Chapter 45 – Securities Regulation
Berardi also failed to discover that the cash balance on December 31, 1960, was
temporarily inflated. Why was PM not liable for this misstatement? Although
Berardi had failed to find correspondence between Talcott and BarChris indicating
that BarChris had to return the temporary cash deposit to Talcott, the court found that
it was not reasonable to expect Berardi to read all of BarChris’s correspondence,
absent a red flag. [Note that the underwriters, who are not considered in our excerpt
of the opinion, were required to read BarChris’s correspondence-with-Talcott file,
because they had red flags that the contingent liabilities were large.]
Concerning the S-1 review (which is designed to ensure that the audited financial
statements are accurate as of the effective date), Berardi failed to comply with GAAS,
generally accepted auditing standards. He did not comply with PM’s checklist, spent
only 20 and one-half hours on the review, looked at no important financial records
other than the end-of-March trial balance, discussed unfavorable matters with Trilling
instead of investigating independently, read only selected meeting minutes–the ones
given to him–ignoring executive committee minutes that would have alerted him to
the worsened receivables delinquency problem, and did not read the prospectus,
which would have revealed the past loans from officers and alerted him to check for
the new loans. Therefore, PM was liable for failing to make a reasonable
investigation.
Additional Point for Discussion: Ask your students what standards of conduct may be
gleaned from this case. First, the level of due diligence depends upon whether a
person has superior abilities (as a person’s level of intelligence, experience, and
education increases, a person is better able to detect red flags and to form a belief that
the registration statement is defective), the office he holds (e.g., controllers have
greater access to accounting data than do vice-presidents of marketing, giving them a
better opportunity to discover red flags concerning accounting data), and the person’s
status as an inside or an outside director. [Securities Act Rule 176 lists several
circumstances that in part determine whether a defendant has made a reasonable
investigation and has reasonable grounds for a belief.]
Second, potential defendants should read the registration statement carefully before
signing it. Third, potential defendants should not rely upon insiders who may have
something to hide. Fourth, auditors will be held to the standard of their profession.
Although at one time there was some doubt about whether the courts would hold
auditors to a higher standard than GAAS, it is fairly clear now that GAAS is the
appropriate standard for Section 11 liability. See the professionals’ liability chapter,
Chapter 46, for an extended discussion of this issue.
Close your discussion of this case by pointing out the probably disastrous effect this
case had on the lives of the defendants. Ask your students whether any CPA firm
would have been willing to take a chance on Berardi after this case.
F. The Global Business Environment: Securities Regulation of Global Issuers (p. 1206): Note
that with the increase in the number of market-based economies in the 1990s, there has been a
proliferation of securities law globally. Most new securities laws were created in anticipation
of businesses seeking capital from investors in the new market economies. American law has
tended to be the model for those establishing laws in these emerging economies, but each
nation has its eccentricities. One constant, however, is that a country’s laws apply to all
issuers, both foreign and domestic.
G. 1934 Act Reporting Requirements
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Chapter 45 – Securities Regulation
1. Briefly note the differences between the issuers that must register their securities and
those that must file periodic reports under the Act. Note how the duties to register and to
file may be suspended.
2. Briefly describe the documents that must be filed by reporting issuers. Note that these
documents are rarely seen by investors.
a. The 10-K report includes, in addition to information listed in the textbook at page
1207 information on material legal proceedings involving the issuer, descriptions of
matters submitted to shareholders during the last quarter, and directors and executive
officers’ holdings of the issuer’s securities.
b. Other matters required in the 8-K report include a change in the independent
accountant certifying the issuer’s financial statements and a resignation of a director
due to a disagreement with the issuer regarding the issuer’s operations, policies, or
practices. Note that the 8-K must be filed less quickly due to a recent change in the
law: four days after the occurrence of the event.
c. Log On (p. 1207): Students can check the SEC’s EDGAR database.
3. Short-Swing Insider Trading. Cover the disclosure obligation of insiders and their
liability for buying and selling or selling and buying their issuer’s equity securities in a
six-month period. [You may want to wait to cover this when you cover insider trading
under Rule 10b-5.]
a. Note that it is irrelevant that the insider did not use inside information. The potential
for abuse is so great and the probability of obtaining proof so small, that Congress
believed that an absolute liability rule was necessary. The presumption is that an
insider would not be buying and selling in such a short period of time unless he were
acting on inside information. However, a person’s access to inside information may
affect a court’s determination whether a person is an officer for purposes of section
16(b).
