Securities Law Cases Outline
Securities law is the body of law concerning the regulation of securities. Securities law is primarily federal law, and much of it comes from the Securities Act of 1933 and the Securities Exchange Act of 1934. However, state laws may also regulate securities. (These are commonly called “Blue Sky” laws.) Many securities law cases are brought by the Securities and Exchange Commission (SEC), but individuals may also have private rights of action. Below is an outline of key cases in securities law with links to the full text of virtually every case, provided free by Justia.
The Securities Act of 1933 and the Securities Exchange Act of 1934
The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal laws that regulate securities with rules such as registration and disclosure requirements primarily designed to protect investors. The 1934 Act created the Securities and Exchange Commission (SEC).
SEC v. W.J. Howey Co. 一 An investment contract subject to the requirements of the Securities Act of 1933 is an investment of money in a common enterprise that leads to the expectation of profits from the efforts of a promoter or third party.
SEC v. C.M. Joiner Leasing Corp. 一 Whether an offering is an investment contract may be determined by the character that the instrument is given in commerce by the terms of the offer, the distribution plan, and the economic inducements held out to the prospect.
SEC v. Koscot Interplanetary, Inc. 一 For purposes of the Howey Test, a common enterprise is one that has a uniformity of impact on investors from the promoter’s efforts. The requirement that the expectation of profits come solely from the efforts of others may be satisfied by the significant and essential managerial efforts of others, even if investors contribute some effort.
United Housing Foundation, Inc. v. Forman 一 Whether “shares of stock” are securities within the purview of the Securities Acts is determined by the economic realities of the transaction rather than the form.
Landreth Timber Co. v. Landreth 一 An instrument labeled “stock” with all the traditional characteristics of stock is presumed to be a security within the meaning of the Securities Acts.
Reves v. Ernst & Young 一 Notes may be securities within the meaning of the Securities Acts unless they bear a resemblance to an enumerated exception or should be considered a new exception based on the motivations of the buyer and seller, the plan of distribution, the reasonable expectations of the investing public, and the presence of any alternative regulatory scheme or other risk-reducing factor.
SEC v. Datronics Engineers, Inc. 一 A public company may violate the Securities Act when it merges private companies into its subsidiaries and then spins off the subsidiaries’ shares as dividends and retains some for its services without registering the securities.
Registration Requirements and Exempt Transactions
Under Section 5 of the Securities Act of 1933, all non-exempt securities must be registered with the SEC. Certain transactions are exempt under Section 4 of the Act when investors do not need the protections that the Act provides.
SEC v. Ralston Purina Co. 一 An offer need not be made to the public at large to be a public offering subject to the registration requirements of the Securities Act of 1933. A transaction “not involving any public offering” is one in which the offerees do not need the Act’s protection.
SEC v. Continental Tobacco Co. 一 A sale of securities to a class of investors made when investors do not have the kind of relationship with the issuer that would make registration unnecessary for their protection is not exempt from the registration requirements of the Securities Acts of 1933 and 1934.
SEC v. Chinese Consolidated Benevolent Ass’n, Inc. 一 A group that systematically solicits funds to buy foreign bonds may be considered an underwriter not exempt from the registration requirements of the Securities Act of 1933, even if the group is not authorized or compensated by the issuer.
SEC v. Guild Films Co., Inc. 一 A bank that accepts unregistered securities as collateral for a loan may be considered an underwriter not exempt from the registration requirements of the Securities Act of 1933 when it attempts to sell those securities.
U.S. v. Wolfson一 A transaction in which a controlling shareholder sells shares through a broker may not be exempt from registration requirements when the shareholder has such control over the issuer as to be considered an issuer themselves.
Diskin v. Lomasney & Co. 一 Written offers made during the waiting period between the filing and the effective date of a registration statement must be made by way of a prospectus that complies with Section 10. Non-complying offers cannot be retroactively cured.
SEC v. Manor Nursing Centers, Inc. 一 Post-registration developments that make the registration materially misleading must be disclosed through an amended or supplemented prospectus.
False or Misleading Statements and Omissions
Section 11 of the Securities Act of 1933 allows purchasers to sue for materially false or misleading statements or omissions in a registration statement. Defendants, other than the issuer, may assert a due diligence defense in response to a Section 11 claim. Section 12 similarly makes offerors and sellers of securities liable for materially false or misleading statements or omissions in a prospectus or oral communication.
Escott v. BarChris Construction Corp. 一 Corporate officers and directors may be liable under Section 11 of the Securities Act of 1933 for material false statements or omissions in a registration statement if they do not exercise the required level of due diligence.
Wielgos v. Commonwealth Edison Co. 一 A forward-looking statement, including one regarding capital expenditures, falls within the safe harbor of Rule 175(a) unless it was made or reaffirmed without a reasonable basis or disclosed without good faith.
