented or failed to declare facts regarding
fair value of its stock. Robinson v Cupples Container Co. (1975, CA9 Cal) 513 F2d 1274.
Although violation of Act and Rule is not excused by fair and adequate purchase price, purchase price is factor which may be considered in determining whether
plaintiffs would have acted differently had they been aware of information not disclosed. Ehrler v Kellwood Co. (1975, CA8 Mo) 521 F2d 1347, CCH Fed Secur L Rep P
95271.
General partners may be liable for securities fraud even though prospectus informed limited partner of artificial value of shares exchanged for his interest, where
general partners knew stated value of shares could not be obtained. Mayer v Oil Field Systems Corp. (1983, CA2 NY) 721 F2d 59, CCH Fed Secur L Rep P 99549.
It is not violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) to state that price offered for securities is fair and adequate where price concerned is
above book or market value. Mills v Sarjem Corp. (1955, DC NJ) 133 F Supp 753.
Information as to exchange basis for shares of 2 corporations involved in contemplated merger was material information required to be disclosed under § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)). Nathanson v Weis, Voisin, Cannon, Inc. (1971, SD NY) 325 F Supp 50, CCH Fed Secur L Rep P 92998, 26 ALR Fed 671.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for seller of securities to fail to disclose that seller had purchased securities for
approximately 10 percent of selling price, and that seller had sold or was selling his remaining stock in corporation to another party for approximately 25 percent of
price being charged purchaser. Blasdel v Mullenix (1971, WD Okla) 356 F Supp 924, CCH Fed Secur L Rep P 94047.
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In order to recover in private action under antifraud provisions of Securities Exchange Act, it is necessary for plaintiff to show not only false representation or
omission of information, but that what was misrepresented or withheld was material, and where allegation of omission of information relates to price at which
corporation has agreed to sell securities to third person, which third person has in turn agreed to sell portion of such securities to plaintiff, such omission is not
material where plaintiff in fact was aware of price agreed upon between corporation and third person and was willing to pay higher price per share based upon his
own investment judgment as to worth of corporation, which judgment was based on full information untainted by any fraudulent misrepresentation or omission.
Branham v Material Systems Corp. (1973, SD Fla) 354 F Supp 1048, CCH Fed Secur L Rep P 93988.
Statement that price offered for securities in tender offer is "inadequate" is not false or misleading statement or omission of material fact on grounds that it gives no
basis for claim that offered price is "inadequate" since term, when used in connection with price of stock, is highly subjective, price of stock in general market being
controlled not only by price-earnings ratio and other such mathematical formulae but by intuition or "hunch" of buyers and sellers of stock; in any event, such
statement cannot be deemed to be false or misleading where basis for opinion of claimed "inadequacy" of offered price is spelled out by management of corporation
making such statement in letter to shareholders on day following date upon which alleged misleading statement was made. Gulf & Western Industries, Inc. v Great
Atlantic & Pacific Tea Co. (1973, SD NY) 356 F Supp 1066, CCH Fed Secur L Rep P 93765, 1973-1 CCH Trade Cases P 74357, affd (1973, CA2 NY) 476 F2d 687, CCH
Fed Secur L Rep P 93814, 1973-1 CCH Trade Cases P 74403.
It was violation of § 10(b) for securities salesmen falsely to represent to customers that price at which they were offering bonds was at or below current market
prices, and to omit to tell other customers that price at which bonds were offered greatly exceeded current market prices. SEC v Charles A. Morris & Associates, Inc.
(1973, WD Tenn) 386 F Supp 1327, CCH Fed Secur L Rep P 93756.
USCS § 78j(b). Marshall Associates, Inc. v Lite--Tronics, Inc. (1974, WD Pa) 372 F Supp 905.
Allegations that controlling shareholders effected merger for purpose of squeezing out minority shareholders, and that controlling shareholders misrepresented facts
to accounting firms so as to obtain lowest possible value of stock upon which to base payment to minority shareholders, stated claim under § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. Levine v Biddle Sawyer Corp. (1974, SD NY) 383 F Supp 618, CCH Fed Secur L Rep P 94816.
It was violation of SEC Rule 10b-5 for purchaser of securities fraudulently to represent to seller that stock was practically worthless. Rude v Cambell Square, Inc.
(1976, DC SD) 411 F Supp 1040, CCH Fed Secur L Rep P 95691.
Undisclosed information dealing with preliminary negotiations for sale of corporate assets may be considered "material" where negotiations included substantial
overtures that, if known by plaintiffs, might have affected their willingness to sell their stock at price quoted. Paul v Berkman (1985, WD Pa) 620 F Supp 638, CCH
Nontendering shareholders' federal securities fraud claims are dismissed, where plaintiffs allege proxy statement soliciting acceptance of takeover/merger
fraudulently underestimated value of corporation's land holdings, because (1) alleged fraudulent statements did not induce plaintiffs to tender their shares, and (2)
alleged fraudulent statements could not have caused shareholder approval of merger since tender offeror already owned 87 percent of shares at that point, and
therefore allegations fail to show required element of reliance and causation. Bruno v Cook (1987, SD NY) 660 F Supp 306, CCH Fed Secur L Rep P 93258.
Court denies broker-dealer's and salesperson's motions to dismiss 15 USCS § 78j(b) claim of stock purchasers, where plaintiffs allege that president of corporation
falsely asserted to securities salespersons of broker-dealer that, inter alia, his corporation's stock was guaranteed to open at $ 1.25, and that salespersons knowingly
conveyed such false information to plaintiffs in order to induce their stock purchases, because plaintiffs' allegations sufficiently set forth requisite (1) false material
representation, (2) in connection with purchase of security, (3) scienter, (4) reliance, and (5) causation. Jubran v Musikahn Corp. (1987, ED NY) 673 F Supp 108,
Former shareholders are denied summary judgment on their securities fraud claims against corporation and its former president and board chairman, where
shareholders' allegation that defendants did not disclose that they did not consider fairness of self-tender offer price accepted by shareholders is tantamount to
allegation that defendants breached their fiduciary duty to shareholders, because such allegation is not one of intentional material omission that must be basis of
claim under 15 USCS §§ 78j(b) and 78m(e). Lessner v Casey (1988, ED Mich) 681 F Supp 415, CCH Fed Secur L Rep P 93932.
District Court had subject-matter jurisdiction over former wife's suit against former husband alleging that former husband violated 15 USCS § 78j and Rule 10b-5
during negotiation of partition agreement by misrepresenting value of stock that former wife was to sell him pursuant to agreement. Powell v Chambers (1999, MD
La) 69 F Supp 2d 854.
Alleged guarantee by acquiring corporation that its stock would trade at certain post-merger price was nonactionable fraud under 15 USCS § 78j(b), since any
reliance by investor on purported guarantee of specific stock price was unreasonable as matter of law. Pacheco v Cambridge Technology Partners (Massachusetts),
Inc. (2000, DC Mass) 85 F Supp 2d 69.
In securities fraud action by stock purchaser alleging that company and its officers made misstatements and omissions surrounding value of company's stock in
violation of 15 USCS §§ 78j(b) and 78t(a), and 17 C.F.R. § 240.10b-5, motion of company and its officers to dismiss for failure to state claim was granted where (1)
purchaser failed to plead, as required by Private Securities Litigation Reform Act, that alleged misrepresentations proximately caused or even touched upon reasons
for his loss; (2) certain forward looking statements by company and its officers accompanied by sufficient cautionary language were protected under Reform Act's
safe harbor; and (3) as to one statement, purchaser failed to allege with particularity facts giving rise to strong inference that company and its officers acted in
severely reckless manner as required by Reform Act. Barr v Matria Healthcare, Inc. (2004, ND Ga) 324 F Supp 2d 1369, CCH Fed Secur L Rep P 92872.
Failure to disclose arbitrary fixing of price of securities is violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). In re Lowenthal, Hale, Jaffe, Inc.,
Securities Exchange Act of 1934, Release No. 10844, June 7, 1974, SEC Docket Vol 4, No. 11, p 383, 1974 SEC LEXIS 1150.
219.--Anticipated changes
Baseless assertion that price of securities being sold would appreciate was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). R. A. Holman & Co. v
SEC (1966, CA2) 366 F2d 446, amd on other grounds (1967, CA2) 377 F2d 665 and cert den (1967) 389 US 991, 19 L Ed 2d 482, 88 S Ct 473, reh den (1968) 389
US 1060, 19 L Ed 2d 867, 88 S Ct 767.
Statement that price of highly speculative and unregistered securities would soon go "sky high", as result of contemplated merger, was violation of § 10(b) of
Securities Exchange Act (15 USCS § 78j(b)). Nees v SEC (1969, CA9) 414 F2d 211, CCH Fed Secur L Rep P 92455.
Baseless predictions regarding likelihood of appreciation in value of stock being sold without adequate basis violated § 10(b) of Securities Exchange Act (15 USCS §
78j(b)). Armstrong, Jones & Co. v SEC (1970, CA6) 421 F2d 359, CCH Fed Secur L Rep P 92562, cert den (1970) 398 US 958, 26 L Ed 2d 543, 90 S Ct 2172.
Fraudulent statement that public offering of security would be made at price 3 times then trading level and prediction that price would rise to higher level constituted
violation of Securities Exchange Act § 10(b) (15 USCS § 78j(b)), and SEC Rule § 10b-5. SEC v Dolnick (1974, CA7 Ill) 501 F2d 1279, CCH Fed Secur L Rep P 94762.
In suit by former shareholders of subsidiary charging that parent corporation failed to disclose existence of negotiations for sale of parent company, knowledge of
impending sale, although it might have affected market value of stock by demonstrating greater need for parent to purchase subsidiary shares, thereby apprising
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plaintiffs of "nuisance value" of retaining shares, is not information of type that 15 USCS § 78j was intended to encompass. Grigsby v CMI Corp. (1985, CA9 Cal) 765
Statements of salesmen as to future market prices, even though mere predictions and opinions, were uttered for purpose of influencing customers to buy stock and
were not voiced in good faith, and salesmen knew, or should have known, that there was no basis in fact for such optimistic representations and voicing such
opinions was violation of Securities Exchange Act. Securities & Exchange Com. v Broadwall Secur., Inc. (1965, SD NY) 240 F Supp 962.
Physician and others who formed corporation to market drug and engaged in telephone and writing campaign to sell stock in company, claiming, inter alia, that 1