Example: Problem Cases ##8 and 9.
b. Note that a 10% holder must be a 10% holder at the time he made the decision to
purchase and at the time he made the decision to sell.
Example: A 1% holder buys 11% of the issuer’s shares. Two months later, he sells
all 12%. There is no liability, because there was no purchase by a 10% holder: the
purchase merely made him a 10% holder.
Directors and officers need merely be a director or officer either when they buy or
when they sell.
H. Proxy Solicitation Regulation
1. State the function of regulating proxy solicitations: to allow shareholders to exercise their
voting rights intelligently and to permit insurgent shareholders to have a fair opportunity
to oust incumbent management. Rule 14a-9 imposes liability for material misstatements
and omissions in proxy statements.
2. Shareholder proposals
a. The SEC proxy rules were adopted in 1983 and been amended slightly since then.
Critics charge that the rules have drastically reduced the level of shareholder
participation, harming the best interests of shareholders. Probably the better view of
the rule is that they have reduced the number proposals that have little chance of
being approved by shareholders. The reality remains that most shareholders are
profit motivated, care nothing about shareholder proposals, and sell their shares
(following the Wall Street rule) if they do not like the way the corporation is being
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Chapter 45 – Securities Regulation
managed. At this point, you may want to discuss the material on proxy solicitations
in Chapter 43.
b. Review the SEC rules regarding excludable proposals. There are several other
grounds for excluding proposals that are not in the text, including:
1) the proposal is contrary to SEC rules or regulations.
2) the proposal relates to an election to a political office.
3) the proposal is moot.
4) the proposal is beyond the corporation’s power to effectuate.
c. Use the following examples of shareholder proposals to illustrate the exclusion rules:
1) A proposal to bar the Cracker Barrel restaurant from discriminating against gay
job applicants. Excludable, because hiring policies were part of ordinary
business operation.
2) A proposal to require cumulative voting for directors. Usually this would not be
excludable, but in one no-action letter, the SEC held the proposal excludable,
because under Wisconsin corporation law, cumulative voting was not permitted.
3) A proposal to require directors to retain impartial real estate appraisers to update
the value of corporate real estate from cost to a higher present value and to reflect
such value in corporate financial statements. Excludable, because SEC rules
require corporations to follow generally accepted accounting principles, which
require valuation of real estate at lower of cost or market.
4) A proposal to require a supermarket chain to compile information on non-union
lettuce purchases and distribute such information. Not excludable, because it
does not relate to ordinary business and is mere compliance work.
5) A proposal to require Manville Corp. to disclose its contracts with university
professors who are consultants, their compensation, and the contributions to the
universities with which they are affiliated. Not excludable, even though the
dollar amount was small, because the information may be material to the issuer’s
business.
6) A proposal to require Firestone to take steps to initiate liquidation of the
corporation and to recommend that shareholders who agree that the board has
clearly demonstrated that it has been unable to earn a fair return on assets vote in
favor of the proposal. The latter part was excludable because it may be
misleading: what is a fair return?
7) A proposal that Humana Corp. make more charitable contributions because
“many American educational, medical, and cultural agencies are threatened with
financial disaster.” The latter part was excludable not on the grounds that it was
false, but that it was misleading.
8) A proposal to require disclosure of corporate action taken to contain radioactive
material at a dam break. Not excludable. Not ordinary and not moot, because
the proposal wants more disclosed than has been previously disclosed.
9) Additional Example: Problem Case # 11.
d. You should follow shareholder proposals as shareholders react to the credit crunch
and falling market prices of 2008 and 2009. Several shareholders have proposed that
their corporation expense options given to management, an accounting treatment that
some shareholders argue will provide a more accurate picture of the financial
position of the companies. While some boards of directors are voluntarily making
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Chapter 45 – Securities Regulation
the change (Coca-Cola and GE are two examples), boards that resist are generally
able to defeat shareholder proposals demanding the change (Eli Lilly is an example).
