Federal Securities Law

Third Edition

Thomas Lee Hazen

Cary C. Boshamer Distinguished Professor of Law

The University of North Carolina at Chapel Hill School of Law

Legal Editor

Kris Markarian

Federal Judicial Center 2011

This Federal Judicial Center publication was undertaken in furtherance of the Center's 

statutory mission to develop educational materials for the judicial branch. While the Center regards the content as responsible and valuable, it does not reflect policy or recommendations of the Board of the Federal Judicial Center.

iii

Contents

Preface ...................................................................................................... vii

Acknowledgments ...................................................................................... ix

I. Introduction ......................................................................................... 1

A. Federal Securities Laws ................................................................... 1

1. Overview of 1933 Act ................................................................. 2

2. Overview of 1934 Act ................................................................. 4

B. Securities and Exchange Commission (and Self-Regulation) ...... 4

C. Sources of Litigation ....................................................................... 7

D. Self-Regulation ................................................................................ 8

E. Private Remedies ........................................................................... 10

II. Scope and Reach of Securities Laws .................................................. 11

A. Definition of Security .................................................................... 11

B. Jurisdictional Provisions ............................................................... 15

C. SEC Enforcement Powers ............................................................. 18

D. Relation to Other Federal Laws .................................................... 20

E. Relation to State Laws ................................................................... 24

III. Regulating Distribution of Securities—Securities Act of 1933 ........ 27

A. Structure of 1933 Act .................................................................... 27

B. Registration Process Under 1933 Act .......................................... 27

1. Prefiling Period ........................................................................ 29

2. Waiting Period ......................................................................... 31

3. Post-Effective Period ............................................................... 34

4. Shelf Registration (Rule 415) .................................................. 35

C. Disclosure Requirements in Securities Offerings ........................ 35

1. Registration Forms .................................................................. 35

2. Adequacy of Registration Statement Disclosures ................... 38

D. Exemptions from Registration Under 1933 Act .......................... 40

1. Exempt Securities ..................................................................... 41

a. Exemptions for Certain Exchanges of Securities: 

Sections 3(a)(9) and 3(a)(10) ............................................ 43

b. Intrastate Exemption: Section 3(a)(11) ............................. 43

c. Small-Issue Exemptions: Sections 3(b) and 3(c) .............. 45
Federal Securities Law

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2. Exempt Transactions ............................................................... 46

a. Transactions Not Involving Issuer, Underwriter, or 

Dealer: Section 4(1) ............................................................ 46

b. Transactions by Issuer Not Involving Public Offering: 

Section 4(2) ......................................................................... 50

c. “Section 4(11⁄2)” Exemption ............................................... 51

d. Exemption for Certain Dealer Transactions: Section 4(3) 53

e. Exemption for Unsolicited Brokers’ Transactions: 

Section 4(4) ......................................................................... 54

f. Exemption for Certain Small and Limited Offerings: 

Regulation D ....................................................................... 54

g. Other Exemptions .............................................................. 58

3. General Exemptive Authority ................................................. 60

4. Integration of Transactions ..................................................... 60

E. Liabilities Under 1933 Act ............................................................ 62

1. SEC Administrative Remedies ................................................ 62

2. Private Rights of Action ........................................................... 62

a. Misrepresentations and Omissions in Registration 

Statements: Section 11 ........................................................ 64

b. Securities Sold in Violation of Section 5, and Securities 

that Contain Material Misstatements or Omissions: 

Section 12 ............................................................................ 67

3. SEC Actions and Criminal Prosecutions: Section 17 ............. 71

4. Secondary Liability Under 1933 Act ....................................... 73

a. Controlling-Person Liability .............................................. 73

b. Aiding and Abetting Liability ............................................. 74

F. Securities Class Actions ................................................................ 76

1. Private Securities Litigation Reform Act ................................ 76

2. Securities Litigation Uniform Standards Act ......................... 83

IV. Regulating Issuers, Securities Professionals, and Securities 

Markets—Securities Exchange Act of 1934 ...................................... 87

A. Scope of 1934 Act .......................................................................... 87

B. Prohibition of Manipulative Activities ........................................ 90

C. Shareholder Voting: Federal Regulation of Proxies and Proxy 

Solicitation .................................................................................... 92

1. Materiality ................................................................................ 96

2. Causation ................................................................................. 98
Contents

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3. Culpability Required ................................................................ 99

4. Remedies .................................................................................. 99

D. Tender Offers and Takeover Bids: Williams Act ....................... 100

E. Liabilities Under 1934 Act .......................................................... 110

1. Manipulation of Exchange-Traded Securities: Section 9(e) 110

2. False Filings and Other Misstatements ................................. 112

a. Section 18 .......................................................................... 112

b. Rule 10b-5 ......................................................................... 112

c. Additional Implied Rights of Action ............................... 123

3. Wrongdoing Related to Tender Offers: Section 14(e) ......... 130

4. Insider Reporting and Short-Swing Profits: Section 16

Overview ................................................................................. 131

F. Insider Trading ........................................................................... 131

1. Insider Trading and Rule 10b-5 ............................................ 131

2. Insider Trading Sanctions: SEC Actions ............................... 138

3. Private Rights of Action for Insider Trading ........................ 141

4. Insider Transactions and Section 16 ..................................... 143

a. Officer ................................................................................ 144

b. Director ............................................................................. 144

c. 10% Beneficial Owner ...................................................... 145