share of stock selling for $ 1 would shortly be worth $ 25 per share violated SEC Rule 10b-5. Reube v Pharmacodynamics, Inc. (1972, ED Pa) 348 F Supp 900, CCH
Corporate officers were not obligated to volunteer information about negotiations, which they presumed to be non-public, concerning corporation's sale of technical
information and Japanese patents to Japanese company, and Japanese company's purchase of one million shares of corporation's common stock. Defendant officers'
statements during period of negotiations that they were unable to attribute unusually heavy trading in corporation's stock to any corporate developments were not
"untrue" or "misleading" under Rule 106-5, since undisclosed events cannot affect market, and no rumors or even knowledge of rumors could be attributed to
defendants. Zuckerman v Harnischfeger Corp. (1984, SD NY) 591 F Supp 112, CCH Fed Secur L Rep P 91470.
In order for prediction of stock price to be basis of action under 15 USCS § 78j, prediction must have been made with intent to defraud and, although prediction may
be found misleading, no action will lie where there is no credible evidence of intent to defraud with respect to future performance of stock price. Mayer v Oil Field
Systems Corp. (1985, SD NY) 611 F Supp 635, CCH Fed Secur L Rep P 92075, affd (1986, CA2 NY) 803 F2d 749, CCH Fed Secur L Rep P 92953.
It was violation of antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for securities broker to state that price of stock being sold would rise
in future even though price did in fact rise and several investors sold stock at increased prices; whether representation as to future market price is fraudulent
depends upon whether representation is warranted by facts and circumstances at time it is made and not upon subsequent fortuitous rise in price. Re Heft, Kahn &
Infante, Inc. (1963) 41 SEC 379.
It was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) for securities broker, in selling securities of corporation, to represent without basis that
limited amount of stock was available and that it would probably open on trading market in short period at price substantially above offering price, and that customer
could not possibly lose money on such stock. In re Schmidt, Sharp, McCabe & Co. (1965) 42 SEC 745.
In selling securities of company which intended to sell birth control pills but had not demonstrated efficacy of pills or legal right to sell them anywhere except
Republic of Panama, broker violated fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 in asserting without justification
that market price of securities, which then ranged between $ 2 and $ 20 per share, would go to at least $ 50 and might reach $ 100 per share, and that stock would
be comparable to that of another company which was well established in field. In re Spangler, Inc. (1976) 46 SEC 238.
220. Others
Preliminary injunction enjoining defendants from violation of federal securities laws will be reversed, despite fact that issuance and sale of Safekeeping Receipts for
Treasury Bills (TBs) violated 15 USCS § 78j(b) in that investors will be purchasing interest in pool of TBs instead of in identifiable TB, since TB program came close to
being innocuous. SEC v American Bd. of Trade, Inc. (1984, CA2 NY) 751 F2d 529, CCH Fed Secur L Rep P 91894.
Where investor in new fishing operation knew that venture did not predate his investment and admitted that he was aware of various risks and that other items were
not at issue when he purchased his interest, court will not find materiality in venture's failure to set forth risks of investment, whether venture would lease or buy
fishing boats, and type of fish to be gathered. Toombs v Leone (1985, CA9 Cal) 777 F2d 465, CCH Fed Secur L Rep P 92394.
In suit alleging violations of §§ 12(2) and 17(a) of Securities Act of 1933 (15 USCS §§ 77 l(2) and 77q(a)) and of § 10(b) of Securities Exchange Act of 1934 (15
USCS § 78j(b)) by bank following its conversion from mutual savings bank owned by its depositors to stock form of organization, complaint alleges securities law
violations where it claims that plaintiff purchasers relied on false representations in making purchases of stock, it names appraisers as parties, and complaint is not
based on alleged violations of any regulation of Federal Home Loan Bank Board regarding approval of bank's conversion plan, but alleges that purchasers were
defrauded as result of their reliance on representations in stock offering circular after conversion. Rembold v Pacific First Federal Sav. Bank (1986, CA9 Or) 798 F2d
Omission by company seeking to go private of disclosure required by SEC Rule 13e-3(e), promulgated under § 13(e) of Securities Exchange Act of 1934 (15 USCS §
78m(e)), will constitute violation of anti-fraud provisions of § 10(b), 13(e), and 14(a) of Act (15 USCS §§ 78j(b), 78m(e), and 78n(a)), only where information is
necessary to prevent half-truth; violations of Rule 13e-3, Item 8, which violations consist of insufficiently detailed statements as to why proposal to go private is fair
and factors upon which belief in fairness is based, do not constitute fraud under §§ 10(b) and 14(a), but should be considered as violations only of specific rule in
question. Howing Co. v Nationwide Corp. (1987, CA6 Ohio) 826 F2d 1470, CCH Fed Secur L Rep P 93340, cert den (1988) 486 US 1059, 100 L Ed 2d 930, 108 S Ct
2830.
No cause of action with respect to alleged nondisclosures in proxy and tender offer materials was stated under § 10(b) for § 14(a) or (e) of Securities Exchange Act
of 1934 (15 USCS § 78j(b) or § 14(a) or (e)) to extent that complaint alleged failure to disclose various social and professional relationships among officers and
directors of target company where relationships are trivial, and immaterial as matter of law, especially in light of extensive disclosure of management and director of
stock ownership and terms of management's participation in leveraged buy-out; similarly, allegation that defendant violated their disclosure obligations by "burying"
identity of directors in annex to "offer to purchase" was frivolous as matter of law. Field v Trump (1988, CA2 NY) 850 F2d 938, CCH Fed Secur L Rep P 93905, 100
ALR Fed 421, cert den (1989) 489 US 1012, 103 L Ed 2d 185, 109 S Ct 1122.
There was violation of § 10(b) of Securities Exchange Act of 1934 and of SEC Rules 10b-5 and 10b-9(a)(2), by corporate registered securities broker-dealer and
individual who was registered broker and president of corporate broker-dealer, where corporate-broker was managing underwriter for public offering of corporation's
stock, which was offered on "best efforts, part-or-none" basis, according to which proceeds of offering were to be held in escrow and returned to investors if specified
number of shares were not sold within offering period, but improper attempt was made to make offering appear successful when required number of shares had not
been sold in that parties had obtained short-term loans and arranged for purchase by related entities of minimum amount of shares which would close offering, and
once offering had been closed and escrow broken, loans were repaid with funds from offering itself; it was not defense that prospectus contained "friends of the
company list" or "directed stock list," providing for sale of stock to persons designated by issuing company, since not only are these types of provisions more likely to
be operative where demand for stock exceeds supply, but prospectus claimed that such sales would be made only to extent not inconsistent with public distribution
of stock, whereas transactions in question were inconsistent with public distribution since they diluted efficacy of "part-or-none" provision. C.E. Carlson, Inc. v SEC
(1988, CA10) 859 F2d 1429, CCH Fed Secur L Rep P 93800, reh den (1988, CA10) 859 F2d 1429, CCH Fed Secur L Rep P 94100.
Where plaintiff union alleged defendant investment advisor/manager formed subsidiary to perform certain functions but did not disclose its limited role and that
previous third party would provide majority of services for reduced fee, and that advisor's "other fees," were more akin to "management fees" that were required to
be separately stated, such misrepresentations were material under 15 USCS § 78j(b) since advisor would be lining its pockets at expense of investors, and few facts
were more important in investors' "total mix" of information than fact that, in violation of disclosure requirements, expenses categorized as transfer agent fees were
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not transfer agent fees at all and included kickbacks to subsidiary. Operating Local 649 Annuity Trust Fund v Smith Barney Fund Mgmt. LLC (2010, CA2 NY) 595 F3d
Press release was unequivocally false and left impression that anticipated product existed and no reasonable juror could conclude that corporation was not conscious
that press release could be misinterpreted, so it was issued with deliberate recklessness. SEC v Platforms Wireless Int'l Corp. (2010, CA9 Cal) 617 F3d 1072.
Sellers of franchise agreements, which were found to be investment contracts, violated antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b))
and SEC Rule b-5 by failing to disclose that: (1) franchisor's management was receiving overrides equalling 18 percent of gross franchise sales; (2) certain
executives of franchisor had received franchises for "services"; (3) none of franchisor's incorporators or key executives had any managerial experience in industry in
which franchisor sought to compete; and (4) no retail commissions were to be paid during "pilot program". SEC v Galaxy Foods, Inc. (1976, ED NY) 417 F Supp
1225, CCH Fed Secur L Rep P 95684, affd without op (1977, CA2 NY) 556 F2d 559, cert den (1977) 434 US 855, 54 L Ed 2d 127, 98 S Ct 175.
In securities fraud case under 15 USCS § 78j(b), allegation of lack of valid corporate purpose does not fulfill requirement of deception, misrepresentation, or
nondisclosure of material facts; directors' failure to disclose motive for repurchase by corporation of its stock does not constitute deception, misrepresentation or
nondisclosure of material fact within meaning of Rule 106-5 (15 USCS § 78j(b)). Gieringer v Silverman (1982, ED Wis) 539 F Supp 498, CCH Fed Secur L Rep P
98732, affd (1984, CA7 Wis) 731 F2d 1272, CCH Fed Secur L Rep P 91422.
False entry into corporate minute book stating that directors approved swap of gold medallions for stock violated 15 USCS § 78j(b). SEC v World-Wide Coin Inv.
(1983, ND Ga) 567 F Supp 724, CCH Fed Secur L Rep P 99214.
Corporation's failure to advise its shareholders of pertinent facts of employee stock ownership plan does not constitute material, fraudulent omission in violation of 15
USCS §§ 78j(b) and 78n(e), where (1) under New Jersey law there was no requirement that plan be submitted for shareholder approval, (2) Supreme Court has
rejected such attempts to bring arguable violations of state law fiduciary duties within ambit of nondisclosure provisions of federal securities regulations, and (3)
even if fault were found with completeness of corporation's disclosures, remedy would be to require full and fair disclosure, not to rescind lawful and appropriate
corporate act. Danaher Corp. v Chicago Pneumatic Tool Co. (1986, SD NY) 633 F Supp 1066, 7 EBC 1433, CCH Fed Secur L Rep P 92556.
Claims of misrepresentation and omissions against stock-broker are sufficient because investors alleged that broker misrepresented that options were safe form of
