Chapter 1

Private Actions ¾ Responsibility and Liability

§ 1.01

NOTE: The following materials were extracted from other publications and some sections and subsections were eliminated without changing the numbering of the remaining sections. To facilitate internal cross-referencing, we have not renumbered the remaining sections.

§ 1.01 The Changing Face of Securities Regulation

Private actions have two aspects. One, they are the grist of the securities litigator’s practice. Two, they provide additional incentives to securities practitioners and their clients to exercise caution in preparing disclosure documents for filing with the Commission and in otherwise disseminating information to the market. The focus of Going Public Handbook has been on the substantive aspects of the private remedies with a view to making practitioners aware of their responsibilities when acting as disclosure counsel. The opinion in BarChris (see § 1.02[8][a]) probably had as much, if not more, impact in guiding counsel and issuers in preparing registration statements for filing under the Securities Act than it did on litigators determining what must be alleged and proved to assert a claim under Section 11. This is still an appropriate focus and is the approach of this Chapter.

The assumption was made that good disclosure practices would protect issuers against litigation. This is still a valid assumption provided issuers exercise appropriate caution. Securities practitioners and their clients, nonetheless, must be aware that the public company is under attack by a well-financed and determined group of securities fraud class action law firms. The company that goes public in a successful public offering is likely to trade at a premium. The pricing of a public issue is critical and may give rise to some tension between the issuer and the underwriter. The underwriter, nonetheless, in an active new issue market is likely to insist that the shares be priced so as to assure that to some degree the offering will be oversubscribed. The company buoyed by the new financing implements its business plan and hopefully meets the market’s expectations. So long as it does so there is not likely to be any litigation. If, however, at some point the company falters and the necessary disclosure of the problems encountered leads to a sharp drop in the price of the shares, a class action may follow. In many instances, the action will not focus on the conservative disclosures of the prospectus, but will allege a broader scheme to defraud of which the public offering was only a part, with emphasis on representations made in the secondary market. The hot IPO 1999-2000 market gave rise to an unprecedented number of actions being filed largely based on the alleged improper practices relating to the allocation of the offering. See Stanford Class Action Clearinghouse..

Disclosure counsel involved in the drafting of an IPO registration statement for filing under the Securities Act tend to focus on the SEC staff review process and the due diligence obligations of their clients. The immediate need is to satisfy the staff’s comments and assure that the registration statement goes effective timely. The closing of a successful offering comes at the end of a long process and is the occasion for plaudits for a job well done. The real test, however, is not making it through the registration process, but withstanding the scrutiny that will come if the company falters along the way. The cop on the beat is more likely to be securities fraud class action lawyer(s) rather than the SEC enforcement staff. The adoption of the Private Securities Litigation Reform Act (PSLRA), designed to place obstacles in the way of such class actions, has made the issuer’s problem more apparent. The concerns in this regard of the proponents of the Act created some public awareness of the perceived problems. The adoption of the Act also made it a good deal easier to track the extent of litigation. It is apparent that the attack on public companies has not subsided. See Stanford Class Action Clearinghouse.. This requires not only vigilance on the part of securities practitioners, but awareness of the ins and outs of securities litigation. Chapter 2 et seq. focus on securities litigation, with emphasis on the aspects of the PSLRA that relate to procedure and that are primarily litigation oriented. Those aspects of the Act that directly relate to the issue of liability and suggest specific disclosure practices, such as the safe harbor for forward-looking statements, are incorporated in this Chapter 10, which continues to focus on the substantive aspects of liability under the Securities Acts. The division between substance and procedure, however, is not readily made in all instances. The law of joint and several liability and of contribution, extensively modified by the PSLRA, from most perspectives is substantive. The fact is, however, that those issues seldom arise in the context of a trial or in post-judgment proceedings, but rather impact the settlement process. Since class actions that survive a motion to dismiss are more likely to be settled than tried issues relating to contribution are more likely to arise in connection with the negotiation of partial settlements as part of the class action settlement process. For that reason, joint, several, and proportionate liability and contribution issues are included in Chapter 4. The PSLRA has tacked onto it amendments to the Exchange Act imposing certain obligations on auditors to adopt procedures designed to detect and illegal acts affecting the financial statements of reporting companies. See Exchange Act § 10A.Since this Chapter 1 is concerned with the private actions and the PSLRA provides that failure to detect and report such illegal activities is enforceable only in an action by the Commission, this provision is discussed in Chapter 7 rather than this Chapter.