Also known as: s. 11 · sec. 11 · s.11
Written by attorneys — see sources below.
A statutory cause of action under the Securities Act of 1933 that permits purchasers of securities to recover damages from the issuer and other specified defendants for material misstatements or omissions in a registration statement.
Sterling Manufacturing's board approves a merger plan with Synergy Systems and submits it to shareholders for approval. The board recommends approval in the proxy materials. Shareholders vote in favor, satisfying the statutory requirement that the plan receive shareholder approval after board adoption.
Sydney Santos purchases shares in a registered offering. She later discovers that the registration statement contained a material error that an accountant failed to catch through ordinary diligence. Santos sues the accountant under section 11. The claim proceeds without any showing that the accountant acted with intent to deceive.
From 1946 through 1967, Ernst & Ernst, an accounting firm, was retained by First Securities Company of Chicago, a small brokerage firm and member of the Midwest Stock Exchange and the National Association of Securities Dealers, to perform periodic audits of the firm's books and records. Ernst & Ernst prepared for filing with the Securities and Exchange Commission the annual reports required of First Securities under § 17(a) of the 1934 Act. It also prepared responses to the financial questionnaires of the Midwest Stock Exchange. Respondents were customers of First Securities who invested funds in a fraudulent securities scheme perpetrated by Leston B. Nay, president of the firm and owner of 92% of its stock. From 1942 through 1966, with the majority of the transactions occurring in the 1950s, Nay induced respondents to invest in escrow accounts that he represented would yield a high rate of return. In fact, there were no escrow accounts, as Nay converted respondents' funds to his own use immediately upon receipt. These transactions were not in the customary form of dealings between First Securities and its customers. They were not reflected on the books and records of First Securities. They were not shown on its periodic accounting to respondents or included in First Securities' filings with the Commission or the Exchange. The fraud came to light in 1968 when Nay committed suicide, leaving a note that described First Securities as bankrupt and the escrow accounts as spurious. Respondents subsequently filed this action for damages against Ernst & Ernst in the United States District Court for the Northern District of Illinois under § 10(b) of the 1934 Act. The complaint charged that Nay's escrow scheme violated § 10(b) and Rule 10b-5. It also charged that Ernst & Ernst had aided and abetted Nay's violations by its failure to conduct proper audits of First Securities. As revealed through discovery, respondents' cause of action rested on a theory of negligent nonfeasance. The premise was that Ernst & Ernst had failed to utilize appropriate auditing procedures in its audits of First Securities. This failure prevented discovery of internal practices of the firm said to prevent an effective audit. The practice principally relied on was Nay's rule that only he could open mail addressed to him at First Securities or addressed to First Securities to his attention. Respondents specifically disclaimed the existence of fraud or intentional misconduct on the part of Ernst & Ernst. After extensive discovery the District Court granted Ernst & Ernst's motion for summary judgment and dismissed the action. The Court of Appeals for the Seventh Circuit reversed and remanded. The Supreme Court granted certiorari to resolve the question whether a private cause of action for damages will lie under § 10(b) and Rule 10b-5 in the absence of any allegation of scienter.
View caseSean Steele, a Virginia resident, sues a New York corporation in federal court in New York over alleged misstatements in a registration statement. The corporation moves to dismiss on forum non conveniens grounds because the events occurred in Virginia. The court weighs private and public interest factors to decide whether to retain the case.
The plaintiff Gilbert, a resident of Lynchburg, Virginia, operated a public warehouse in that city. He brought suit against Gulf Oil Corporation alleging that the defendant, in violation of local ordinances, carelessly handled a delivery of gasoline to the warehouse tanks and pumps, resulting in an explosion and fire. The fire destroyed the warehouse building, merchandise, fixtures, and customers' stored property, and caused injury to business profits, with total claimed damages exceeding $365,000. The defendant is a Pennsylvania corporation qualified to do business in both Virginia and New York. When the action was commenced in the Southern District of New York on the basis of diversity of citizenship, the defendant moved to dismiss under the doctrine of forum non conveniens. It asserted that Virginia was the appropriate forum because the plaintiff resided there, all events in the litigation took place there, and most witnesses resided there, with both state and federal courts available. The district court dismissed the action, applying New York law on forum non conveniens pursuant to Erie Railroad Co. v. Tompkins. The Circuit Court of Appeals reversed that decision. The Supreme Court granted certiorari to review the application of the doctrine in federal courts.
View caseStella Shapiro receives a prospectus but does not purchase the offered securities. After the offering, she claims the prospectus contained material omissions and sues under section 11. The court dismisses the action because Shapiro lacks standing as a non-purchaser.