investment suitable for generating conservative growth and income consistent with elderly investors' investment needs and alleged that broker omitted to consider
investors' needs and best interests in order to sell them securities which were not suitable for them but which would generate commissions larger than those on
bonds or stocks, and because misrepresentations and omissions were "in connection with purchase or sale of security" where they allegedly induced investors to
open option and margin accounts. Levine v Merrill Lynch, Pierce, Fenner & Smith, Inc. (1986, SD NY) 639 F Supp 1391, CCH Fed Secur L Rep P 92841.
Corporation's officers misrepresented meaning of resolution of corporation's board of directors concerning purchase of employee's stock, and thus violated 15 USCS §
78j(b), in action by employee following sale of stock, where (1) resolution stated corporation "shall buy" employee's shares, not that employee must sell them, and
(2) officers told employee that he was required to sell, because resolution can be interpreted as agreement to convince employee just as well as agreement to order
him. McLaury v Duff & Phelps, Inc. (1988, ND Ill) 691 F Supp 1090, 52 BNA FEP Cas 558, 46 CCH EPD P 38050, CCH Fed Secur L Rep P 93767.
Securities fraud action fails under 15 USCS § 78j(b), where managers of retirement fund clearly stated in prospectuses that fund would seek to achieve long-term
growth by investments in longer-term fixed income securities and statement occurred long before stock market crash, because investors were not misinformed. De
Bruyne v Equitable Life Assurance Soc. (1989, ND Ill) 720 F Supp 1342, 11 EBC 1625, CCH Fed Secur L Rep P 94843, affd (1990, CA7 Ill) 920 F2d 457, 13 EBC
Securities fraud claim is stated under 15 USCS § 78j(b), where complaint alleges that stockbroker explicitly promised investor 10 percent return on short-term
investment, because such specificity takes prediction of profit out of realm of puffery and into that of actionable misrepresentation. Shamsi v Dean Witter Reynolds,
Inc. (1989, DC Mass) 743 F Supp 87, CCH Fed Secur L Rep P 94892.
Trial is necessary in securities fraud suit under 15 USCS § 78j(b), where unresolved factual issues concerning "banding" method for fixing annuity interest include
whether it produced higher yield than portfolio method, when limitation's period began to run, and whether nondisclosure of banding method was material, because
material issues of fact remain. Otto v Variable Annuity Life Ins. Co. (1990, ND Ill) 730 F Supp 145, CCH Fed Secur L Rep P 95260.
Investors' claim for violations of 15 USCS § 78j(b) against personal financial planning firm is not granted summarily, where documents investors submitted used
ambiguous terms such as "investment fees" or "placement fees" to describe payments firm received from limited partnerships into which investors purchased and
documents only described firm's aggregate revenue stream, because investors failed to present undisputed evidence that firm received commissions on investments
that are subject of action. Borden, Inc. v Spoor Behrins Campbell & Young (1993, SD NY) 828 F Supp 216, CCH Fed Secur L Rep P 97696.
Buyer's motion to dismiss seller's securities fraud claim is denied, where seller agreed to sell securities to buyer in return for commission payment, liquidated
expenses, consulting contract for seller, and options to acquire stock, buyer bought seller's stock and subsequently bought entire company, and buyer reneged on
compensation deal, because claim that buyer induced seller to part with his stock through fraudulent scheme is sufficient to fall within broad reach of 15 USCS §
78j's prohibition of material misstatements with intent to deceive or defraud in connection with sale of securities. Leisure Founders v CUC Int'l (1993, SD Fla) 833 F
Supp 1562, CCH Fed Secur L Rep P 98113, 7 FLW Fed D 394.
Claim of debenture holders against issuer and offerors, its directors and officers and co-underwriters is dismissed, where holders alleged that prospectus gave
investors false impression that in event of default senior lenders had only 2 remedies available (debt acceleration or forced asset sale), but where prospectus did not
indicate that they were exclusive remedies but, rather, identified in various places range of remedies available to senior lenders in event of default, because when
read as whole prospectus did disclose all available remedies and was not materially misleading. Nielsen v Greenwood (1994, ND Ill) 849 F Supp 1233, magistrate's
recommendation (1994, ND Ill) CCH Fed Secur L Rep P 98523, accepted, adopted, motion gr (1995, ND Ill) 873 F Supp 138, affd sub nom Nielsen v Piper, Jaffray &
Hopwood (1995, CA7 Ill) 66 F3d 145, CCH Fed Secur L Rep P 98970, cert den (1996) 516 US 1116, 133 L Ed 2d 849, 116 S Ct 919 and magistrate's
recommendation, class certif gr, in part, class certif den, in part, summary judgment gr (1996, ND Ill) 1996 US Dist LEXIS 14441.
Corporation did not fail to disclose material facts regarding its condition, so as to be liable for securities fraud under 15 USCS §§ 78j(b) and 10(b), where price of
stock dropped only 2 percent upon announcement of reduction in market plans that allegedly "stunned" marketplace, indicating that market already had discounted
price based on earlier disclosures. Leventhal v Tow (1999, DC Conn) 48 F Supp 2d 104, CCH Fed Secur L Rep P 90623.
Investors failed to state claim of securities fraud under 15 USCS § 78j(b) against company manufacturing mobile and modular homes when they alleged company
announced it would not be acquiring any outlets of its largest customer, which was bankrupt, and then did "complete turnaround" by leasing 37 locations one month
later, since necessary showing that statement was reckless was not made. Miller v Champion Enters. (In re Champion Enters., Secs. Litig.) (2001, ED Mich) 144 F
Supp 2d 848, motion den, dismd (2001, ED Mich) 145 F Supp 2d 871, CCH Fed Secur L Rep P 91465, affd (2003, CA6 Mich) 346 F3d 660, 56 FR Serv 3d 1177, 2003
FED App 359P, reh den, reh, en banc, den (2003, CA6) 2003 US App LEXIS 26622 and (criticized in Carol Gamble Trust 86 v E-Rex, Inc. (2004, CA9 Nev) 84 Fed
Appx 975, CCH Fed Secur L Rep P 92698).
In investor's securities fraud suit regarding investment company's portfolio management program, investor failed to state claim under § 10(b) of Securities Exchange
Act of 1934, 15 USCS § 78j(b), based upon aggregation of trades because investment company fully disclosed aggregation of trades. Morris v Wachovia Secs., Inc.
(2003, ED Va) 277 F Supp 2d 622.
Where investors alleged that subsidiary intentionally underbid contract which resulted in overstatement of income in parent's accounting statements, subsidiary could
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be found liable as alleged source of misleading information published by parent and investors made sufficient allegations, but parent, holding company, and officers
could not be found liable pursuant to, inter alia, group pleading doctrine. In re Alstom SA Secs. Litig. (2005, SD NY) 406 F Supp 2d 433.
Where Securities and Exchange Commission alleged that broker violated 15 USCS §§ 77q(a), 78j(b), and 17 C.F.R. § 240.10b-5, it was granted summary judgment
because evidence established that brokers used 13 different identification numbers and over 170 brokerage accounts, many of which were registered to broker in
issue, to carry out market timing transactions, though they only had 5 clients; moreover, representations were material as, but for them, mutual funds would not
have allowed certain transactions; in addition, circumstantial evidence showed that broker acted with sufficient scienter as there was ample evidence that his actions
were intentionally geared toward evading detection by mutual fund managers; and district court was allowed to draw inference of guilt from broker's assertion of
Fifth Amendment. SEC v Druffner (2007, DC Mass) 517 F Supp 2d 502.
There was genuine issue of material fact as to whether defendant officer of company was deliberately reckless when he testified that he did not remember reviewing
press release, did not approve press release, and was not familiar with statement that was attributed to him in action that alleged violation of 15 USCS § 78j(b). SEC
v Platforms Wireless Int'l Corp. (2008, SD Cal) 559 F Supp 2d 1091, CCH Fed Secur L Rep P 94639.
Plaintiff had failed to state cause of action against company after company represented that it was going to purchase and merge target company with related
business entity because company could not be liable as aider or abettor under 10b, 15 USCS § 78j, for allegedly false statements made by target company, plaintiff
had not provided evidence that company was required to modify its form 13D in order to correct false and misleading statements, and statements made by company
representative during "road show" addressing proposed merger were not materially false or misleading at time they were made. Amida Capital Mgmt. II, LLC v
Cerberus Capital Mgmt., L.P. (2009, SD NY) 669 F Supp 2d 430.
It was violation of antifraud provisions of Securities Exchange Act for underwriting syndicate to announce that proceeds of offering had been received without
disclosing difficulties encountered in completing distribution; to create false and misleading impression that all securities had been sold by terminating underwriting
syndicate; to dominate market for securities; and to complete distribution by increasing compensation paid for selling securities. In re First Mid America, Inc.,
Securities Exchange Act of 1934 Release No. 10846, June 10, 1974, SEC Docket vol 4, No. 12, p 418, 1974 SEC LEXIS 1142.
Bond purchaser failed to state claim for securities fraud under 15 USCS § 78j(b) and 17 CFR § 240.10b-5 against bond issuers because purchaser's allegations were
insufficient to show that issuers intentionally or negligently failed to disclose their intention to apply charge-offs to junior-lien mortgages before senior-lien
mortgages; fact that issuers' prior offering's underlying mortgages, which were entirely junior-lien, had disclosed junior-lien charge-off policy did not reasonably lead
to inference that issuers' instant offering's underlying mortgages, which were mix of senior and junior-lien, had across-the-board charge off policy to both junior-lien
and senior-lien mortgages, loss scenario graphs and tables included in instant offering's term sheet could not serve as basis for actionable misstatements since they
were opinions, and any alleged oral assurances by issuers' officers never clearly stated that senior-lien and junior-lien mortgage loans would be treated as one loan
for charge-off purposes. Good Hill Partners L.P. ex rel. Good Hill Master Fund, L.P. v WM Asset Holdings Corp. CI 2007-WM2 (2008, SD NY) 583 F Supp 2d 517.
Unpublished: Government did not sufficiently prove that defendants' conduct in trading for their proprietary accounts instead of matching executable buy and sell
orders from New York Stock Exchange (NYSE) customers in violation of NYSE R. 92(a) was deceptive under 15 USCS § 78j(b) because it did not identify way in which
they communicated anything to their customers, let alone anything false, and its proof that they violated NYSE rule did not establish securities fraud in civil context,
let alone in criminal prosecution. United States v Hayward (2008, CA2) CCH Fed Secur L Rep P 94792.
VI.CONDUCT NOT INVOLVING FALSE OR MISLEADING STATEMENTS OR OMISSIONS