G. Regulation of Marketplace and Securities Professionals .......... 150

H. Regulation of Exchanges and Securities Markets ...................... 154

I. Regulation of Credit Rating Agencies ........................................ 159

Appendix: Statutory Conversion ........................................................... 161

Securities Act of 1933 ....................................................................... 161

Securities Exchange Act of 1934 ...................................................... 163

For Further Reference ............................................................................. 165

Glossary ................................................................................................... 167

Table of Cases .......................................................................................... 173

By Case Name ................................................................................... 173

By Court ........................................................................................... 187

vii

Preface

This monograph provides an introduction to and overview of the complexities of litigation involving the federal securities laws, with an emphasis on the issues that are most likely to arise in litigation: basic registration, disclosure, and antifraud provisions. Because of space limitations, 

this monograph does not address the securities laws governing securities 

professionals and the operation of the securities markets, nor the regulation of investment companies and investment advisers. At the end of the 

monograph there is a list of selected references for further reading.

Codification of the securities laws is extremely confusing. Of the 

seven federal securities statutes, the acts referred to most frequently in 

this monograph are the Securities Act of 1933 and the Securities Exchange Act of 1934. As is the case with all of the federal securities laws, 

the section numbers of the acts do not coincide with the U.S. Code cites; 

citations in the text are to the sections of the respective act and are not 

footnoted. The appendix contains conversion charts to help locate the 

correlative section of the U.S. Code. The 1933 and 1934 Acts, like other 

securities statutes, are evolving laws. For example, in 1968 Congress 

added the Williams Act amendments, which introduced federal regulation of tender offers, and in 1975 there were significant amendments to 

the 1934 Act’s market regulation provisions. In 1995 and 1998, litigation 

reform provisions were added to the securities laws. In 2002, the Sarbanes-Oxley Act introduced corporate governance reforms and enhanced 

criminal penalties. In 2010, Congress introduced massive financial reform with the enactment of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. Only a small portion of Dodd-Frank impacts 

the subject-matter of this monograph, and those changes have been included at relevant portions of the analysis.

The Securities and Exchange Commission’s rules are found in Part 17 

of the Code of Federal Regulations. Rules under the 1933 Act are found 

in 17 C.F.R. §§ 230.100–230.904 and are numbered from 100 to 904. The 

1934 Act rules are found in 17 C.F.R. §§ 240.01–240.31.1 and are numbered according to the section of the Act (e.g., Rule 10b-5 is promulgated 

under § 10(b)).
Federal Securities Law

viii

This edition has been revised to include case law through the Supreme Court’s October 2010 term; it includes district and appellate case 

law through September 15, 2011.

All cites to the U.S. Code are to the 2006 edition unless otherwise 

specified. All cites to the Code of Federal Regulations are to the 2010 edition unless otherwise specified.

Portions of this monograph were adapted from Thomas Lee Hazen, 

Treatise on the Law of Securities Regulation (2d ed. West 1990; 3d ed. West 

1995; 6th ed. 2009).
ix 

Acknowledgments 

The Federal Judicial Center would like to thank Chief Judge Sarah S. 

Vance (E.D. La.), who provided invaluable assistance in reviewing the 

draft of this monograph. The author would like to thank the editorial 

staff at the Federal Judicial Center, especially Kris Markarian, who provided helpful editorial assistance on this and previous editions. 

1

I. Introduction

A. Federal Securities Laws

Shortly after the Wall Street crash of 1929, Congress entered the securities 

regulatory arena with the Securities Act of 1933. When Franklin Roosevelt signed that act into law, he announced that securities law was to be 

changed from a system of caveat emptor to one of caveat vendor. As such, 

the Securities Act was the first federal consumer protection statute relating to securities.1

 There have been seven statutes in this area,2 six of which 

are still in effect: the Securities Act of 1933,3 the Securities Exchange Act 

of 1934,4 the Trust Indenture Act of 1939,5 the Investment Company Act 

of 1940,6 the Investment Advisers Act of 1940,7 and the Securities Inves1. S. Rep. No. 73-47, at 6–7 (1933) (ch. 38, Title I, § 1, 48 Stat. 74).

2. The Public Utility Holding Company Act of 1935, 15 U.S.C. §§ 79 to 79z-6 (2000 

& Supp. 2001), was enacted to correct abuses in financing and operating public utilities. 

Most of the Securities and Exchange Commission’s work in this area had been completed,

and in 2005 the Act was repealed by the Energy Policy Act of 2005, Pub. L. No. 109–58, 

119 Stat. 594 (2005); Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005, 70 Fed. Reg. 75592–01, 2005 

WL 3464225 (FERC Dec. 8, 2005).

3. 15 U.S.C. §§ 77a–77z (referred to alternatively as the “1933 Act” and the “Securities Act”).

4. Id. §§ 78a–78ll (referred to alternatively as the “1934 Act” and the “Exchange Act”).

5. Id. §§ 77aaa–77bbbb. The Trust Indenture Act of 1939 deals with debt financing 

of public issue companies in excess of a specified amount (currently $5 million). It imposes standards of independence and responsibility on the indenture trustee for the protection of the security holders.

6. Id. §§ 80a-1 to 80a-64. The Investment Company Act of 1940 regulates publicly 

owned companies that are engaged primarily in the business of investing and trading in 

securities. It regulates investment company management composition, capital structure, 

advisory contracts, and investment policy modifications, and it requires SEC approval for 

transactions by such companies with directors, officers, or affiliates. The Act was 

amended in 1970 to impose additional controls on management compensation and sales 

charges. The Act also subjects investment companies to the disclosure requirements of the 

1933 Act when offering their securities publicly and to the reporting, proxy solicitation, 

and insider-trading provisions of the 1934 Act.

