University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

257

Pages:

2
Author:

bratrochanter

Summary of Securities Regulation 1171 and Key Cases Common Law Fraud and Securities Claims:   Overlap and Distinctions: o Common law fraud shares elements with Rule 10b-5 claims (e.g., misstatements, materiality, reliance). o However, fraud-on-the-market reliance does not apply under common law fraud. Instead, reliance must be justifiable, assessed based on factors such as the investor’s sophistication and fiduciary relationships. Sophisticated Investors and Justifiable Reliance: o Courts scrutinize the reliance of sophisticated investors like SRM. Hedge funds managing billions, with access to extensive financial data, must exercise due diligence. o In this case, the court found SRM’s reliance on Countrywide’s general public statements unjustifiable, especially since Countrywide disclosed significant risks in its filings (e.g., the uncertainty surrounding pay-option ARM loans). Continuous Disclosure Obligations:   Corporations are required to disclose material facts promptly under Rule 10b-5, especially if events occur between periodic reporting dates that could affect investment decisions. Merger Disclosure Standard: o Under Basic, Inc. v. Levinson, the materiality of merger negotiations depends on their likelihood of success and importance to the issuer. o Disclosure is not mandatory if: 1. No prior disclosure on the topic was made. 2. SEC rules don’t compel disclosure. 3. Disclosure could jeopardize the merger. Forward-Looking Statements Safe Harbor:  The Private Securities Litigation Reform Act (PSLRA) shields companies from liability for forward-looking statements if: 1. Statements are identified as forward-looking. 2. Accompanied by meaningful cautionary language. 3. Made without actual knowledge of their falsity. Insider Trading and Tippee Liability:    Rule 10b-5 Prohibition: o Insiders with nonpublic, material information must refrain from trading or disclose the information before trading. o Tippees (those receiving insider tips) can also be liable if: 1. The insider breached fiduciary duties by providing the information for personal benefit. 2. The tippee knew or should have known of this breach (Dirks v. SEC). Misappropriation Theory: o Liability extends to those who misuse confidential information obtained via a fiduciary breach, even if not directly tied to the corporation (e.g., tender offers). Penalties: o Under §20A of the 1934 Act, insiders or tippees disgorge illicit profits or avoided losses. o The SEC can impose treble damages as a civil penalty, adding a deterrent beyond disgorgement. Case Focus: SRM v. Countrywide:   Ruling: o The court dismissed SRM’s claims under Rule 10b-5 and common law fraud. o It determined that: 1. Countrywide made sufficient risk disclosures in public filings. 2. SRM, as a sophisticated investor, could not justifiably rely on general optimistic statements. Takeaways: o Public disclosures and investor sophistication play key roles in securities fraud cases. o Courts emphasize that investors must investigate risks, particularly when stakes are high and information is available.