221. Generally
To be fraudulent under Securities Exchange Act, act or activity need not principally consist of false or misleading statement or omission of material facts, although
such false or misleading statements or omissions may be expected to come into play at some point in most fraudulent acts. Hooper v Mountain States Sec. Corp.
(1960, CA5 Ala) 282 F2d 195, cert den (1961) 365 US 814, 5 L Ed 2d 693, 81 S Ct 695.
SEC Rule 10b-5 prohibits manipulative activities per se, and not only activities resembling common law fraud; rule makes no reference to requirement that
defendants charged thereunder must fail to disclose material facts for their conduct to be proscribed. United States v Charnay (1976, CA9 Nev) 537 F2d 341, CCH
Fed Secur L Rep P 95560, cert den (1976) 429 US 1000, 50 L Ed 2d 610, 97 S Ct 527, 97 S Ct 528.
Coverage of SEC Rule 10b-5 is not confined to misrepresentations and nondisclosures, but also prohibits any person from employing device, scheme or artifice to
defraud or from engaging in any acts, practice, or course of business which operates or would operate as fraud or deceit upon any other person; complaint
adequately alleged violation of Rule where it stated that plaintiff was victim of ongoing scheme, purpose of which was to extract premium from him each year on
continuing basis in violation of Rule. Hilgeman v National Ins. Co. (1977, CA5 Ala) 547 F2d 298, CCH Fed Secur L Rep P 95879, reh den (1977, CA5 Ala) 564 F2d
416.
Former officers and/or directors of bank may not be held liable under securities laws for accurate reports of past successes, even if present circumstances are less
rosy. Serabian v Amoskeag Bank Shares (1994, CA1 NH) 24 F3d 357, CCH Fed Secur L Rep P 98228 (criticized in Greebel v FTP Software, Inc. (1999, CA1 Mass) 194
F3d 185, CCH Fed Secur L Rep P 90658) and (criticized in D.E. & J L.P. v Conaway (2003, ED Mich) 284 F Supp 2d 719).
Investor who does not allege that investment banking firm acted with intent to deceive, manipulate or defraud in refusing to liquidate investor's account does not
state claim cognizable under 15 USCS § 78j(b) for firm's failure to liquidate account. Kravetz v Brukenfeld (1984, SD NY) 591 F Supp 1383, CCH Fed Secur L Rep P
91609.
Village and its fire and police funds adequately state claims under Rule 10b-5 where allegations of fraud are based on failure of securities broker to inform investors
that investors' agent was making unauthorized transactions, and despite absence of allegations of misrepresentation or omission. Arlington Heights v Poder (1989,
ND Ill) 712 F Supp 680, CCH Fed Secur L Rep P 94811.
Claim of former minority shareholder against corporation and its chief executive officer, alleging fraudulent conduct in connection with corporation's redemption of his
shares for amount less than what shares were worth, is denied summarily, where plaintiff never requested any materials regarding value of corporation's stock, and
where fiduciary duty owed to minority shareholders does not include duty to automatically reveal materials regarding value of stock when minority shareholder
expresses desire to sell, because corporation's failure to provide information regarding value of its stock at time plaintiff expressed his desire to sell does not
constitute material omission giving rise to fraud in sale of securities. Scarabello v Reichle (1994, ND Ill) 856 F Supp 404, CCH Fed Secur L Rep P 98154.
Under "bespeaks caution" doctrine, if cautionary statement is added to predictive statement regarding company issuing securities, then predictive statement may not
be actionable securities fraud under 15 USCS § 78j(b) as matter of law. Robertson v Strassner (1998, SD Tex) 32 F Supp 2d 443, CCH Fed Secur L Rep P 90303
(criticized in Southland Sec. Corp. v INSpire Ins. Solutions Inc. (2004, CA5 Tex) 365 F3d 353, CCH Fed Secur L Rep P 92803).
Indirect statement of company's officer in newspaper article that company was not facing bankruptcy was not false or misleading because investment management
firms who were suing company and its officers failed to make allegations that particularized basis on which information in article was allegedly misleading; moreover,
any omission regarding company's financial position was immaterial in light of what was disclosed in article overall. In re Stone & Webster, Inc., Sec. Litig. (2003, DC
Mass) 253 F Supp 2d 102, CCH Fed Secur L Rep P 92302.
Certain reports by securities analysts concerning company did not contain false or misleading statements made by or attributable to company's officers because
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statements, generally, were not attributed to company or officers in reports. In re Stone & Webster, Inc., Sec. Litig. (2003, DC Mass) 253 F Supp 2d 102, CCH Fed
Regarding company's officers' statements concerning company's backlog figures, none of statements were attributable to first officer, who did not even seem to be
aware of statements; as for second officer, statements fell within safe harbor provided by Private Securities Litigation Reform Act; in other words, officers' statements
about "improved margins" were predictions of profit margins that company's projects would achieve in future. In re Stone & Webster, Inc., Sec. Litig. (2003, DC
Claims based on alleged misrepresentations in company's statements to Securities and Exchange Commission and press release concerning status of project failed to
meet particularity standard of Private Securities Litigation Act because allegations concerning claims did not set forth facts that showed exactly why statements or
omissions were misleading; specific allegations offered to support contention that company's officers had actual knowledge throughout class period that project had
been terminated, and that continued recognition of revenue from that project was fraudulent, asserted much less than what was claimed for them; further, because
allegations concerning whether officers had knowledge in 1997, 1998, or 1999, that project was effectively terminated were insufficient, so too were allegations
concerning recognition and reporting of what investment management firms who were lead plaintiffs in class action against company and its officers called phantom
revenue associated with project, as there was insufficient proof to support strong inference of officers' scienter. In re Stone & Webster, Inc., Sec. Litig. (2003, DC
Claim that company intentionally underbid series of major contracts at officer's behest and with another officer's acquiescence, if not other officer's active
participation, was short on concrete facts, and therefore, failed to state claim that company's disclosures were deficient and officers' engineered or willfully
disregarded deficiencies. In re Stone & Webster, Inc., Sec. Litig. (2003, DC Mass) 253 F Supp 2d 102, CCH Fed Secur L Rep P 92302.
Investment management firms did not meet their burden of pleading with particularity that company's financial statements were fraudulently overstated, and so
company had no duty to expand upon or add negative characterizations to its disclosures about its current cash position as contained in its press releases and
Securities and Exchange Commission reports beginning with October 27, 1999, third quarter earnings release; similarly, no liability could be premised on liquidity-
related disclosures made before summer of 1998, because investment management firms did not plead that company was starting to get strapped for cash until that
time. In re Stone & Webster, Inc., Sec. Litig. (2003, DC Mass) 253 F Supp 2d 102, CCH Fed Secur L Rep P 92302.
Defendants' motion for summary judgment on plaintiffs' securities fraud claims under § 10(b) of Securities and Exchange Act of 1934, 15 USCS § 78j(b), and Va.
Code Ann. § 13.1-502(2002) was granted because plaintiffs failed to raise issue of fact regarding their unreasonable reliance on unsubstantiated oral statements that
were in contradiction to terms of merger agreement. Poth v Russey (2003, ED Va) 281 F Supp 2d 814, affd (2004, CA4 Va) 99 Fed Appx 446.
State could not have maintained cause of action against investment broker that had entered into agreement with Nebraska Investment Council (NIC), for violation of
15 USCS § 78j because investment company's investments and decisions on behalf of NIC were consistent with NIC's stated objectives and NIC represented to
company that it had authority to make stated objectives. Myers v Neb. Inv. Council (2006) 272 Neb 669, 724 NW2d 776.
222. Auditor's negligence
Auditors cannot be held liable for their negligent failure to inquire into adequacy of client's internal control system. Ernst & Ernst v Hochfelder (1976) 425 US 185, 47
L Ed 2d 668, 96 S Ct 1375, CCH Fed Secur L Rep P 95479, reh den (1976) 425 US 986, 48 L Ed 2d 811, 96 S Ct 2194.
SEC Rule 17a-5 imposes no duty upon auditor to ascertain compliance of securities firm with NASD rules; action charging auditor with aiding and abetting firm's
violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and SEC Rule 10b-5, cannot be based upon failure to ascertain lack of such compliance.
Hochfelder v Ernst & Ernst (1974, CA7 Ill) 503 F2d 1100, CCH Fed Secur L Rep P 94781, revd on other grounds (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375,
CCH Fed Secur L Rep P 95479, reh den (1976) 425 US 986, 48 L Ed 2d 811, 96 S Ct 2194.
Claim of purchasers of corporation's common stock against corporation's outside auditor for aiding and abetting securities fraud is not dismissed, where purchasers
alleged (1) auditor endorsed corporation's 1991 annual report but failed to discover that actual income for 1991 was less than 60 percent of income actually reported
and that corporation had committed $ 12 million in inventory fraud, (2) auditor had long and profitable history of providing corporation with accounting services and
had motive for ignoring corporation's fraudulent accounting, and (3) numerous accounting laxities that auditor intentionally or recklessly ignored, because complaint
stated claim for recklessness from which intent might be inferred. In re Leslie Fay Cos. Sec. Litig. (1993, SD NY) 835 F Supp 167, CCH Fed Secur L Rep P 98031.
223. Breach of securities-related contracts
Mere failure to consummate agreement regarding sale of stock is not necessarily actionable fraud under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)).
Walling v Beverly Enterprises (1973, CA9 Cal) 476 F2d 393, CCH Fed Secur L Rep P 93947, 17 FR Serv 2d 219.
Complaint did not state cause of action under fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) where it alleged simple breach of contract
for purchase of shares of stock coupled with claim that in order to prevent plaintiffs from enforcing their claim for damages, defendant corporation and its officers
fraudulently divested corporation of its assets. Oppenheimer v Bernstein (1975, CA2 NY) 514 F2d 720.
Underwriter violated § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 by failing to carry out promise to underwrite public offering of
corporation's stock. M. L. Lee & Co. v American Cardboard & Packaging Corp. (1964, ED Pa) 36 FRD 27, 8 FR Serv 2d 12C.24, Case 1.
Breach of contract allegation fulfills requirement of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) that fraudulent practice be "in connection with the
purchase or sale of any security"; proper allegations of fraud then bring what would in their absence be common law breach of contract action into purview of §
10(b). Oliver v Bostetter (1977, DC Md) 426 F Supp 1082, CCH Fed Secur L Rep P 96059.
Complaint alleging wrongful liquidation of margin account, and fraudulent statement of broker that he would not so liquidate, fails to state claim for violation of
federal securities laws under 15 USCS § 78j; complaint alleges no acts that are manipulative or deceptive under § 78j, and plaintiff, at most, states claim for breach
of contract. Loper v Advest, Inc. (1985, WD Pa) 617 F Supp 652, CCH Fed Secur L Rep P 92349.
Claims of putative class of shareholders in action for breach of contract against stockbroker to extent claims stated were actually for fraud that was related to
purchase of securities were preempted by Securities Litigation Uniform Standards Act of 1998, P.L. No. 105-353, 112 Stat. 3227, codified at 15 USCS §§ 77p,
78bb(f). Dacey v Morgan Stanley Dean Witter & Co. (2003, SD NY) 263 F Supp 2d 706, CCH Fed Secur L Rep P 92501.
224. Failure to use or improper use of prospectus
Failure to deliver prospectus in itself does not state cause of action under SEC Rule 10b-5 because such conduct is not inherently fraudulent and deceitful. Rotstein v
Reynolds & Co. (1973, ND Ill) 359 F Supp 109, CCH Fed Secur L Rep P 94179.
Investor failed to show actionable misrepresentations and omissions when he alleged broker orally guaranteed return on investment in oil drilling tax shelter, failed to
provide reserve information, and did not provide rates of return on previous shelters, because there is (1) no evidence of scienter on part of broker, (2) no evidence
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investor relied on any misrepresentations, and (3) no evidence misrepresentations caused loss; further, investor knew he could rely only on written prospectus.