In re Worlds of Wonder Securities Litigation 一 Under the bespeaks caution doctrine, a court may rule as a matter of law that forward-looking representations contained sufficient cautionary language or risk disclosure.
Barnes v. Osofsky 一 Section 11 of the Securities Act of 1933 applies only to purchases of newly registered shares.
Pinter v. Dahl 一 The definition of sellers within the meaning of Section 12(1) of the Securities Act of 1933 may extend beyond individuals who have title to the securities, but not to individuals who persuade others to buy the securities without receiving a financial benefit for themselves or the securities owner.
Gustafson v. Alloyd Co., Inc. 一 Section 12(2) of the Securities Act of 1933 does not apply to private sale contracts, but only to public offerings by an issuer or controlling shareholder.
Tender Offers, Takeovers, and the Williams Act
The Williams Act, enacted in 1968, requires takeover bidders to disclose certain information regarding a tender offer to the SEC and the target company, such as the offer terms, the source of the funds, and the bidder’s intentions.
GAF Corp. v. Milstein 一 A group that intends to pool their stock ownership that will together be more than 10 percent of a certain class must register under Section 13(d) of the Securities Exchange Act.
SEC v. First City Financial Corp., Ltd. 一 It may be appropriate for a court to order that a defendant who violated Section 13(d) of the Securities Exchange Act of 1934 surrender their profits.
SEC v. Carter Hawley Hale Stores, Inc. 一 Stock repurchases in response to tender offers may only be protected by tender offer rules if they meet certain characteristics of a tender offer.
Hanson Trust PLC v. SCM Corp. 一 Whether the private purchase of corporate shares constitutes a tender offer within the meaning of Section 14(d) depends on the likelihood of a substantial risk that solicitees will lack the necessary information to make an informed decision.
Epstein v. MCA, Inc. 一 When consideration paid for stock constituting an integral part of a tender offer is different from that paid to other shareholders in the tender offer, the transaction may violate Rule 14d-10.
Piper v. Chris-Craft Industries, Inc. 一 A defeated tender offeror does not have standing to sue for damages under Section 14(e) of the Securities Exchange Act of 1934.
Proxy Solicitation and Materially Misleading Statements
Under Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9, proxy solicitations made to shareholders of registered securities may not contain materially false or misleading statements or omissions.
J.I. Case Co. v. Borak 一 Section 27 of the Securities Exchange Act of 1934 permits both derivative and direct private suits for violations of Section 14(a).
Mills v. Electric Auto-Lite Co. 一 A proper action under Section 14(a) requires a material misstatement or omission in a proxy statement, but not necessarily proof that its effect was decisive.
Adams v. Standard Knitting Mills, Inc. 一 Scienter is required for outside accountants to be liable under Rules 14a-9 or 10b-5 for including material misrepresentations or omissions in proxy solicitations.
Virginia Bankshares, Inc. v. Sandberg 一 Shareholders whose votes are not required by law or corporate bylaw to authorize the corporate action subject to the proxy solicitation cannot show causation of damages compensable under Section 14(a) of the Securities Exchange Act of 1934.
Fraud, Deceit, and Manipulation
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 prohibit manipulation and deception in connection with the purchase or sale of securities. Section 17(a) of the Securities Act of 1933 also prohibits the fraudulent sale of securities.
Kardon v. National Gypsum Co. 一 Section 27 of the Securities Exchange Act of 1934 implies a private right of action for violations of Section 10(b).
Basic, Inc. v. Levinson 一 Misleading statements made during merger discussions are material under Rule 10b-5 if there is a substantial likelihood that a reasonable investor would have considered the information significant. Both the probability that the merger will occur and the anticipated magnitude of the event should be considered.
Ernst & Ernst v. Hochfelder 一 Scienter, meaning intent to deceive, manipulate, or defraud, is necessary for a defendant to be liable for a violation of Section 10(b) and Rule 10b-5.
Rolf v. Blyth, Eastman Dillon & Co. 一 Scienter may be established with evidence of recklessness when there is a fiduciary duty owed to the defrauded party.
Aaron v. SEC 一 Scienter is required when the SEC seeks to enjoin violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 105, and Section 17(a)(1) of the Securities Act of 1933, but not to enjoin violations of Sections 17(a)(2) and 17(a)(3) of the 1933 Act.
Santa Fe Industries, Inc. v. Green 一 Evidence of a breach of fiduciary duty is not enough for liability under Section 10(b) and Rule 10b-5. There must be evidence of manipulation or deception.
Weiner v. the Quaker Oats Co. 一 A corporation and its officers may have a duty to update or at least not repeat particular projections regarding the corporation’s financial condition when that information would have been material to a reasonable investor.