7. Id. §§ 80b-1 to 80b-21. The Investment Advisers Act of 1940, as amended in 1960, 

established a scheme of registration and regulation of investment advisers comparable to 
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2

tor Protection Act of 1970.8 The discussion that follows focuses on the 

Securities Act of 1933 and the Securities Exchange Act of 1934.9

1. Overview of 1933 Act

The 1933 Act was, and still is, directed primarily at public offerings of 

securities. Subject to certain exemptions, the 1933 Act requires the registration of all securities when first made publicly available. Many states 

had already adopted their own securities laws (so-called “blue sky” laws), 

which contained a merit approach under which the state securities commissioner could examine the merits of the investment and then decide if 

the securities were suitable for a public offering. After considerable debate, Congress decided not to adopt the merit regulatory approach of the 

state acts, opting instead for a system of full disclosure. The theory behind the federal regulatory framework is that investors are adequately 

protected if all aspects of the securities being marketed are fully and fairly 

disclosed, leaving no need for the more time-consuming merit analysis. 

The 1933 Act contains private remedies for investors who are injured because of violations of the Act. There are also antifraud provisions that bar 

material omissions and misrepresentations in connection with the sale of 

securities. However, the scope of the 1933 Act is limited. The 1933 Act 

that in § 15 of the 1934 Act with respect to broker–dealers (discussed in detail later). The 

Investment Advisers Act treats advisers as fiduciaries. Broker–dealers have not been subject to comparable language, but as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress mandated that the SEC evaluate the discrepancies 

between adviser and broker–dealer regulation to determine if additional rule making is 

warranted. Id. § 913.

8. Id. §§ 78aaa–78lll. The Securities Investor Protection Act of 1970 established the 

Securities Investor Protection Corporation (SIPC) to aid securities firms in financial difficulty. The SIPC is involved in insolvent firms’ liquidation and payment of claims asserted 

by customers. The SIPC is funded by monetary assessments on its members and a $1 

billion line of credit from the U.S. Treasury. If the SIPC determines that a member firm is 

in danger of failing, it may apply to a court both for a decree that the firm’s customers 

need the protection of the Act and for the appointment of a trustee to liquidate the firm. 

If the firm’s assets are insufficient to pay all legitimate customer claims, the SIPC must 

advance to the trustee sufficient funds to satisfy all such claims up to a $100,000 maximum for each customer (but with respect to claims for cash, not more than $40,000).

9. For discussion of the other securities laws, see Thomas Lee Hazen, Treatise on the 

Law of Securities Regulation (6th ed. 2009).
I. Introduction

3

covers only distributions10 (both primary and secondary) of securities, 

whereas the 1934 Act addresses all types of securities transactions. Additionally, the 1933 Act’s investor protection extends only to purchasers 

(not sellers) of securities.11

The essence of registration under the 1933 Act is an initial disclosure 

document, known as the registration statement. It is important to understand that neither securities nor the companies issuing securities are registered under the 1933 Act. Instead, the 1933 Act calls for the registration 

of transactions—namely, the public offering. Once the offering is complete the registration ceases to be effective. In reality, notwithstanding the 

statutory terminology, it thus is a mistake to talk of registered securities 

under the 1933 Act.12 In contrast, 1934 Act registration, which is discussed later, does in fact involve registration of securities.13

The registration statement is created by a team consisting of lawyers, 

accountants, the issuer’s management, and underwriters. The portion of 

the registration statement distributed to potential investors is known as 

the prospectus. The registration statement and prospectus must be filed 

before any public sale of securities can take place. After the registration 

statement is filed with the Securities and Exchange Commission (SEC), 

there is a waiting period during which the SEC reviews the filing for 

completeness, but not for accuracy. Publicly traded securities are also 

10. Distribution is the term used to describe a large infusion of shares into the public 

markets. As described by Rule 100 of the Securities and Exchange Commission’s Regulation M, “Distribution means an offering of securities, whether or not subject to registration under the Securities Act, that is distinguished from ordinary trading transactions by 

the magnitude of the offering and the presence of special selling efforts and selling methods.” 17 C.F.R. § 242.100. Difficult questions can arise as to how large an offering is required to trigger the concept of a distribution—as compared with an ordinary secondary 

transaction in the market. See, e.g., United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968), 

cert. denied, 394 U.S. 946 (1969); In re Ira Haupt & Co., 23 S.E.C. 589 (1946).

11. As discussed more fully in subsequent sections, the 1933 Act imposes disclosure 

obligations and other restrictions on sellers but not on purchasers of securities. The Act 

has this focus, since it was aimed at the distribution process. In contrast, the 1934 Act, 

which addresses transactions generally, imposes obligations on purchasers as well as sellers.

12. But see 1933 Act § 6, 15 U.S.C. § 77f(a) (“Any security may be registered with the 

Commission . . .”). 

13. See 1934 Act § 12, 15 U.S.C. § 78l.
Federal Securities Law

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subject to the registration requirements of the 1934 Act, which impose 

periodic reporting requirements upon public companies.