Platsis v E.F. Hutton & Co. (1986, WD Mich) 642 F Supp 1277, CCH Fed Secur L Rep P 93360, affd (1987, CA6 Mich) 829 F2d 13, CCH Fed Secur L Rep P 93400, cert
den (1988) 485 US 962, 99 L Ed 2d 427, 108 S Ct 1227.
Use of prospectus relating to registered public offering of class of stock to sell stock of same class but not part of stock covered by registration statement violates §
10(b) of Securities Exchange Act (15 USCS § 78j(b)). In re Benjamin (1958) 38 SEC 614.
225. High pressure sales
Sale of "franchises" in high-pressure, carnival-type atmosphere, where "franchisees" opportunities to make money were to be derived principally from obtaining
further franchisees, was manipulative and deceptive device proscribed by § 10(b) of Securities Exchange Act (15 USCS 78j(b)) and SEC Rule 10b-5. SEC v Galaxy
Foods, Inc. (1976, ED NY) 417 F Supp 1225, CCH Fed Secur L Rep P 95684, affd without op (1977, CA2 NY) 556 F2d 559, cert den (1977) 434 US 855, 54 L Ed 2d
127, 98 S Ct 175.
226. Loan transactions
Deposit of large sum in bank in return for issuance of certificates of deposit, and subsequent bank loans obtained on basis of confidence established through such
large deposit, which activity produced impairment of bank's capital resulting in its collapse thereby injuring stockholders of bank, constituted violation of SEC Rule
10b-5, and bank stockholders had right to recover for injuries sustained as against such depositor and borrower. Young v Seaboard Corp. (1973, DC Utah) 360 F
Acceptance of payment of loan cut of proceeds of public offering by corporation, at time when loan was subordinated to loan of bank, did not give rise to cause of
action by shareholder of corporation for violation of antifraud provisions of § 15 USCS § 78j(b), where offering statement stated, under heading of loan agreements,
that loan was secured by security interest in all company's accounts receivable, inventory and equipment, that it was subordinated to security interest held by bank,
and then unpaid balance was intended by corporation to be prepaid out of proceeds of offering. Jenkins v Fidelity Bank (1973, ED Pa) 365 F Supp 1391, CCH Fed
In absence of allegation that loan was extended for ultimate purpose of converting pledged securities, borrower was not defrauded merely because bank exercised its
right of foreclosure at private sale after giving borrower written notice of intention to do so; allegation that officers of corporation conspired with bank to shift balance
of voting strength in corporation through bank's selling pledged shares of corporation in violation of bank's agreement with pledgor was not sufficient to state cause
of action for fraud under SEC Rule 10b-5. Dopp v Franklin Nat'l Bank (1974, SD NY) 374 F Supp 904, CCH Fed Secur L Rep P 94484, 14 UCCRS 866.
In action brought by purchasers of corporation's common stock against insiders of corporation for failure to disclose material loan details in corporation's annual
reports, defendants are not entitled to summary judgment where, although defendants never engaged in any face-to-face transactions with plaintiffs, by publishing
annual report, accuracy and completeness of which is relied upon by investing public, defendants shared special fiduciary relationship with plaintiffs and, therefore,
had affirmative duty, under Rule 10b-5, to disclose facts material to investing public in annual report. Issen v GSC Enterprises, Inc. (1982, ND Ill) 538 F Supp 745,
Manipulation of market price of corporation's stock by keeping dividends to minimum was violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)). Mutual
Shares Corp. v Genesco, Inc. (1967, CA2 NY) 384 F2d 540.
Defendant bank that engaged in credit "bubble" scheme designed to stimulate market for securities by creating false demands on orders that it could not fulfill was
liable to brokerage house that went bankrupt, as brokerage house was protected from all fraudulent schemes; such acts by bank were against public interest and
could have had unsettling and manipulative effect on securities market. Carroll v First Nat'l Bank (1969, CA7 Ill) 413 F2d 353, CCH Fed Secur L Rep P 92432, cert
den (1970) 396 US 1003, 24 L Ed 2d 494, 90 S Ct 552.
Where dangers of market manipulation that SEC Rule 10b-6 was designed to eradicate are present, SEC is justified in applying rule without showing defendant's
intent to participate in distribution, or to defraud market place, since prohibition of rule is absolute. Jaffee & Co. v SEC (1971, CA2) 446 F2d 387, CCH Fed Secur L
Rep P 93092.
Market manipulation is proscribed activity under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), and SEC Rule 10b-5. Schaefer v First Nat'l Bank (1975, CA7
Ill) 509 F2d 1287, CCH Fed Secur L Rep P 94967, 1975-1 CCH Trade Cases P 60137, cert den (1976) 425 US 943, 48 L Ed 2d 186, 96 S Ct 1682.
Broker violated 15 USCS § 78j(b) where: (1) he continued trading, at continuously rising prices, although he knew little if anything about issuer, and notwithstanding
unanswered inquiry which he had sent to issuer requesting additional information; and (2) broker knew that vast majority of shares were being purchased by
another broker, but did not seek explanation for such buying activity. SEC v Management Dynamics, Inc. (1975, CA2) 515 F2d 801, CCH Fed Secur L Rep P 95017,
19 FR Serv 2d 1405.
Allegations that defendants, in attempting to coerce directors of target corporation to approve merger, caused associates to sell stock of target corporation at low
price for purpose of depressing market value of that stock, while agreeing to indemnify associates against any losses thereby incurred, alleged indictable offense of
violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5. United States v Charnay (1976, CA9 Nev) 537 F2d 341, CCH Fed Secur L
Rep P 95560, cert den (1976) 429 US 1000, 50 L Ed 2d 610, 97 S Ct 527, 97 S Ct 528.
Corporation which made unsuccessful tender offer could not maintain action against second corporation for deceptive and manipulative acts in trading of stock of
target corporation so as to defeat tender offer. Crane Co. v American Standard, Inc. (1979, CA2 NY) 603 F2d 244, CCH Fed Secur L Rep P 96823, 27 FR Serv 2d 80.
"Manipulation" as used in SEC Rule 10b-5 refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors
by artificially affecting market activity, and has referred, in general, to devices used to induce investment in company's stock, not to devices implemented to
discourage such investment. Alabama Farm Bureau Mut. Alabama Farm Bureau Mut. Casualty Co. v American Fidelity Life Ins. Co. (1979, CA5 Fla) 606 F2d 602, CCH
Fed Secur L Rep P 97192, reh den (1980, CA5 Fla) 610 F2d 818 and cert den (1980) 449 US 820, 66 L Ed 2d 22, 101 S Ct 77.
Securities issuers may be liable under SEC Rule 10b-5, where (1) issuers knowingly conspire to bring onto market securities which are not entitled to be marketed,
intending to defraud purchasers, (2) purchaser reasonably relies on securities' availability on market as indication of their apparent genuineness, and (3) as result of
scheme to defraud, purchaser suffers loss. Shores v Sklar (1981, CA5 Ala) 647 F2d 462, CCH Fed Secur L Rep P 98033, cert den (1983) 459 US 1102, 74 L Ed 2d
949, 103 S Ct 722 and (criticized in Arduini/Messina Pshp. v National Med. Fin. Servs. Corp. (1999, SD NY) 74 F Supp 2d 352, CCH Fed Secur L Rep P 90656).
Mere announcement of prospective tender offer and price which would be offered, without prior disclosure of favorable financial information concerning target
company's last quarter earnings, did not constitute manipulative device or act within meaning of either 15 USCS § 78j(b) or 78n(e), since it created no artificial
impact on market activity and did not freeze price of stock at amount stated in announcement, especially where all available financial information was subsequently
disclosed in offering material. Billard v Rockwell International Corp. (1982, CA2 NY) 683 F2d 51, CCH Fed Secur L Rep P 98733.
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Controlling market for stock and entering into lock-up agreements with majority shareholders in corporate merger attempt did not constitute manipulation of market
where lock-up agreements were fully disclosed in proxy, and failure to disclose market freeze was not actionable deception, since claim of manipulation requires
showing of deception. Kademian v Ladish Co. (1986, CA7 Wis) 792 F2d 614, CCH Fed Secur L Rep P 92764.
Shareholder's allegation of manipulation failed because requisite elements of misrepresentation or omission were not alleged, where investor group had committed
"green mail", which is blackmail of corporate management for substantial amounts of corporate money or other assets by obtaining block of corporation's securities.
Pin v Texaco, Inc. (1986, CA5 Tex) 793 F2d 1448, CCH Fed Secur L Rep P 92823, 5 FR Serv 3d 1258, reh den, en banc (1986, CA5 Tex) 797 F2d 977 and reh den, en
banc (1986, CA5 Tex) 797 F2d 977.
Individual who was chief executive officer, chairman of board, and principal shareholder of corporation manipulated market in violation of § 10(b) of Securities
Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-6 promulgated thereunder, by instructing officers of corporation to purchase corporation's own stock
during distribution, since even applicable 1980 version of Rule 10b-6 applied to officers and directors of corporation, and this individual had special relationship with
corporation that gave him incentive to promote distribution of offered securities; Rule 10b-6 applied where individual clearly attempted to induce purchase of stock
that was subject of distribution, notwithstanding that purchases came after issue had been sold. SEC v Burns (1987, CA9 Cal) 816 F2d 471, CCH Fed Secur L Rep P
93235.
Generally, market domination is factor that supports manipulation charge, but extent to which investor controls or dominates market at any given period of time
cannot be viewed in vacuum; percent of domination must be viewed in light of time period involved and other indicia of manipulation. United States v Mulheren
Defendant and codefendant violated 15 USCS § 78j(b) by orchestrating trading by themselves and subscribers of defendant's investment advisor website in order to
artificially affect market prices of various thinly traded securities; defendants and codefendant engaged in market manipulation by directing subscribers to trade and
to disclose negative information at times and in manners that were dictated not by market forces, but by desire to manipulate market for benefit of defendant and
codefendant. United States v Royer (2008, CA2 NY) 549 F3d 886.
Securities and Exchange Commission's findings of stock manipulations in violation of § 10(b) of Securities and Exchange Act of 1934 and S.E.C. Rule 10b-5 were not
supported by substantial evidence, as neither matched orders nor wash sales alone constituted securities violation; further, findings of intent to manipulate market
were unsupported by record evidence because record showed friend of two petitioners chose to sell his shares on public market for reasons wholly independent of
petitioners. Rockies Fund, Inc. v SEC (2005, App DC) 428 F3d 1088, CCH Fed Secur L Rep P 93573.
To state claim for manipulation under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), plaintiff must at very least complain of conduct that interferes with
proper functioning of free markets, free market being one in which investors are provided with sufficient information to enable them to assess accurately value of
security; conduct that interferes with free market only by depriving it of complete information is not necessarily manipulative; practices in market place which have
effect of either creating false impression that certain market activities are occurring when in fact such activities are unrelated to actual supply and demand or
tampering with price itself are manipulative. Hundahl v United Ben. Life Ins. Co. (1979, ND Tex) 465 F Supp 1349, CCH Fed Secur L Rep P 96815.
Two-tier pricing structure of tender offer, although intentionally designed to attract shareholders of target company and encourage them to tender shares at first
stage of transaction, does not constitute manipulative conduct within meaning of 15 USCS §§ 78j(b) and 78n(e), where its use neither coerces shareholders into
tendering their shares nor interferes with market of other potential offerers for target company stock. Radol v Thomas (1982, SD Ohio) 534 F Supp 1302, CCH Fed
Postponement of debenture offering was not manipulative where reason for delay was unacceptably high interest rate. Flum Partners v Child World, Inc. (1983, SD
Judgment for defendant professional football team on nonvoting stockholders' claim of market manipulation prior to merger, where team's nonvoting stock was not
listed on national exchange and no evidence was adduced of nonvoting stock price manipulation during year preceding merger, because plaintiffs thus failed to prove
claim under either 15 USCS §§ 78i or 78j. Pavlidis v New England Patriots Football Club, Inc. (1986, DC Mass) 675 F Supp 688, CCH Fed Secur L Rep P 93807.