In 1963 the United States filed a civil antitrust action against Old Blue Chip Stamp Co., a company providing trading stamps to retailers, and nine retailers who owned 90 percent of its shares. In 1967 the action was terminated by entry of a consent decree. The decree contemplated a plan of reorganization whereby Old Blue Chip would merge into a newly formed corporation, Blue Chip Stamps. The holdings of the majority shareholders would be reduced. The new company would offer a substantial number of its shares of common stock to retailers who had used the stamp service in the past but were not shareholders. The offering was to be proportional to past stamp usage and packaged in units consisting of common stock and debentures. The reorganization plan was carried out. The offering was registered with the Securities and Exchange Commission under the Securities Act of 1933. A prospectus was distributed to all offerees as required by section 5 of that Act. Somewhat more than 50 percent of the offered units were actually purchased. In 1970, two years after the offering, Manor Drug Stores, a former user of the stamp service and therefore an offeree of the 1968 offering, filed suit in the United States District Court for the Central District of California against Old and New Blue Chip, eight of the nine majority shareholders of Old Blue Chip, and the directors of New Blue Chip. The complaint alleged that the prospectus prepared and distributed in connection with the offering was materially misleading in its overly pessimistic appraisal of Blue Chip's status and future prospects. It further alleged that Blue Chip intentionally made the prospectus overly pessimistic. This was done to discourage the offerees from accepting the offer. The goal was so that the rejected shares might later be offered to the public at a higher price. Class members because of and in reliance on the false and misleading prospectus failed to purchase the offered units. The complaint sought on behalf of the alleged class some $21,400,000 in damages representing the lost opportunity to purchase the units, the right to purchase the previously rejected units at the 1968 price, and some $25,000,000 in exemplary damages. The district court dismissed the complaint for failure to state a claim upon which relief might be granted. On appeal to the United States Court of Appeals for the Ninth Circuit, a divided panel reversed the district court. After the Ninth Circuit denied rehearing en banc, the Supreme Court granted certiorari.
View caseSpencer Silver, a printer, learns material nonpublic information about a target company while working on merger documents. He buys shares without disclosing the information. The government charges him with securities fraud. The court holds that Silver had no duty to disclose because he was not an insider or fiduciary.
In 1975 and 1976 Vincent Chiarella worked as a markup man in the New York composing room of Pandick Press, a financial printer. Among the documents he handled were five announcements of corporate takeover bids. The identities of the acquiring and target corporations were concealed by blank spaces or false names. The true names were sent to the printer on the night of the final printing. Chiarella deduced the names of the target companies from other information contained in the documents. Without disclosing his knowledge, Chiarella purchased stock in the target companies. He sold the shares immediately after the takeover attempts were made public. By this method he realized a gain of slightly more than $30,000 in the course of fourteen months. The Securities and Exchange Commission subsequently began an investigation of his trading activities. In May 1977 Chiarella entered into a consent decree with the Commission in which he agreed to return his profits to the sellers of the shares. On the same day he was discharged by Pandick Press. In January 1978 he was indicted on seventeen counts of violating § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. After he unsuccessfully moved to dismiss the indictment, he was tried and convicted on all counts in the District Court. The Court of Appeals for the Second Circuit affirmed the conviction. The Supreme Court granted certiorari.
View caseSebastian Santos buys shares after reading an opinion in the registration statement that the issuer believed its reserves were adequate. The reserves later prove insufficient. Santos sues under section 11. The court examines whether the opinion was misleading because it omitted material facts about the basis for the belief.
In 2005, Omnicare, Inc., the nation’s largest provider of pharmacy services for residents of nursing homes, filed a registration statement with the Securities and Exchange Commission in connection with a public offering of its common stock. The registration statement contained two statements expressing Omnicare’s opinion on legal compliance: “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws” and “We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.” Adjacent text noted state-initiated enforcement actions against pharmaceutical manufacturers for offering payments to pharmacies. It cautioned that laws might be interpreted inconsistently with Omnicare’s views. It warned that business could suffer if federal concerns about rebates led to the end of price concessions. Respondents, pension funds that purchased Omnicare stock in the offering, sued after the Federal Government filed suit against Omnicare alleging receipt of kickbacks from pharmaceutical manufacturers in violation of anti-kickback laws. Their complaint alleged that the opinion statements were materially false. Their complaint alleged that Omnicare had omitted material facts necessary to make the statements not misleading, including an attorney’s warning that a particular contract carried a heightened risk of liability. The complaint expressly excluded and disclaimed any allegation that could be construed as alleging fraud or intentional or reckless misconduct. The United States District Court for the Eastern District of Kentucky granted Omnicare’s motion to dismiss. The Court of Appeals for the Sixth Circuit reversed. The Supreme Court granted certiorari.
View caseThe issuer, its principal executive, financial, and accounting officers, a majority of the directors, each underwriter, and any accountant who prepared or certified part of the registration statement may be held jointly and severally liable.
No. Section 11 imposes liability for material misstatements or omissions without requiring proof that the defendant acted with intent to deceive or recklessness.
Non-issuer defendants may avoid liability by proving a due diligence defense, showing that after reasonable investigation they had reasonable ground to believe and did believe that the registration statement contained no material misstatement or omission.
…a tender offeror to purchase 5% of the target company's stock prior to disclosure of its plan for acquisition. : Section 11 of the 1934 Act generally forbids a member of a national securities exchange from effecting any transaction on the exchange for its own account. 15 U. S. C. § 78k (a) (1). But Congress has…