2. Overview of 1934 Act

Congress enacted the Securities Exchange Act of 1934, extending further 

regulation over a wider range of participants and transactions in the securities industry. Since the 1934 Act greatly increased the required administrative responsibility, Congress established the Securities and Exchange 

Commission.14 The 1934 Act regulates all aspects of public trading of securities. It covers sellers as well as purchasers of securities and imposes 

disclosure, reporting, and other duties on publicly held corporations. It 

also deals with stock manipulation, insider trading, manipulative or deceptive devices or contrivances in connection with the purchase or sale of 

stock, misstatements in documents filed with the SEC, and a myriad of 

other actions affecting securities sales, sellers, and purchasers. The 1934 

Act was substantially amended in 1975, largely to increase the SEC’s 

authority over national securities exchanges and the structure of the market system. It has been amended many other times as well.

B. Securities and Exchange Commission (and SelfRegulation)

The federal securities laws are administered by the Securities and Exchange Commission (referred to alternatively as the SEC or the Commission). In terms of function, although not in terms of size, the SEC is a 

true “superagency” and exercises most administrative powers, with one 

exception: It cannot adjudicate disputes between private parties.

Section 4 of the 1934 Act provides that the SEC have five commissioners—appointed by the President of the United States with the advice 

and consent of the Senate—no more than three of whom can be from the 

same political party. The main SEC office is in Washington, D.C., and is 

14. See generally SEC, A Twenty-Five Year Summary of the Activities of the Securities 

and Exchange Commission 1934–1959 (1961); Joel Seligman, The Transformation of 

Wall Street—A History of the Securities and Exchange Commission and Modern Corporate Finance (1982).
I. Introduction

5

composed of a number of divisions.15 There are eleven regional SEC offices.16

The SEC’s role in administering the securities laws takes two basic 

forms: direct SEC regulation through rules, orders, and enforcement; and 

an elaborate system of industry self-regulation carried out under SEC 

supervision and oversight. The self-regulatory organizations (SROs) include the securities exchanges. For years the primary SROs were the New 

York Stock Exchange (NYSE) and the National Association of Securities 

Dealers (NASD),

17 but in 2007 they were merged into the Financial Industry Regulatory Authority (FINRA). The Municipal Securities Rulemaking Board (MSRB), which establishes rules governing municipal securities dealers, is also an SRO. SROs have their own membership criteria, rules of operation, and disciplinary procedures, all of which are subject to SEC review.

Much of the SEC’s rule-making power derives from sections of the 

securities laws that specifically empower the SEC to promulgate rules that 

have the force of statutory provisions. Rule making by direct legislative 

delegation necessarily has the effect of law so long as it is carried out according to statute. The SEC also promulgates interpretive rules, including 

“safe harbor” rules,18 designed to aid corporate planners and attorneys in 

15. The key divisions are (1) Corporation Finance (which is often referred to as 

“Corp. Fin.”), with primary responsibility for examining all registration documents for 

compliance with the disclosure requirements of the securities laws and preparation of 

disclosure guides promulgated by the agency; (2) Enforcement, responsible for the investigation of all suspected securities laws violations; (3) Trading and Markets (formerly 

Market Regulation), which oversees regulatory practices and policies relating to the exchanges, the over-the-counter markets, and broker–dealers; and (4) Investment Management, which administers the Investment Company and Investment Advisers Acts of 

1940. Most lawyers contacting the SEC deal with staff members who give informal advice. 

In addition to the four divisions, the SEC has nineteen “offices” including the Office of 

General Counsel, Office of the Chief Accountant, Office of Compliance and Inspections, 

and the Office of Administrative Law Judges. See http://www.sec.gov/divisions.shtml. For 

the SEC organizational chart, see http://www.sec.gov/images/secorg.pdf.

16. Regional offices are located in Atlanta, Boston, Chicago, Denver, Fort Worth, Los 

Angeles, Miami, New York City, Philadelphia, Salt Lake City, and San Francisco.

17. When the NASD and NYSE demutualized, their self-regulatory arms were spun 

off as independent self-regulators (NASD Regulation—NASDR; and New York Stock 

Exchange Regulation—NYSER).

18. See infra text accompanying notes 148–55.
Federal Securities Law

6

complying with the statutes’ requirements. Unlike the rules promulgated 

pursuant to statutory delegation, interpretive rules do not carry the force 

of law.

Supplementing the rules are the SEC’s forms for the various statements and reports that issuers, broker–dealers, and others are required to 

file under the securities laws. These forms, which have the legal force of 

administrative rules, play an important part in defining the extent of disclosure obligations in the regulatory scheme.19

The SEC also engages in a substantial amount of “informal rule making” by setting forth its views on questions of current concern, but not as 

legal requirements imposed pursuant to formal procedures mandated by 

the Administrative Procedure Act.20 The SEC disseminates unsolicited 

advisory opinions in the form of “releases,” which may include guidelines 

or suggested interpretations of statutory provisions and rules. These releases necessarily provide less precedential and predictive value than rules 

promulgated under the more formal interpretative rule-making process. 

One step below interpretive releases are “no-action” letters, which are the 

SEC’s responses to private requests from individuals, entities, or their 

attorneys seeking an indication of whether certain contemplated conduct 

is in compliance with statutory provisions and rules. No-action responses 

take the form of recommendations from SEC staff members that the 

Commission take no enforcement action. Although technically not 

19. SEC Regulations S-K and S-X provide detailed guides for disclosures. They put 

the meat on the bones provided by the applicable SEC forms and schedules. Regulation SK contains the guidance for narrative disclosures, whereas Regulation S-X provides the 

guidance for financial statements and related disclosures. Regulation S-B was a parallel set 

of narrative disclosure guides for small businesses. 17 C.F.R. §§ 228.10 et seq. (2006). 