Investors fail to state claim under 15 USCS § 78j(b), where complaint alleges fraud on market theory and public offering of bonds throughout U.S. in diverse market,
because sort of open and developed market required for theory is not alleged. Stinson v Van Valley Dev. Corp. (1989, ED Pa) 714 F Supp 132, CCH Fed Secur L Rep P
95847.
For purposes of establishing securities fraud under 15 USCS § 78j, "market manipulation" is conduct designed to deceive or defraud investors by controlling or
artificially affecting price of securities. In re Blech Sec. Litig. (1996, SD NY) 928 F Supp 1279, CCH Fed Secur L Rep P 99262.
Securities and Exchange Commission's motion for summary judgment was granted in its action against former broker and broker's firm, where broker had violated §
17(a) of Securities Act of 1933, 15 USCS § 77q(a), § 10(b) of Securities Exchange Act of 1934, 15 USCS § 78j(b), and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5;
broker's scheme entailed broker's and other individuals' gaining control of both supply and demand of certain entity's stock sufficient to drive up stock price
artificially from $ 5 to $ 11.75 from May to July 1993. SEC v Martino (2003, SD NY) 255 F Supp 2d 268, CCH Fed Secur L Rep P 92473, affd, remanded (2004, CA2
NY) 94 Fed Appx 871.
Where corporation allegedly structured financial transactions that permitted other entities to disguise debt on their books and carried transactions on its own books
as equity investments rather than extensions of credit, securities purchaser's allegations that transactions were inconsistent with corporation's stated risk
management policies and historical business practices merely supported claim of mismanagement that was not actionable securities fraud; while such conduct could
demonstrate that corporation engaged in risky transactions, it did not rise to level of depicting manipulative or deceptive conduct within meaning of securities laws.
In re Citigroup, Inc. Sec. Litig. (2004, SD NY) 330 F Supp 2d 367, CCH Fed Secur L Rep P 92887.
Where investor alleged that defendants engaged in price manipulation regarding mutual fund pricing, investor could not state claim for price manipulation based on
adoption of fair value price methodology, because mere implementation of fair value pricing was lawful and not actionable; however, investor sufficiently stated claim
based on allegation that defendants used investor's secret trading techniques to manipulate method by which values were calculated. DH2, Inc. v Athanassiades
(2005, ND Ill) 404 F Supp 2d 1083, CCH Fed Secur L Rep P 93630.
Practice of placing orders at end of day in order to cause stock to close at uptick, that is, price higher than prior sale price, violates § 78j(b). In re Andrew Doherty,
et al. (1991) 50 SEC 624.
Representative of broker willfully violates and aides and abets violation of 15 USCS § 78i, § 77q and § 78j where he knowingly places orders for person who is
engaged in scheme to manipulate price of stock upward through circulating false rumor of tender offer and who places orders for inmates of federal prison and their
families to advance scheme. Turner v Otis (1883) 30 Kan 1, 1 P 19.
228. Non-exempt distributions
SEC Rule 10b-5 is broad enough to afford civil remedy against issuer of securities and others involved in distribution when issuer and its agents conducted
distribution, allegedly made under exemption from registration provided by § 4(2) of Securities Act (15 USCS § 77d(2)), in such manner that it failed to qualify for
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that exemption. Woolf v S. D. Cohn & Co. (1975, CA5 Fla) 515 F2d 591, CCH Fed Secur L Rep P 95223, reh den (1975, CA5 Fla) 521 F2d 225, CCH Fed Secur L Rep P
95359 and vacated on other grounds (1976) 426 US 944, 49 L Ed 2d 1181, 96 S Ct 3161.
229. Obtaining stock for inadequate or no consideration
Causing corporation to issue stock in return for worthless assets violates Securities Exchange Act's fraud provisions. Hooper v Mountain States Sec. Corp. (1960, CA5
Ala) 282 F2d 195, cert den (1961) 365 US 814, 5 L Ed 2d 693, 81 S Ct 695.
Corporation is not unjustly enriched, in violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), when it withdraws offer to exchange common shares for
preferred shares without having obtained valuable property of preferred shareholders as consideration for offer; nor does corporation secure unjustified windfall or
enrichment as result of redemption which was legally and financially within its power to effectuate independently of any action by preferred shareholders whose stock
was redeemed. Levine v Seilon, Inc. (1971, CA2 NY) 439 F2d 328, CCH Fed Secur L Rep P 92960.
Majority shareholder of corporation, which held shares as executor of estate of deceased majority shareholder, violated fraud provisions of § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 by causing all of assets of corporation to be exchanged for stock of second corporation which was worth
substantially less than assets, where transaction was combined with one whereunder shares held by majority shareholder were sold to corporation which so obtained
assets, and redress against majority shareholder could be obtained by corporation through derivative action. Bailey v Meister Brau, Inc. (1976, CA7 Ill) 535 F2d 982,
Under antifraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), corporation may bring action where it is fraudulently induced to issue stock, as,
for example, where corporation is so induced to issue stock for no or inadequate consideration. Kane v Central American Mining & Oil, Inc. (1964, SD NY) 235 F Supp
559, 9 FR Serv 2d 4F.22, Case 2.
Fairness of corporate merger allegedly brought about with inadequate consideration flowing to acquiring corporation, in violation of § 10(b) of Securities Exchange
Act (15 USCS § 78j(b)) and SEC Rule 10b-5, must be tested by examining whether corporation received either wholly inadequate consideration or fraudulently low
price; fact that value of acquired investment company principal asset, stock of acquiring corporation, was used in determining exchange value rather than market
price of stock of acquired corporation did not show violation of Act or Rule. Harriman v E. I. Du Pont de Nemours & Co. (1975, DC Del) 411 F Supp 133, CCH Fed
Assertions that tender offer violated fraud provisions of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, on ground that it was made for
inadequate consideration and without legitimate corporate purpose did not state cause of action where shareholders were not being divested against their will, but
had choice of tendering their shares or remaining in corporation. Vernon J. Rockler & Co. v Minneapolis Shareholders Co. (1977, DC Minn) 425 F Supp 145, CCH Fed
Secur L Rep P 95857 (criticized in Fraley v Williams Ford Tractor & Equip. Co. (1999) 339 Ark 322, 5 SW3d 423).
Two-tier merger arrangement with $ 125 per share disparity between offers on front end and back end did not coerce shareholders into tendering at front end in
order to avoid freeze-out at lower end, where offer and merger did not circumvent natural forces of market demand. Radol v Thomas (1983, SD Ohio) 556 F Supp
586, CCH Fed Secur L Rep P 99210, affd (1985, CA6 Ohio) 772 F2d 244, CCH Fed Secur L Rep P 92289, cert den (1986) 477 US 903, 91 L Ed 2d 562, 106 S Ct 3272
and app dismd without op (1985, CA6 Ohio) 774 F2d 1163, cert den (1986) 475 US 1086, 89 L Ed 2d 724, 106 S Ct 1469.
230. Obtaining stock redemption agreements
Majority shareholders of corporation, who induced minority shareholder to execute buy-sell agreement whereunder, upon death of any shareholder of corporation,
estate of deceased shareholder would be required to sell to corporation all stock owned by deceased shareholder at time of death at pre-established price, were not
liable to estate of such deceased shareholder on basis of violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 thereunder,
notwithstanding that they were fiduciaries with respect to such deceased minority shareholder, where they had not acted fraudulently in setting price at which stock
would be required to be sold, where majority shareholders, in establishing price, had relied upon experienced accountant who was well acquainted with operations of
corporation, and in so establishing such price, it was not necessary for majority shareholders to consider corporation's earnings because corporation's plant and
equipment were obsolete, business in which corporation was engaged was extremely competitive, plant's layout and location were poor, and corporation anticipated
loss of key employee of corporation and did not have qualified replacement for such employee. Nanfito v Tekseed Hybrid Co. (1973, CA8 Neb) 473 F2d 537, CCH Fed
Securities fraud claim by executrix of shareholder's estate against closely held corporation and its CEO is denied summarily, where executrix agreed to amend stock
purchase agreement to allow corporation to redeem half rather than all of shareholder's shares in return for her surrender of right to benefit in merger or
consolidation of corporation within 550 days of redemption, and where corporation failed to disclose to her that its option to purchase had expired at time she agreed
to amendment, because executrix clearly had notice of terms of option and could show no misleading statements about option that would trigger duty to speak.
Connelly v General Medical Corp. (1995, ED Va) 880 F Supp 1100.
231. Protecting control position
Neither company directors' policy, motivated by desire to perpetuate their own control over company, of resisting all offers to acquire company regardless of potential
benefits such offers might bring to shareholders of company, nor failure to disclose such policy, is actionable under SEC Rule 10b-5, absent element of manipulation
or deception. Panter v Marshall Field & Co. (1981, CA7 Ill) 646 F2d 271, CCH Fed Secur L Rep P 97929, 1981-1 CCH Trade Cases P 63971, cert den (1981) 454 US
1092, 70 L Ed 2d 631, 102 S Ct 658.
Acquiring corporation did not violate § 10(b) of Securities Exchange Act (15 USCS § 78j(b)), by failing to have fairness of merger price offer evaluated by
independent legal counsel or investment advisor, where there was no failure to disclose that fact. Lessler v Dominion Textile, Ltd. (1975, SD NY) 411 F Supp 40.
Cause of action under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 was asserted where it was alleged that directors of corporation, in
order to protect their control positions, decided to purchase stock of largest shareholder of corporation for premium price and to agree, on behalf of corporation, to
terminate lawsuit commenced against that stockholder by corporation. Seigal v Merrick (1976, SD NY) 422 F Supp 1213.
Shareholders state valid 15 USCS § 78j(b) claim against directors of corporation and former principal shareholder, where "Repurchase" or "Greenmail" agreement
whereby corporation paid $ 4 per share premium to principal shareholder in order to purchase his large block of shares and obtain his agreement to drop legal claims
against corporation and not to purchase corporation stock for 10 years is at core of action, because fraud and scienter are sufficiently pled by allegations that (1)
principal shareholder made public statements indicating that he was not greenmailer and that he was looking out for welfare of all shareholders even as he was
embarking on greenmail negotiations, and (2) directors aided and abetted same fraud by entering into greenmail negotiations without revealing them to public. Fry v
Trump (1988, DC NJ) 681 F Supp 252, CCH Fed Secur L Rep P 93937.
232. Purchase of securities during distribution period
SEC Rule 10b-6, which prohibits bids for purchases of security by or on behalf of issuer of such security if security is subject of distribution, is not violated by
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corporation's off-exchange cash purchases of target company's stock during pendency of successful tender offeror's offer to exchange its securities for target
corporation's stock, where plaintiff did not contend that price it paid for target corporation's stock in attempting to gain control of target was influenced by violations,
but instead claimed that it lost opportunity to gain control of target because of violations. Piper v Chris-Craft Indus. (1977) 430 US 1, 51 L Ed 2d 124, 97 S Ct 926,
CCH Fed Secur L Rep P 95864, reh den (1977) 430 US 976, 52 L Ed 2d 371, 97 S Ct 1668 and reh den (1977) 430 US 976, 52 L Ed 2d 371, 97 S Ct 1668 and reh
den (1977) 430 US 976, 52 L Ed 2d 371, 97 S Ct 1668 and (criticized in Lerro v Quaker Oats Co. (1996, CA7 Ill) 84 F3d 239, CCH Fed Secur L Rep P 99239, 34 FR
Serv 3d 974).
Under Securities Exchange Act, proscription against broker-dealer's purchase of security which he is then distributing is violated where brokerage firm sells to its
officers and their families during distribution, particularly where there is subsequent repurchase by firm for resale to public. R. A. Holman & Co. v SEC (1966, CA2)
366 F2d 446, amd on other grounds (1967, CA2) 377 F2d 665 and cert den (1967) 389 US 991, 19 L Ed 2d 482, 88 S Ct 473, reh den (1968) 389 US 1060, 19 L Ed