I. Ethics in Action: Sarbanes-Oxley Act of 2002 (p. 1209)
1. This is a good time to hit the changes imposed on public companies by the Sarbanes-
Oxley Act of 2002. If you want to cover all of Sarbox at once, you’ll want to assign
additional materials in Chapters 4, 43, and 46.
2. Cover the section on SOX 404, the most controversial part of the Act. You will want to
keep track of Congress’s and the SEC’s reactions to the high cost of compliance with
SOX 404. Will the Congress or the SEC repeal its application, exempt some firms from
its application, or reduce the standard for compliance? Or will the cost of SOX 404
compliance continue to go down as its benefits go up, eliminating the complaints from
issuers?
J. 1934 Act Liability Provisions
1. Section 18. Note the similarities and differences between Securities Act Section 11 and
Securities Exchange Act Section 18. More material on Section 18 appears in Chapter 46.
Especially refer to the concept review on pages 1254-1255 of that chapter.
2. Section 10(b) and Rule 10b-5. This is the most important liability section in the
securities laws. It deserves careful treatment in class.
a. Review the elements of a Rule 10b-5 violation. Note especially that it is designed to
stop fraud. In an omission case, the fraud requirement dictates that there be a duty to
disclose, usually because of a fiduciary duty owed to the plaintiff.
If there is no fraud–that is, no misstatement or omission–there is no Section 10(b)
liability. Thus, mere corporate mismanagement or other breach of a fiduciary duty
that corporate managers owe to shareholders does not create Section 10(b) liability.
There must be a misstatement or omission of material fact.
Example: Problem Case # 13.
Rule 10b-5 requires a showing of scienter–intent to deceive. Note that recklessness
may establish scienter, at least when the defendant owes a fiduciary duty to the
plaintiff.
Example: Problem Case # 15.
Additional Example: Introductory Chapter Problem (p. 1182).
Give special attention to materiality as it affects a corporation’s obligation to provide
continuous information about itself. This has been an important issue for over 20
years.
Rule 10b-5 also requires the proof of loss causation by the investor plaintiff’s.
Example: Problem Case #12.
b. SRM Global Fund L.P. v. Countrywide Financial Corp. (p. 1212). This is one of
several cases that were brought against companies and their officers in the wake of
the financial meltdown of 2007 and 2008. Other cases include Problem Cases ## 15
and 16 at the end of this chapter. These cases are particular relevant to students. The
cases can bring home the legal and financial realities of the crisis, while also showing
the difficulty of proving a Rule 10b-5 case. In this case, the court held that the
plaintiff had not proved the defendants’ fraud either under Rule 10b-5 or state
common law.
Points for Discussion: What were the misstatements or omissions of material fact that
the plaintiffs alleged caused the plaintiff’s losses and the defendants to have liability
under Rule 10b-5? They are summarized in the first two pages and include
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Chapter 45 – Securities Regulation
representations by the defendants that Countrywide had adequate reserves and
protections to ensure its liquidity if there were defaults on the ARMs by its
borrowers. You should ask students to point out several of the representations,
although it is superfluous to list all of them. Why did the court find the defendants
had not violated Rule 10b-5? Countrywide and its officers in a variety of contexts
had hedged the statements regarding liquidity protections by citing Countrywide’s
inexperience in dealing with pay-option ARMs, stating that delinquencies may
increase as loans mature, and warning that market interest rate increases would
reduce borrowers’ ability to meet the increased monthly payments on their ARMs.
These and other warnings were made in filings with the SEC and meetings with the
media. Note also how the court turned SRM’s fraud-on-the-market argument against
it: if the market efficiently captures all publically available positive information
about Countrywide’s liquidity protections, then it must capture all publicly available
negative information about the risks Countrywide faced.
Additional Points for Discussion: Note also that the court was not willing to hold the
defendants liable even though they could pinpoint the very moment in August 2007
when Countrywide’s liquidity disappeared. Why not? That ability to pinpoint
Countrywide’s financial Armageddon existed only in hindsight. It is not appropriate
to judge someone’s action with the 20-20 vision of hindsight.
