Know the risks - Zurich

More documents

Recommendations

Info

Liabilities under the federalsecurities lawsSecurities Act of 1933“The statute imposes strictliability for any false materialrepresentation or omission inthe registration statement.”Congress enacted the Securities Act of 1933 (1933 Act) in reaction to the real andperceived abuses in the issuance of securities that resulted in the Wall Street crashof 1929. Subject to certain exemptions, the 1933 Act requires the registration ofsecurities being offered to the public. The 1933 Act requires full and fair disclosureof all material facts necessary for investors to evaluate whether to purchase, sell orhold the security. The most common allegation in suits seeking relief under the 1933Act is that a prospectus, registration statement, or attachments to the registrationstatement filed in connection with the public issuance of securities violated violatedthe Act because they contained material misstatements or omissions of materialfacts in connection with an offering. Plaintiffs often allege that the financialstatements incorporated into the prospectus and registration statement materiallymisrepresented the true financial condition of the corporation issuing the securities.Section 11 suits are commonly brought as class actions against the corporation, itsdirectors, any officers that signed the registration statement, and others. Section15 of the 1933 Act additionally imposes “controlling person” liability on otherdefendants to the same extent as the primary violator.In order to establish a prima facie case under Section 11, a plaintiff need not allegeany form of fraud or even negligent conduct on the part of the defendants. Rather,the statute imposes strict liability for any false material representation or omission inthe registration statement.Section 12(2) of the 1933 Act similarly gives purchasers of a security a remedyagainst the offer or seller of a security for misstatements or omissions in connectionwith the security’s offer or sale. If successful, the plaintiff in a Section 12(2) case isentitled to a return of the purchase price of the security. A seller is not liable if theseller did not know or in the exercise of reasonable care could not have known ofthe untruth or the omission. Under some circumstances, directors may be held liableas “sellers” under Section 12(2).Securities Exchange Act of 1934The Securities Exchange Act of 1934 (1934 Act) regulates the public trading ofsecurities. The 1934 Act requires public companies to file detailed quarterly, annualand other reports with the SEC. The most commonly invoked provision concerningliability in the 1934 Act is Section 10(b), as implemented by Rule l0b-5. Under Rulel0b-5, in connection with the purchase or sale of any security, it is unlawful for anyperson to:15Financial institutions guide
• employ any device, scheme or artifice to defraud,• make any untrue statement of a material fact,• omit to state a material fact necessary to make statements not misleading, or• engage in any act, practice or course of business which operates as a fraud ordeceit upon any person.Private actions under Rule l0b-5 are often brought as class actions, in which thedamages of a class of shareholders who purchased or sold during a given period areaggregated. In addition, “controlling person” liability may be imposed under Section20 of the 1934 Act. Under the anti-fraud provisions of the federal securities laws,directors and other “insiders” who are in possession of material inside informationeither must disclose the information to the investing public or abstain fromrecommending or trading in the securities while the confidential information remainsundisclosed. 35 Financial institutions that engage in brokerage activities or participatein mergers and acquisitions are also exposed to potentially significant liability underRule l0b-5. Persons in possession of material nonpublic information may not usesuch information for the benefit of their customers or in connection with trades onbehalf of themselves or their employer. 36Although, under the Gramm-Leach-Bliley Act, depository institutions are notincluded in the statutory definition of “broker” or “dealer” under the 1934 Act aslong as they engage only in specified securities transactions, affiliates and non-banksubsidiaries of a depository institution or its holding company may be subject tobroker-dealer regulations. Section 15(a) of the 1934 Act requires the registrationof any broker or dealer that effects any transaction in, or induces or attempts toinduce the purchase or sale of, any security (not including exempted securities).Section 15(c) prohibits the use of fraudulent or deceptive devices in connection withthe sale of any security by a broker-dealer. As “sellers” of securities under federalsecurities laws, broker-dealers are exposed to liability under many provisions of the1933 Act and the 1934 Act. The meshing of traditional products and services withsecurities activities exposes many financial institutions to additional and, possibly,unanticipated liability.Securities litigation reformBy the mid-1990s, a perception had developed that too many securities lawsuits oflittle or no merit – particularly class action suits for alleged violations of Section 10(b)of the 1934 Act and Rule 10b-5 – were being filed against companies whose stockhad dropped in price. The Private Securities Litigation Reform Act of 1995 (PSLRA)was intended to curb perceived abuses in securities litigation.The major reforms contained in the PSLRA include:35 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2dCir., 1968).36 See, e.g., Chiarella v. United States, 445 U.S.222 (1980); Dirks v. SEC, 463 U.S. 646 (1983).• An express safe harbor under the 1933 and 1934 Acts for both oral and written“forward-looking statements” (e.g., financial estimates), which providesprotection from liability for reporting companies and persons acting on theirbehalf in connection with forward-looking statements made in news releases,annual reports and other public disclosures16Financial institutions guide
Page 6 and 7: • Reviewing how appropriate finan
Page 8: While the scope and application of
Page 11 and 12: agents, or servants of the [bank] t
Page 13 and 14: Sarbanes-OxleyThe Sarbanes-Oxley Ac
Page 15: duty; (2) that such violation, prac
Page 19 and 20: Claims by or on behalf ofthe instit
Page 21 and 22: “In recent years, there hasbeen a
Page 23 and 24: • Copies of regulators’ examina
Page 25 and 26: Most indemnification statutes disti
Page 27 and 28: • An institution may be insolvent
Page 29 and 30: ConclusionCorporate indemnification

Know the risks - Zurich

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?