2d 867, 88 S Ct 767.
Under Securities Exchange Act, it is unlawful for one who participates in distribution as issuer (or other person on whose behalf distribution is made), underwriter,
prospective underwriter, broker, or dealer, or any other person who has agreed to participate or is participating in such distribution, to bid for or purchase, for any
account in which he has beneficial interest, any security which is subject of such distribution, or any security of same class and series, or any right to purchase any
such security. Securities & Exchange Com. v Scott Taylor & Co. (1959, DC NY) 183 F Supp 904.
SEC Rule 10b-5 defines certain conduct as manipulative per se, such violative conduct includes failure to comply with requirement that dealer who is participating in
distribution may not bid for or purchase stock being distributed until after he has completed his part in distribution; where participating dealer has disposed of its
allotment in distribution and thereupon commences trading in stock being distributed, and where it places quotes for such stock in pink sheets and becomes market
maker at request of underwriter still engaged in distribution thereof, such dealer is guilty of aiding and abetting violation of Rule 10b-6. SEC v Resch--Cassin & Co.
SEC Rule 10b-6 proscribing participants in distribution from purchasing or bidding on stock being distributed during period of distribution prohibits trading only in
sense of buying, not selling; complaint which merely sets forth series of allegedly fraudulent transactions by defendants, and which contains no allegations that
defendant sold to accounts in which they had beneficial interest does not state fact necessary to establish claim under rule. Goldstein v Regal Crest, Inc. (1974, ED
Pa) 62 FRD 571, CCH Fed Secur L Rep P 94469, 18 FR Serv 2d 723.
Persons affiliated with brokerage firm which was underwriter in best efforts, minimum number of units or none, public offering, violated SEC Rule 10b-6 in
immediately commencing trading in securities so offered following closing where closing had wrongfully taken place, minimum number of units not having been sold
in offering. SEC v Commonwealth Chemical Secur., Inc. (1976, SD NY) 410 F Supp 1002, affd in part and mod in part (1978, CA2 NY) 574 F2d 90, CCH Fed Secur L
Rep P 96351, 24 FR Serv 2d 1387.
Under SEC Rule 10b-6, distribution is to be distinguished from ordinary trading transactions and other normal conduct of securities business upon basis of magnitude
of offering, and particularly upon basis of selling efforts and selling methods utilized; distribution includes any special market operations which constitute departure
from casual trading; broker-dealer, whose participation in distribution involved only approximately one percent of total volume, did not participate in distribution
within meaning of Rule 10b-6. Byrnes v Faulkner, Dawkins & Sullivan (1976, SD NY) 413 F Supp 453, affd (1977, CA2 NY) 550 F2d 1303.
Registered offering of securities is not automatically distribution for purposes of SEC Rule 10b-6. In re Collins Secur. Corp. (1975) 46 SEC 20.
Under 15 USCS § 78j(b), broker-dealer may neither bid for and purchase certain shares of stock before completing his participation in distribution of securities and
rights to purchase securities of same class, nor place orders for such shares for accounts of persons who have not authorized such purchases. In re Diehl (1981)
1981 SEC LEXIS 1609.
It was violation of 15 USCS § 78j(b), and SEC Rule 10b-6, for members of underwriting syndicate participating in securities distribution to purchase securities for
their own accounts and for accounts in which they had beneficial interests. In re First Mid America, Inc., Securities Exchange Act of 1934 Release No. 10846, June
10, 1974, SEC Docket vol 4, No. 12, p 418, 1974 SEC LEXIS 1142.
233. Restricting dividends
There is no violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5 where party announces during tender offer its intention to
eliminate dividends of company when acquired, and thereafter does so for purpose of lowering cost of subsequent merger to itself; although directors have duty to
act in best interest of shareholders and breach that duty if they eliminate dividends when such action is not in best interest of shareholders, such breach of fiduciary
duty may not be equated with fraud prohibited by § 10(b) and Rule 10b-5. Marsh v Armada Corp. (1976, CA6 Mich) 533 F2d 978, CCH Fed Secur L Rep P 95496, cert
den (1977) 430 US 954, 51 L Ed 2d 803, 97 S Ct 1598.
Allegation that defendants have attempted to manipulate value of plaintiff's stock by reducing and withholding dividends does not allege purchase or sale of
securities and, therefore action cannot be maintained under § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC Rule 10b-5. Stern v Gutmann & Co.
(1974, ND Ill) 65 FRD 128.
234. Sale of unregistered stock
Sale of unregistered security does not fall within proscription of SEC Rule 10b-5 because, unlike market rigging or manipulative practices, sale itself defrauds or
deceives no one, and assertion to contrary is tantamount to contention that every violation of securities law is actionable under antifraud provisions of Securities
Exchange Act, such theory being supported neither by statute or its rule, nor by cases interpreting them. Rotstein v Reynolds & Co. (1973, ND Ill) 359 F Supp 109,
235. Securing purchase price with purchased stock
There is no evil under Securities Exchange Act in sale of securities merely because part of deferred purchase price is secured by pledge of shares sold. Ayers v
Wolfinbarger (1974, CA5 Ala) 491 F2d 8, CCH Fed Secur L Rep P 94438, reh den (1974, CA5 Ala) 493 F2d 1405.
236. Selling stock at favored price
There was no violation of SEC Rule 10b-5 where corporation entered into agreement with former shareholder and president of corporation whereby he would resign,
sell his shares to corporation at stipulated price, and release all claims against corporation and persons connected therewith, notwithstanding that corporation was
subsequently sold to purchaser at higher price per share than that paid former president for his shares, where it had been made clear to former president that
company would not be sold to him as he had wished while no representation had been made that company would not be sold to another, so that it was irrelevant
whether, as contended by former president, release signed by him was void under § 29(a) of Securities Exchange Act of 1934 (15 USCS § 78cc(a)) because there
were future unripened claims at time of release. Hamilton v Harrington (1986, CA7 Wis) 807 F2d 102, CCH Fed Secur L Rep P 93039.
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Stock trades are only suspicious when dramatically out of line with prior trading practices at times that are calculated to maximize personal benefit from undisclosed
inside information; to evaluate suspiciousness of stock sales, three factors are considered: (1) amount and percentage of shares sold; (2) timing of sales; and (3)
consistency with prior trading history; although great weight is generally given to percentage of stock that was sold by insider, when stock sale results in truly
astronomical figure, less weight should be given to fact that sale may represent small portion of defendant's holdings. Nursing Home Pension Fund, Local 144 v
Oracle Corp. (2004, CA9 Cal) 380 F3d 1226, CCH Fed Secur L Rep P 92909.
Complaint by stockholders against defendant officers of corporation, which alleged that defendants dumped their stock on market prior to purchase of stock by
plaintiffs, failed to state cause of action. Joseph v Farnsworth Radio & Television Corp. (1951, DC NY) 99 F Supp 701, affd (1952, CA2 NY) 198 F2d 883.
Majority or controlling shareholder is under no duty, under 15 USCS § 78j(b), to other shareholders to refrain from receiving premium upon sale of his stock which
merely reflects control potential of that stock; there is no obligation for majority shareholder to "share and share alike" with other shareholders with respect to
opportunity to sell stock at attractive price. Christophides v Porco (1968, SD NY) 289 F Supp 403, CCH Fed Secur L Rep P 92253.
237. Selling trust assets
Sales of securities held in trust without consent of beneficiary does not give rise per se to violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) or SEC
Rule 10b-5. Lincoln Nat'l Bank v Lampe (1976, ND Ill) 414 F Supp 1270, CCH Fed Secur L Rep P 95637.
Trustee bank appointed to hold assets of minors, with sole discretion to act, had no duty to disclose to minor beneficiaries its intention to sell range corporation stock
held in trust for minors, to enable them to pursue remedy in state court, as law limits ability of minors to bring action in their own behalf and trust agreement affords
minors no expectation that bank would inform them in advance of its actions. Hackford v First Sec. Bank, N.A. (1981, DC Utah) 521 F Supp 541, CCH Fed Secur L
Rep P 98350, affd (1983, CA10 Utah) CCH Fed Secur L Rep P 99402, cert den (1983) 464 US 827, 78 L Ed 2d 105, 104 S Ct 100.
238. Short tendering
Investor did not violate § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-4 promulgated thereunder, by instructing brokerage firm to
tender 4,000 shares of corporation's stock which investor owned in response to corporation's tender offer for its own stock and then instructing brokerage firm to sell
short (sell stock investor did not yet own) another 2,000 shares of corporation's stock at prevailing market price since under these circumstances, there was nothing
manipulative or deceptive about short sale proposed by investor, nor would it violate purpose of Rule 10b-4 which is to prevent shareholder from double-tendering
stock in response to partial offer and thus increase percentage of violator's stock accepted for purchase and dilute that of other tendering shareholders; arbitrators
who awarded damages to investor on basis of brokerage firm's refusal to execute short sale could not be said to have violated law in not strictly enforcing "net long"
provision of Rule 10b-4 where arbitrators' deliberations indicated serious doubts about rationality and interpretation of "net long" proviso and how it serves Rule's
avowed purpose of preventing stockholder from increasing his pro rata share of stock tendered and accepted over that of other stockholders, nor did arbitrators act
arbitrarily in estimating damages, since exact damages could not be precisely determined, nor in failing to explain their computation of damages. Merrill Lynch,
Pierce, Fenner & Smith, Inc. v Bobker (1986, CA2 NY) 808 F2d 930, CCH Fed Secur L Rep P 93014.
Section 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC short tendering rule issued thereunder, were not violated by short tendering of 148 shares, out
of total of 30,649, because of duplicate customer instructions where, upon discovery of error on day following close of offer, tenderer immediately purchased
additional 148 shares to satisfy obligation. Bache & Co. v International Controls Corp. (1971, SD NY) 324 F Supp 998, CCH Fed Secur L Rep P 92981, 14 FR Serv 2d
1349.
Stock restriction, enforceable under state law without regard for existence of valid on lawful corporate purpose, was not unenforceable under § 10(b) of Securities
Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5 because of claim that is served no valid corporate purpose. St. St. Louis Union Trust Co. v Merrill Lynch,
Pierce, Fenner & Smith, Inc. (1977, CA8 Mo) 562 F2d 1040, CCH Fed Secur L Rep P 96151, cert den (1978) 435 US 925, 55 L Ed 2d 519, 98 S Ct 1490.
240. Theft
Misappropriation of proceeds of sale is violation of § 10(b) of Securities Exchange Act (15 USCS § 78j(b)) and SEC Rule 10b-5, notwithstanding that purchase price
agreed upon may represent fair value of securities which are subject of transaction. Superintendent of Ins. v Bankers Life & Casualty Co. (1971) 404 US 6, 30 L Ed
2d 128, 92 S Ct 165, CCH Fed Secur L Rep P 93262.
Investment advisor was quilty of fraud, in violation of 15 USCS § 77q, § 78j, and § 80b-6, justifying his unconditional bar from association with any investment
advisor, where he improperly deposited in his own bank account and in account of partnership which he controlled, funds of clients of 2 investment clubs, one of
which had stated objective of investing in stocks and mutual funds for growth and the other in medium grade, tax-free municipal bonds, and wrongfully diverted
funds to other transactions foreign to stated investment objectives furnished clients, from which he stood to make personal profit, and willfully concealed such
transactions from contemporary and subsequent purchasers of interests in investment clubs. In re Don A. Long (1981) 47 SEC 651.
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TOC: United States Code Service; Code, Const, Rules, Conventions & Public Laws > TITLE 15. COMMERCE AND TRADE > CHAPTER 2B. SECURITIES EXCHANGES >
§ 78j. Manipulative and deceptive devices [Caution: See prospective amendment note below.] [Part 1 of 3]
Citation: 15 U.S.C. 78J
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15 USCS 78j SEC Rules