Additional Points for Discussion: The most telling argument, although it could be
used only with regard to the state common law of fraud claim, was that SRM must
have been taking stupid pills. OK, the court did not use that term, but it was clear
that the court found that SRM, being a large hedge fund and a very sophisticated
investor, should have done more to protect itself by investigating information
available to it and not to be misled by positive information. As we know from media
reports, SRM was not the only investor who failed to see the warning signs and lost
significant amounts of money in the financial meltdown.
c. Continuous Disclosure Obligation. Cover the rule regarding the continuous
disclosure duty: material information must be disclosed, unless the corporation has a
proper business purpose to withhold the information from the public. Go over the
Basic, Inc. v. Levinson case, which is mentioned in the text at page 1212 and page
1216 and is the subject matter of Problem Case # 14. This is one of the most
important cases in the history of securities litigation, because it addressed several
important issues. The acceptance of the fraud-on-the-market theory was expected.
The adoption of a case-by-case basis for determining the materiality of merger
negotiations eliminated the division of the courts of appeals on the issue. Note also
that the court refused to accept the argument that administrative convenience justified
the agreement-in-principle test for not determining when merger negotiations were
material. This was very much a pro-investor decision.
d. Forward Looking Statements. Note the language of this safe harbor, especially that it
may be met by either of three alternatives.
Example: Problem Case # 16.
e. Rule 10b-5 and trading on inside information
1) At this time, you may wish to cover insider liability for short-swing trading under
section 16(b), which is covered at pages 1207-1208.
2) Stress the disclose-or-refrain rule. Go over the Concept Review on page 1219,
which summarizes the Chiarella and Dirks cases.
3) Insider liability. Chiarella and Dirks can be read to impose liability on insiders
when:
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Chapter 45 – Securities Regulation
a) there is the existence of a fiduciary duty of trust and confidence owed to the
corporation or the shareholders of the corporation whose shares are being
traded, and
b) there is a breach of the fiduciary duty either
* by using confidential corporate information in a transaction in the
corporation’s securities or
* by receiving a personal benefit by disclosing confidential corporate
information to someone who uses the information in a transaction in the
corporation’s shares.
4) Tippee liability. Chiarella and Dirks can be read to impose liability upon tippees
when:
a) there is an insider’s breach of his fiduciary duty by receiving a personal
benefit by disclosing confidential corporate information to the tippee,
b) the tippee knew or should have known of the insider’s breach of his fiduciary
duty, and
c) the tippee uses the information in a transaction in the corporation’s shares.
d) Dirks v. SEC (p. 1217). Review the facts of this case, especially noting that
the SEC and state insurance departments failed to act on allegations of fraud
at Equity Funding. Note that Raymond Dirks struggled for a long time to
clear his name when he and many others in the securities industry believed
he deserved only credit for breaking the Equity Funding scandal. This case
provides strong support for those who argue that allowing insider trading will
bring fraudulent activities into the public light sooner, since those with
knowledge of the fraud will have the incentive to act upon such information
and then disclose it, because they may profit thereby.
Points for Discussion: Why did the court rule that the insider, Secrist, had not
breached a fiduciary duty by making disclosure of the fraud to Dirks? Equity
Funding was unlawfully concealing the fraud; therefore, Secrist had no duty
of confidentiality not to disclose the information. Ask your students to
consider the following: Suppose a corporation refused to disclose preliminary
merger negotiations that it was required to disclose under the rule of Basic,
Inc. v. Levinson. A corporate director, who believed the information should
be disclosed, trades on the information. Has he violated section 10(b)? Is
this situation different from Secrist’s situation in Dirks? Yes, because the
director–unlike Secrist–is not solely motivated to get out the fraud.
In footnote 14 (not included in the excerpt but summarized in the text on
page 1216), the court stated that underwriters, independent accountants,
lawyers, and consultants may be fiduciaries precluded from using corporate
information. The corporation must expect the outsider to keep the disclosed
nonpublic information confidential, and the relationship between the
corporation and the outsider must at least imply such a duty. Ask your
students to give examples of such temporary insiders and the contexts in
which they may receive confidential information.
Additional Example: Problem Cases ## 17 and 18.
e) In December 2014, the Second Circuit of Appeals in U.S. v. Newman, 2014
U.S. App. LEXIS 23190 (2d Cir. 2014) held that tippees have liability only if
four requirements are met:
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Chapter 45 – Securities Regulation
(1) the corporate insider was entrusted with a fiduciary duty; (2) the
corporate insider breached his fiduciary duty by (a) disclosing
confidential information to a tippee (b) in exchange for a personal
benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the
information was confidential and divulged for personal benefit; and (4)
the tippee still used that information to trade in a security or tip another
individual for personal benefit.