However, in 2007 the SEC eliminated the specialized forms and Regulation S-B that formerly were available to small business issuers. At the same time, the SEC redefined the 

concept of small business issuers in order to enable more companies to qualify for the 

new “scaled disclosure requirements” available under both the 1933 and 1934 Acts for 

smaller reporting companies. Companies with less than $75 million in public equity float 

now qualify for scaled disclosure requirements under Regulation S-K as amended and 

under the applicable 1933 and 1934 Act forms as amended. Companies that do not have a 

calculable public equity float qualify for scaled disclosure if their revenues were below $50 

million in the previous year.

20. 5 U.S.C. §§ 551–559.
I. Introduction

7

bound by a staff member’s no-action response, the Commission almost 

invariably follows it.

The SEC publishes Staff Legal Bulletins and other interpretations. 

Although these bulletins and interpretations have less precedential effect 

than formal SEC Releases, they provide further insight into the SEC’s approach to selected issues.21

Broker–dealers (other than those conducting business on a totally 

intrastate basis) must register with the SEC pursuant to § 15(a) of the 

Exchange Act of 1934.22 Registration entails an initial disclosure document plus periodic reporting. Registration subjects broker–dealers to SEC 

adjudicatory proceedings for imposition of disciplinary sanctions. Although the registration requirements apply only to broker–dealer firms, 

the SEC has the authority to discipline “associated persons” of broker–

dealers, including sales personnel.

Section 15(b)(8)23 makes it unlawful for any registered broker–dealer 

to engage in business unless the broker–dealer is a member of a national 

securities association (i.e., FINRA) or effects transactions solely on a national exchange on which the broker–dealer is a member. FINRA and 

exchange membership requirements, rules, market surveillance, and disciplinary procedures are all subject to SEC oversight and review.

C. Sources of Litigation

The judicial case law involving securities emanates from several types of 

proceedings. In addition to its administrative proceedings, the SEC itself 

may proceed by initiating a civil action in federal court if it discovers 

what it believes to be a violation of the law. 

Private parties can bring suit under the federal securities laws. In addition to remedies for private parties, the securities laws vest the SEC 

with enforcement powers. For example, if the alleged violator is a broker–

dealer or investment adviser required to register with the SEC, the SEC 

may initiate an administrative proceeding to revoke or suspend the firm’s 

registration or take other disciplinary action. If the alleged violator is an 

issuer seeking to sell securities under a 1933 Act registration statement, 

21. SEC Staff Legal Bulletins and Interpretations are available at http://sec.gov/.

22. 15 U.S.C. § 78o(a).

23. Id. § 78o(b)(8).
Federal Securities Law

8

the SEC can initiate administrative proceedings to suspend the effectiveness of the statement. In either case, the hearing is first held within the 

SEC, with the SEC making the final decision after initial findings by an 

administrative law judge. Decisions can be appealed to the U.S. court of 

appeals in the District of Columbia or in the circuit where the registrant’s 

principal place of business is located. 

If the alleged violator is neither an issuer making a registered offering 

(or a person associated with such an issuer), nor a securities professional 

registered with the SEC, the Commission must go to court to obtain relief. The SEC may seek an injunction against future violations and, in 

particularly egregious situations, may refer the matter to the Department 

of Justice for prosecution as a criminal violation of the securities laws.

D. Self-Regulation

National securities associations must register with the SEC pursuant to 

§ 15A of the 1934 Act.24 The SEC Division of Trading and Markets (formerly Market Regulation) oversees self-regulatory organizations, including the stock exchanges25 and FINRA. The exchanges have listing requirements for securities, and the National Association of Securities 

Dealers’ Automated Quotation system (NASDAQ) has similar listing requirements for its national stock market (formerly its market system).

Over the course of most of its history, the NASDAQ operated much 

like an exchange, but until 2006 the NASDAQ national market system 

was not a registered national securities exchange. In 2006, the SEC approved NASDAQ’s application to make its national Stock Market a registered securities exchange. The securities that are not listed in the national 

stock market but are nevertheless traded using the NASDAQ or on the 

NASDAQ electronic bulletin board (OTCBB) are considered over-thecounter (OTC) securities and thus are not subject to § 9 prohibitions on 

manipulation. Instead, OTC securities are regulated by § 15(c) of the 

1934 Act.26 OTC markets are distinguished from exchanges in two principal ways: (1) there is no central facility comparable to an exchange floor 

24. Id. § 78o-3.

25. A national securities exchange is defined by registration under § 6 or the 1934 

Act. 15 U.S.C. § 78f.

26. Id. § 78o(c).
I. Introduction

9

(although the National Association of Securities Dealers’ (NASD) introduction in 1971 of an electronic automated quotation system, NASDAQ, 

and more recently its national market system, have made this distinction 

less important); and (2) the function of a firm representing an individual 

buyer is different (in an exchange, the firm acts as a “broker” and the 

only “dealer” is the registered “specialist” (now known as a designated 

market maker) in that stock; in the OTC market, any number of firms 

may act as dealers or “market makers” in a particular stock).

Broker–dealers registered with the SEC must also register with 

FINRA (formerly the NASD). Additionally, their sales personnel must 

register with FINRA as “registered representatives.”27 There are various 

categories of FINRA qualifications, depending on the functions to be performed by the brokerage employee in question. Fitness standards for registered representatives operate to disqualify individuals who have engaged in fraudulent conduct or have been convicted of specified crimes. 