Touche Ross & Co. v. Redington 一 There is no implied private right of action under Section 17(a) of the Securities Exchange Act of 1934.
Birnbaum v. Newport Steel Corp. 一 Rule 10b-5 applies only to fraud perpetrated on a purchaser or seller of securities. It does not apply to breaches of fiduciary duty by corporate insiders that result in fraud upon those who are not purchasers or sellers.
Blue Chip Stamps v. Manor Drug Stores 一 An offeree who chooses not to buy securities because of an overly pessimistic prospectus is not a purchaser or seller who may sue under Section 10(b) and Rule 10b-5.
Cowin v. Bresler 一 A plaintiff seeking injunctive relief may not sue under Section 10(b) and Rule 10b-5 if they are not a purchaser or seller of securities. Furthermore, reliance is not necessary for standing to sue for materially misleading proxy statements under Section 14(a).
Insider Trading
Insider trading is covered under Rule 10b-5, which prohibits fraud and deceit. Insider trading occurs when an insider, such as an officer, director, or another individual who possesses inside information because of their relationship with the company, uses confidential company information for personal gain.
SEC v. Texas Gulf Sulphur Co. 一 An individual with access to material information intended only for business use cannot use that information to trade for their own benefit until it becomes reasonably available to the public. Material information is information that would be important to a reasonable investor and that reasonably might affect the value of a corporation’s stock or securities.
Chiarella v. U.S. 一 A duty to disclose under Section 10(b) of the Securities Exchange Act of 1934 does not arise merely because an individual possesses non-public market information, but instead through a relationship of trust and confidence between parties to a transaction.
Dirks v. SEC 一 A tippee, who receives material non-public information from an insider, assumes a fiduciary duty to shareholders not to trade on that information when they know or should know that the insider breached their fiduciary duty by disclosing that information. There is no breach of fiduciary duty unless the tipper (the insider) receives a personal benefit from disclosure.
U.S. v. Chestman 一 Under the misappropriation theory, an individual who misappropriates non-public information in breach of a fiduciary duty and trades on that information to their own advantage violates Section 10(b) and Rule 10b-5. If the individual who misappropriated the information is not the defendant, the defendant may only be convicted if the misappropriator breached their fiduciary duty or a similar relationship of trust and confidence, and the defendant knew about it. A mere familial relationship does not necessarily create a fiduciary relationship.
U.S. v. Bryan 一 The misappropriation theory is not supported by the language of Section 10(b), Rule 10b-5, the Supreme Court authority interpreting such provisions, or the purposes of such prohibitions.
U.S. v. Carpenter 一 An individual may violate Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 when they knowingly breach the duty of confidentiality by misappropriating pre-publication information concerning stock investment analyses to be made in a financial newspaper, even when the publisher has no interest in the securities.
U.S. v. O’Hagan 一 An individual may violate Section 10(b) and Rule 10b-5 by misappropriating material, non-public information regarding a company other than their own in breach of their fiduciary duty to the provider of the information.
Other Securities Act Provisions
The Securities Act of 1933 and the Securities Exchange Act of 1934 contain other provisions interpreted by the courts. For instance, under Section 20(a) of the Securities Exchange Act of 1934, individuals who control others who are liable under the Act or related rules or regulations may be held jointly and severally liable to the same extent unless the controlling person acted in good faith and did not induce the violation.
Hollinger v. Titan Capital Corp. 一 There need not be an employee-employer relationship to establish sufficient control for a broker-dealer’s vicarious liability under Section 20(a) of the Securities Exchange Act of 1934, but only evidence that the wrongdoer was a registered representative of the broker-dealer.
Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. 一 There is no private right of action for aiding and abetting under Section 10(b) of the Securities Exchange Act of 1934.
Wilko v. Swan 一 Arbitration agreements in securities law disputes are void under Section 14 of the Securities Act. (This decision was overruled by Rodriguez de Quijas v. Shearson/American Express, Inc.)
Rodriguez de Quijas v. Shearson/American Express, Inc. 一 A pre-dispute agreement to arbitrate claims under the Securities Act of 1933 is enforceable.
Bateman Eichler, Hill Richards, Inc. v. Berner 一 A private right of action for damages under securities laws may only be barred on the grounds of the plaintiff’s own culpability when the plaintiff bears substantially equal or larger responsibility for the violations as a direct result of their own actions, and preclusion of the case would not significantly interfere with enforcement and public protection.
Musick, Peeler & Garrett v. Employers Ins. of Wausau 一 Defendants have the right to seek contribution in a 10b-5 action.
This outline has been compiled by the Justia team for solely educational purposes and should not be treated as an independent source of legal authority or a summary of the current state of the law. Students should use this outline as a supplement rather than a substitute for course-specific outlines.