In the Newman case, the tippees were remote from the insiders, and they
knew next to nothing about the insiders and nothing about whether the
insiders received a personal benefit. Therefore, the court concluded that the
tippees did not know of the insider’s breach of fiduciary duty of
confidentiality. Thus, the court found that the government had not proven the
tippees were guilty of insider trading.
The court stated that
To the extent Dirks suggests that a personal benefit may be
inferred from a personal relationship between the tipper and tippee,
where the tippee’s trades “resemble trading by the insider himself
followed by a gift of the profits to the recipient,” . . . we hold that such an
inference is impermissible in the absence of proof of a meaningfully
close personal relationship that generates an exchange that is objective,
consequential, and represents at least a potential gain of a pecuniary or
similarly valuable nature. In other words . . . , this requires evidence of
“a relationship between the insider and the recipient that suggests a quid
pro quo from the latter, or an intention to benefit the [latter].”
The Newman court cited facts that one insider and one tippee to whom he
gave the information (the tippees who traded on the information were tippees
of tippees) were not close friends, but had known each other for years,
having both attended business school and worked at Dell together. The
insider had sought career advice and assistance from the tippee. The tippee
had advised the insider on a range of topics, from discussing the qualifying
examination in order to become a financial analyst to editing the insider’s
résumé and sending it to a Wall Street recruiter. Some of that assistance
began before the insider began to provide tips about Dell’s earnings to the
tippee. The evidence also established that the other insider and the other
tippee were family friends that had met through church and occasionally
socialized together. The Second Circuit Court did not believe these facts
were sufficient to prove that the tippers derived some benefit from the tip.
“If this was a ‘benefit,’” the court wrote, “practically anything would
qualify.”
We will have to watch whether the Supreme Court will review this case
and state that the Dirks court defined personal benefit more expansively than
did the Second Circuit. Moreover, the Supreme Court may take issue with
the Second Circuit’s language that the tippee must “know” of the insider’s
breach of fiduciary duty. In Dirks, the Supreme Court stated that the tippee
must “know or should know” of the insider’s breach.
5) Misappropriation Theory. Note that the Supreme Court has held that Rule 10b-5
liability can be based on a misappropriation of information from a corporation
other than the corporation’s whose shares are being traded. Note that the
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Chapter 45 – Securities Regulation
misappropriation must breach a fiduciary duty owed to the source of the
information.
6) Note that trading on inside information is rampant due to the difficulty of
detection, the historically low amount of liability for a violation (usually merely
disgorge profits), and the large profits to be made if one is successful. In other
words, the risk of liability is not sufficient to deter an investor who is motivated
purely by monetary reasons. Ask your students what they think should be done
about inside trading. Point out that more criminal cases are being brought against
insiders and that the SEC may seek a penalty of three times the profits gained or
loss avoided.
7) Several critics of the securities laws point out that prohibiting insider trading
results in market inefficiency. Permitting insider trading would make the market
more efficient because the market price of a security would reflect all available
information about the security. As a result, allowing insider trading would
benefit all investors by allowing them to buy and to sell at the efficient market
price.
While these arguments are correct, insider trading has been demonstrated to be
one of the most important factors in reducing investor confidence in the securities
markets, because it is perceived as being unfair. Allowing insider trading would
increase the likelihood that investors would not view investing in securities as a
fair game; capital formation would be harmed thereby. Also, while economic
efficiency is important in our society, it is not the only value we cherish.
f. Aiding and Abetting Liability. Note that the Supreme Court in the Central Bank
case, noted in Chapter 46 at page 1249 and 1251, eliminated aiding and abetting
liability under Rule 10b-5. However, Congress modified the 1934 Act to permit the
SEC only to prosecute aiders and abettors. The Supreme Court explained aiding and
abetting liability in the Stoneridge Investment Partners case.
Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (p. 1219): The
Supreme Court held that investors could not sustain a private right of action against
an aider and abettor because the investors could not prove that they relied on the
defendants’ own deceptive conduct.