In addition, registered representatives must pass an exam administered 

by FINRA.28

FINRA is the only registered securities association for broker–dealers 

effectuating transactions in private-sector securities. Section 15B of the 

1934 Act29 addresses the regulation of municipal securities (i.e., state and 

municipal government obligations) and sets forth the authority for the 

Municipal Securities Rulemaking Board, which is the self-regulatory organization for municipal securities dealers. Section 15C30 deals with government securities dealers. Government securities are those issued by the 

federal government or a federal agency. Section 6 of the 1934 Act31 provides for the registration of national securities exchanges, and all exchange rules, procedures, and disciplinary sanctions are subject to SEC 

oversight and review. Section 11 of the 1934 Act32 regulates exchange 

trading. Section 11A deals with the national market system. Section 17A 

27. Many states have parallel registration requirements for broker–dealers and their 

registered representatives.

28. See the Financial Industry Regulatory Authority website (http://www.FINRA.org) 

for a description of the qualification requirements and the various levels of registration.

29. 15 U.S.C. § 78o-4.

30. Id. § 78o-5.

31. Id. § 78f.

32. Id. § 78k. 
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10

of the 1934 Act33 addresses registration of clearing agents and stock transfer agents. Sections 7 and 8 implement margin regulations governing the 

extension of credit using securities as collateral.34 The margin rules are set 

by the Federal Reserve Board but are enforced by the SEC (and the selfregulatory organizations).

E. Private Remedies

Investors who believe they were injured by a violation of the securities 

laws can bring a civil action for damages. Several sections of the 1933 and 

1934 Acts provide for express private rights of action. Perhaps the most 

significant civil liability exists under various “implied” rights of action 

under provisions prohibiting certain activities.

33. Id. § 78q-1. 

34. Id. §§ 78g, 78h.
11

II. Scope and Reach of Securities Laws

A. Definition of Security

The federal securities laws provide jurisdiction over securities. The term 

security is broadly defined by the statutes. Section 2(a)(1) of the Securities 

Act of 1933 is representative:

The term “security” means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation 

in any profit-sharing agreement, collateral-trust certificate, reorganization certificate or subscription, transferable share, investment contract, 

voting-trust certificate, certificate of deposit for a security, fractional 

undivided interest in oil, gas, or other mineral rights, any put, call, 

straddle, option, or privilege on any security, certificate of deposit, or 

group or index of securities (including any interest therein or based on 

the value thereof), or any put, call, straddle, option, or privilege entered 

into on a national securities exchange relating to foreign currency, or, 

in general, any interest or instrument commonly known as a “security,” 

or any certificate of interest or participation in, temporary or interim 

certificate for, receipt for, guarantee of, or warrant or right to subscribe 

to or purchase, any of the foregoing.35

The definition thus contains a list of various types of investments in 

addition to the broader category of “investment contract.” The statutory 

phrase “investment contract” captures the generic concept of what a security is, and interpretation of this phrase has provided basic guidelines 

for defining a security. In such determinations, courts have always been 

mindful that the bottom-line issue is whether the particular investment 

35. 15 U.S.C. § 77b(a)(1) (2000 & Supp. 2001). In 2000, the 1933 Act was amended 

to explicitly exclude security-based swap agreements from the definition of security but 

also to provide that such agreements, although not securities, are subject to the securities 

laws’ antifraud provisions. See Commodity Futures Modernization Act of 2000, Pub. L. 

No. 106-554, 114 Stat. 2763 (Dec. 21, 2000). 15 U.S.C. § 77b-1. Accord 1934 Act § 3A, 15 

U.S.C. § 78c-1.
Federal Securities Law

12

or instrument calls for investor protection under the federal securities 

laws.36

The landmark—and still leading—case on the definition of an investment contract is SEC v. W.J. Howey Co.37 The defendants in Howey

were promoters who were selling orange groves. The promoters also 

marketed an “optional” service agreement, under which a company affiliated with the promoters would handle all management of trees bought by 

the investor. In reality, however, the promoters were selling a security 

interest in the trees and their fruit. Buyers were not expected to come to 

the field and tend their own trees; in fact, that would have been nearly 

impossible, given that there was no physical access or right of access to 

the individual plots. As such, it was virtually impossible for any single 

buyer to manage a plot individually, or even use a competitor’s services. 

Moreover, based on the small size of the plots, only a common enterprise 

and the resultant economies of scale would make the plots economically 

feasible. Thus, although not tied by contract, in economic reality the services offered by the promoters were tied to the property, creating a security.

Under the test developed in Howey, a contract, transaction, or 

scheme is an investment contract if “a person (1) invests his money (2) in 

a common enterprise and (3) is led to expect profits38 (4) solely from the 

efforts of the promoter or a third party.”39 The fourth prong of this test 

was later modified to require only that the profits come “primarily” or 

“substantially” from the efforts of others.40 In determining whether the 

Howey test is satisfied, the focus is on the “economic reality” surrounding 

the investment package as a whole, not exclusively on any single factor.

36. Marine Bank v. Weaver, 455 U.S. 551 (1982) (bank-issued CD not a security 

subject to federal securities laws, since already federally insured, and purchasers therefore 

do not need extra layer of protection the laws afford).

37. 328 U.S. 293 (1946).

