Chapter 40

Securities Regulation

 

Objectives:

1. Explain disclosure requirements of 1933, what is exempt

2. Explain potential liabilities under 1933 act

3. Which provision of 1934 act apply only to public companies, and which to all companies

4. 1934 act disclosure requirements

5. 1934 act potential liabilities

 

I. 1933 Securities Act

          A. Definition of a "security"

                   1. Howey test

                             a. Investment in a common venture

                             b. Premised on reasonable expectation of profit

                             c. To be derived from managerial effort of others

                   2. Reves v. Ernst & Young, p. 834 (S.Ct. 1990)

                   Facts: Farmer's Coop of Ark and Ok sells notes.

                   $11m. Disclose that it is not insured, but that you can

                   Get your money any time and that it is safe.

                   Coop of course goes bankrupt and defaults.

                   Plaintiffs sued and won $6.1m at trial, but reversed on appeal.

                   Holding: The notes are securities.  1. Notes were sold in

                   An effort to raise funds for the venture. 2. Notes distributed

                   To a large number of investors.  3. Public reasonably would

                   Perceive as securities. 4. No risk reducing factor.

          B. Registration process (see chart on p. 836)

          C. Registration requirements and exemptions (see p. 838, 841)

          D. Liability Provisions (see chart on p. 844)

                   Skip Escott case

 

II. 1934 Securities Exchange Act

          A. Disclosure (see chart p. 845, 848)

          B. Deals chiefly with resale of securities

          C. Tender offers (p. 846)

                   1. Acquisition of 5% or more of co.

                   2. Tender offer for 5% or more

                   3. When issuer offers to reacquire its own shares

          D. Fraud and Insider Trading (Rule 10b-5) (chart p. 850)

                   1. Who is an "insider?"

                   2. When is there a breach of fiduciary duty?

                   3. Who is a tippee?

                   4. Traditional theory: Insiders owe a duty to their own shareholders. By taking advantage of inside information, the insider hurts someone they are supposed to be helping.  The relationship the law cares about is between the inside trader and the person on the other end of the trade.

                   5. Misappropriation theory: A person commits security fraud by misappropriating (stealing) confidential information for trading purposes. The violated relationship is between the inside trader and the person the trader got the information from.

          U.S. v. O'Hagan, p. 851, (SCt 1997).  Lawyer for big law firm in Minneapolis is asked by Grand Met to assist with possible takeover of Pillsbury Co. Lawyer is a partner, but does not work on the takeover. However, he buys a bunch of options and stock in Pillsbury.  When the takeover is announced, price goes from $39 to $60.  Lawyer cashes out, making $4.3m. 

          Q1: Does traditional theory apply? No. Lawyer has no duty to Pillsbury or its shareholders.

          Q2: Does misappropriation theory apply, and may government prosecute under that theory? Yes and yes. Lawyer had duty to his client, the acquiring company. He stole that information for his own benefit.

 

          See ethical problem re: corporate disclosure.  Page 853.

 

Skip Schreiber and FCPA