Points for Discussion: Ask students whether they believe Scientific-Atlanta and
Motorola acted ethically by participating in Charter’s scheme to misrepresent its
financial position. It is clearly unethical. They knowingly enabled Charter to engage
in fraud, because they knew that Charter was going to account for the wash
transactions as if there were two legitimate transactions. Ask students whether the
Supreme Court indicated whether the SEC and criminal prosecutors could bring
successful actions against Scientific-Atlanta and Motorola. Yes, the defendants could
suffer significant SEC sanctions and criminal penalties. The court even mentioned
that both the investors and defendants agreed that criminal penalties are a strong
deterrent. So it is not as if the defendants get off scot-free by engaging in this bad
behavior. They just don’t have to pay damages to the investors who relied on
Charter’s financial statements. Why? It is because those statements were Charter’s,
not Scientific-Atlanta’s or Motorola’s. Both defendants properly accounted for the
wash transaction. Charter did not. In other words, the aiders and abettors made none
of their own misstatements on which the investors relied in deciding to purchase
Charter shares. Thus, they had no liability to investors under Rule 10b-5.
Additional Point for Discussion: Why was the court unwilling to adopt the investors’
“scheme liability” argument? Essentially that argument was an end run around the
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Chapter 45 – Securities Regulation
wall protecting aiders and abettors against liability. The court was unwilling to adopt
the argument because such an argument could extend liability to the whole
marketplace in which the Charter or other issuing companies do business. That
would expose a new class of persons to liability, increase the cost of being a public
company, and shift securities offerings away from U.S. markets. Scheme liability
would place liability even on a person’s who acts were a remote cause of the
investors’ injuries. The court found that the Scientific-Atlanta’s and Motorola’s acts
were too remote to satisfy the requirement of reliance.
g. Regulation FD
1) Explain the rationale for Regulation FD: to prevent corporations from making
selective disclosure of material information, that is, to provide equal access to
information for all investors. Regulation D is about the SEC looking out for the
little investor.
2) Cover the examples in the textbook, which show how easily Regulation FD may
be violated, especially inadvertently, and then how difficult it is to rectify a
selective disclosure.
3) Point out the processes that will help issuers comply with Regulation FD.
4) Example: Problem Case # 19.
h. Securities Exchange Act Statute of Limitations
1) Note that the Sarbanes-Oxley Act has changed the statute of limitations for
Rule 10b-5 to a two-year/five-year scheme.
K. Tender Offer Regulation.
1. Tender offer regulation was a reaction to a great increase in the use of hostile tender
offers in the mid-1960s. Initially, Congress was concerned that tender offers would result
in “proud, old companies” being taken over without any means of defense. Congress was
especially concerned about “Saturday night specials,” which were offers that lasted only
a few days and rushed shareholders to decide whether they should sell their shares at a
high price or keep their shares and risk being a minority shareholder in a corporation
dominated by one shareholder. Eventually, Congress recognized that tender offers
provide an effective check on entrenched, inefficient management; therefore, Congress
did not want to deter tender offers. However, shareholders did need time to consider the
offer in order that they would not be rushed to judgment. Hence, Congress adopted a
neutral regulatory scheme that would prefer neither the bidder nor the subject company,
but would protect investors. The SEC has expanded the protections of shareholders in
the hope of promoting an auction for the shares, allowing the highest bidder to win a
tender offer battle.
2. Note that the Williams Act does not contain a definition of tender offer. The courts have
compiled a list of factors indicative of a tender offer, which you should cover in class.
Usually, the courts apply the factors of Wellman v. Dickinson, 475 F.Supp. 783 (S.D.N.Y.
1979):
a. Active and widespread solicitation of public shareholders;
b. Solicitation made for a substantial percentage of the target’s shares;
c. Offer to purchase made at a premium over the prevailing market price;
d. Terms of the offer are firm rather than negotiable;
e. Offer contingent on the tender of a fixed number of shares, often subject to a fixed
maximum number to be purchased;
f. Offer open only for a limited period of time;
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Chapter 45 – Securities Regulation
g. Offeree subjected to pressure to sell his shares;
h. Public announcements of a purchasing program precede or accompany rapid
accumulation of a large amount of the target’s shares.