38. A fixed (as opposed to variable) return can still qualify as a profit under the investment contract test. See SEC v. Edwards, 540 U.S. 389 (2004) (holding promise of fixed 

return from sale-leaseback arrangement satisfied Howey’s profit requirement).

39. Howey, 328 U.S. at 298–99.

40. See, e.g., SEC v. Glenn W. Turner Enter., Inc., 474 F.2d 476 (9th Cir.), cert. denied, 414 U.S. 821 (1973) (holding pyramid sales arrangement is a security).
II. Scope and Reach of Securities Laws

13

The definition of security is not limited to investment contracts. The 

statute contains a list of other types of investments that are explicitly included in the definition. For example, stock is explicitly included in the 

statutory definition. There is a strong presumption that stock is a security. Nevertheless, under the economic reality test, some transfers of stock 

instruments are not transfers of securities. In United Housing Foundation, 

Inc. v. Forman,

41 the Supreme Court rejected the argument that merely 

denominating an interest as stock necessarily makes it a security. In that 

case, the stock was in a government-subsidized residential housing cooperative. Sale of the stock was tied to leasing an apartment in the cooperative. The stock yielded no dividends, provided no rights to appreciation, 

and was nontransferable. Furthermore, the voting rights were not set by 

the number of shares of stock held but by the leasehold interest held. The 

Court, placing substance over form, focused on the economic reality of 

the venture and found that the shares of stock did not fall within the 1933 

Act’s definition of security.

Following this economic reality approach, many courts of appeals 

recognized a “sale of business” exception to treating stock as a security: 

Namely, when an entire business (or in some cases, a “controlling interest” in a business) was sold, the transfer of stock was merely an “incident” 

of the business and thus did not fall under the Securities Act.42 When the 

Supreme Court faced the issue, however, it took a literal approach. In 

Landreth Timber Co. v. Landreth,43 finding that the stock involved had all 

the incidents of “stock,” the Court held that even the sale of all the stock 

of a company is a sale of securities subject to securities laws.

41. 421 U.S. 837 (1975).

42. See, e.g., Christy v. Cambron, 710 F.2d 669 (10th Cir. 1983); King v. Winkler, 673 

F.2d 342 (11th Cir. 1982); Frederiksen v. Poloway, 637 F.2d 1147 (7th Cir.), cert. denied, 

451 U.S. 1017 (1981). See generally Thomas L. Hazen, Taking Stock of Stock and the Sale of 

Closely Held Corporations: When Is Stock Not a Security?, 61 N.C. L. Rev. 393 (1983); 

Irving Seldin, When Stock Is Not a Security: The Sale of Business Doctrine Under the Federal 

Securities Laws, 37 Bus. Law. 637 (1982).

43. 471 U.S. 681 (1985). There is still some question as to whether the “sale of business” doctrine can be used under state securities laws to find the absence of a security. 

Compare Jabend, Inc. v. Four-Phase Sys., Inc., 631 F. Supp. 1339, 1345 (W.D. Wash. 

1986) (indicating doctrine may be applicable under California law) with Specialized 

Tours, Inc. v. Hagen, 392 N.W.2d 520, 536–37 (D. Minn. 1986) (rejecting doctrine).
Federal Securities Law

14

The impact of the demise of the “sale of business” doctrine has implications beyond the sale of closely held businesses. The Landreth decision 

rejects the application of Howey as the exclusive test of what is a security. 

Although Howey is no longer the exclusive test for defining a security, it is 

still good law. Other investment instruments, such as stock and notes 

expressly included in the statute, are analyzed differently; they are presumptively considered to be securities, but the presumption can be overcome.

Although under both the 1933 and 1934 Acts “any note” is a security,

the phrase has been modified by both the statutes themselves and the 

courts. Special provisions of the Acts limit the applicability of the federal 

securities laws to short-term notes. Section 3(a)(10) of the 1934 Act,44 for 

example, excludes from the definition of security any “note . . . aris[ing] 

out of a current transaction” with a maturity not exceeding nine months. 

Section 3(a)(3) of the 1933 Act exempts such notes from registration (but 

not from liability imposed by antifraud provisions of the Act).45 In Reves 

v. Ernst & Young, the Supreme Court declared that the phrase “any note” 

“must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts.”46 The Court 

adopted the “family resemblance” test for determining whether a note is 

a security. Using this approach, the starting point is a rebuttable presumption that the note is a security. Based on a court-created list of notes 

that fall outside the definition of security,47 the presumption may be rebutted by showing that the note in question fits in a category on the list; 

bears a strong “family resemblance” to a category on the list; or belongs 

to another category that should be on the list.

The Reves factors for determining whether a note is a security are as 

follows: (1) the motivations/expectations of the parties involved in the 

note transaction; (2) the investment or commercial nature of the transaction; (3) the reasonable expectations of the public; and (4) the existence 

44. 15 U.S.C. § 78c(a)(10). 

45. The Act further exempts all renewals thereof that are “likewise limited.” Id.

46. 494 U.S. 56, 63 (1990).

47. See, e.g., Chem. Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir.), cert. 

denied, 469 U.S. 884 (1984); Exch. Nat’l Bank v. Touche Ross & Co., 544 F.2d 1126, 1137 

(2d Cir. 1976).
II. Scope and Reach of Securities Laws

15

or nonexistence of other regulatory schemes to control the transaction.48

These factors incorporate the early “commercial versus investment” approach,49 which rests on the view that many transactions regulated in 

more specific ways do not need the protection of the federal securities 

laws.50 The Reves approach further incorporates other considerations to 

ensure that only notes that resemble the type of securities transactions the 

Acts were designed to regulate are included in the definition of note.