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(June 6, 1934, ch 404, Title I, § 10, 48 Stat. 891.)

History; Ancillary Laws and Directives:

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3. Effective date of section:

Code of Federal Regulations:

Related Statutes & Rules:

Short sales by directors, officers, and principal stockholders, 15 USCS § 78p.

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Am Jur Proof of Facts:

Criminal Law and Practice:

Corporate and Business Law:

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Labor and Employment:

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Sale of Securities. 191 ALR Fed 623.

Law Review Articles:

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Emerging Issues Analysis

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3. Davis, Lowenthal, & Ruskin on Stoneridge Investment v. Scientific Atlanta, Inc.

4. Stengel, Fink, & Fournier on Stoneridge Investment v. Scientific Atlanta, Inc.

5. Professor James Fanto on Insider Trading and the Misappropriation Theory

Interpretive Notes and Decisions:

B.Relation to Other Laws

1.Other Securities and Exchange Act Provisions

III.SHORT SALES OR STOP LOSS ORDERS [15 USCS § 78j(a)]

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IV.FRAUD PROVISIONS, GENERALLY [15 USCS § 78j(b)]

D.Fraud in Connection With Purchase or Sale of Securities

2."In Connection With"

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104. Misrepresentations of SEC actions

V.FALSE OR MISLEADING STATEMENTS OR OMISSIONS

B.Particular Misstatements or Omissions As to Issuer

2.Issuer's Financial Condition

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175. Legality of corporate restructuring

C.Particular Misstatements or Omissions As to Security or Transaction

VI.CONDUCT NOT INVOLVING FALSE OR MISLEADING STATEMENTS OR OMISSIONS

VII.INSIDER DUTIES AND VIOLATIONS

A.Special Duty of Disclosure

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252. Effect of insider's diligence and good faith

B.Who Are Insiders

C.False or Misleading Statements or Omissions Pertaining to Inside Information

2.Financial Status of Corporation

3.Business Status or Activities

D.Insider Violations Not Involving False or Misleading Statements or Omissions

VIII.BROKER-DEALER DUTIES AND VIOLATIONS

A.Duty of Fair Dealing

B.False or Misleading Statements or Omissions

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317. Failure to disclose investment advisor's fraud

C.Violations Not Involving False or Misleading Statements or Omissions