3. Note how shareholders are protected by federal tender offer rules:
a. Minimum offering period. Shareholders have at least 20 business days to consider
their decision to sell.
b. Withdrawal period. Shareholders may withdraw their tendered shares at any time
during the term of the offer if a higher bid is made. This allows an investor to
reconsider an imprudent decision and, more importantly, promotes an auction market
for the shares.
c. Proration of purchases. Shareholders need not fear tendering too late if the offer is
oversubscribed, since the purchaser must prorate its purchases among all tenderers.
4. You may note that most shareholders do not sell to the bidder; instead they sell on the
market to arbitrageurs who then sell to the bidder. Arbitrageurs are highly sophisticated
investors who are willing to assume the risk that a tender offer may be withdrawn in
return for high returns on their investments. Arbitrageurs are important to the creation of
an efficient market and perform a vital function in tender offer battles.
5. Private acquisitions of public shares are also regulated by the Williams Act, on the
grounds that such acquisitions may foreshadow a future tender offer. Note the disclosure
obligation is reached when 5% of the shares are held.
Example: Problem Case #20.
L. The Global Business Environment: The Foreign Corrupt Practices Act (p. 1225)
1. Note especially the history of the practices that led to the enactment of the Foreign
Corrupt Practices Act. Ask your students whether they think that such a statute would be
enacted today?
2. Review the payments prohibition. Distinguish between payments that influence
discretionary governmental decisions [which are illegal] and grease payments that merely
facilitate nondiscretionary governmental actions [which are legal].
Example: A corporation may not pay an elected official $10,000 in order to ensure that it
will be granted a government contract. However, the money may be paid to expedite a
government official’s processing of an application to do business in a country, if the
money does not affect the decision whether to grant the corporation the authority to do
business in the country.
3. Note the record keeping and internal control requirements of the FCPA.
M. State Securities Regulation
1. Note that state securities regulation predated federal securities regulation. Although
federal regulation is more important, state securities law remains important as well. The
state securities commissioners tend to be aggressive enforcement officers.
Log On (p. 1226): State commissioners’ websites often have sections that warn investors
of risky or fraudulent securities.
2. Note how merit registration–which exists in many states–is different from the federal
scheme of disclosure-based registration. The states tend to be very paternalistic toward
their investors. Some states even apply a merit standard to exemptions from registration.
3. Registration by coordination. Note how this type of state registration eases an interstate
issuer’s burden of complying with all the securities laws in the United States.
4. Example: Problem Case #21.
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 45 – Securities Regulation
IV. RECOMMENDED REFERENCES
A. Acharya, Cooley, Richardson, & Walter, Regulating Wall Street: The Dodd-Frank Act and the
New Architecture of Global Finance (2010). An assessment of the strengths and weaknesses
of the Dodd-Frank Act.
B. Bader, Schwartz, Palter, & Hertlein, Understanding the Jumpstart Our Business Startups Act:
An In-Depth Look at the Potential Impact of the JOBS Act on Attorneys and Their Clients
C. Bloomenthal & Wolff, Sarbanes-Oxley Act in Perspective (2014-2015 ed.).
D. Bowers, “Facebook Fallout: Ordinary Investors Exposed to Risk, Indianapolis Star, June 2,
2012.
E. Bureau of National Affairs, Securities Regulation & Law Report. Weekly reports of federal
securities regulation cases, statutes, rules, regulations, seminars, and news.
F. Clark-Boardman, Securities Regulation Series. This treatise series, authored by leading
scholars and practitioners, is the best source of detailed information on securities regulation.
They are updated frequently, usually at least yearly. Perhaps the best single volume is a soft
cover text, Going Public Handbook: Going Public, the Integrated Disclosure System and
Exempt Financing.
G. Coffee & Sale, Securities Regulation (12th ed. 2012). A case book with extensive notes.
H. Commerce Clearing House, Federal Securities Law Reporter. Compilation and weekly
update reports of federal securities regulation cases, statutes, rules, and regulations. All
federal statutes and regulations are included.
I. Commerce Clearing House, Blue Sky Law Reporter. Compilation and bimonthly update
reports of state securities regulation. All state securities statutes and regulations are included.
J. Cox and Hazen, Treatise on the Law of Corporations (3rd ed.) A treatise with annual updates.
K. Hazen, Securities Regulation in a Nutshell (10th ed. 2009).
L. Lemke, Lins, Hoenig, & Rube, Hedge Funds and Other Private Funds: Regulation and
Compliance (2011-2012).
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.