B. Jurisdictional Provisions

The Securities Act of 1933 and Securities Exchange Act of 1934 have different jurisdictional reach with respect to companies issuing securities. 

The 1934 Act governs offerings or issuers with sufficient interstate contact to support federal regulation.51 In contrast, § 5 of the 1933 Act asserts 

48. The Court described the factors:

If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a 

“security.” If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or 

to advance some other commercial or consumer purpose, on the other hand, 

the note is less sensibly described as a “security.” . . . Third, we examine the 

reasonable expectations of the investing public: The Court will consider instruments to be “securities” on the basis of such public expectations, even 

where an economic analysis of the circumstances of the particular transaction 

might suggest that the instruments are not “securities” as used in that transaction. Finally, we examine whether some factor such as the existence of another 

regulatory scheme significantly reduces the risk of the instrument, thereby 

rendering application of the Securities Acts unnecessary.

Reves, 494 U.S. at 66–67 (citations omitted).

49. See, e.g., Smith Int’l, Inc. v. Tex. Commerce Bank, 844 F.2d 52 (5th Cir. 1988); 

Union Nat’l Bank v. Farmers Bank, 786 F.2d 881 (8th Cir. 1986).

50. See, e.g., Marine Bank v. Weaver, 455 U.S. 551 (1982) (federally insured CD issued by bank not subject to securities laws); Brockton Sav. Bank v. Peat, Marwick, 

Mitchell & Co., 577 F. Supp. 1281 (D. Mass. 1983); Tafflin v. Levitt, 865 F.2d 595 (4th Cir. 

1989), aff’d, 493 U.S. 455 (1990) (CD issued by savings and loan association not a security).

51. Section 12(a) of the 1934 Act makes it unlawful for any broker or dealer to effect 

any transaction in a security on a national exchange unless a 1934 Act registration has 

been effected for the security. 15 U.S.C. § 78l(a). The registration requirement as it applies 

to non-exchange listed (over-the-counter) securities is set forth in § 12(g). 15 U.S.C. 

§ 78l(g). By virtue of § 12(g) and SEC Rule 12g-1 (17 C.F.R. § 240.12g-1), for issuers of 
Federal Securities Law

16

jurisdiction requiring registration for nonexempt offers or sales of securities through an instrumentality of interstate commerce.52 Although jurisdiction would otherwise exist, there is an exemption from registration for 

offerings taking place within a single state.53

The federal securities laws provide a mosaic approach to jurisdiction. 

The Securities Act of 1933 and most of the other acts comprising the battery of securities laws provide for concurrent jurisdiction of federal and 

state courts, thus giving parties a choice of a federal or state forum54 in 

the context of private causes of action.55 The impact of concurrent jurisdiction was severely limited by the Securities Litigation Uniform Standards Act (SLUSA),

56 which preempts state courts from hearing most 

securities class actions.57 In contrast to the concurrent jurisdiction of the 

other securities laws, the Securities Exchange Act of 1934 provides that 

jurisdiction is exclusively federal, which means that all private suits must 

be brought in federal court. All criminal prosecutions under the securities 

laws and judicial enforcement actions by the Securities and Exchange 

Commission must be maintained only in federal court.58 Similarly, jurisequity securities that are not traded on a registered securities exchange, registration is 

required for issuers having more than $5 million in assets and 500 or more record holders 

of a class of equity securities. In addition, there are companies that, even though not subject to § 12’s registration requirements, must nevertheless file 1934 Act reports. Section 

15(d) of the 1934 Act further provides that issuers having issued securities under a 1933 

Act registration statement with more than 300 record holders of such securities are subject to 1934 Act requirements. 15 U.S.C. § 78o(d).

52. 15 U.S.C. § 77e.

53. 1933 Act § 3(a)(11), 15 U.S.C. § 77c(a)(11).

54. See generally Thomas L. Hazen, Allocation of Jurisdiction Between the State and 

Federal Courts for Remedies Under the Federal Securities Laws, 60 N.C. L. Rev. 707 (1982). 

Cf. Sides v. Simmons, No. 07-80347-CIV-Ryskamp/Vitunac, 2007 WL 3344405 (S.D. Fla. 

Nov. 7, 2007) (1933 Act claims remained in state court while 1934 Act Rule 10b–5 claim 

would proceed in federal court since court declined to invoke abstention doctrine for that 

claim).

55. The concurrent jurisdiction provisions apply only to private suits; they do not 

extend to enforcement actions by the SEC or criminal prosecutions.

56. Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105–353, 112 

Stat. 3227, 105th Cong. (2d Sess. Nov. 3, 1998) (S. 1260).

57. See 1933 Act § 16(f), 15 U.S.C. § 77p(f); 1934 Act § 28(f), 15 U.S.C. § 78bb(f).

58. Securities Act of 1933, § 22(a), 15 U.S.C. § 77v(a); Securities Exchange Act of 

1934, § 27, 15 U.S.C. § 78aa; Public Utility Holding Company Act of 1935, § 25, 15 U.S.C. 
II. Scope and Reach of Securities Laws

17

diction over appeals from SEC administrative decisions is exclusively federal.59 When dealing with private remedies, however, the six securities 

acts present three different approaches to jurisdictional allocation.

Federal courts have taken a broad view of the jurisdictional reach of 

the antifraud provisions contained in the 1933 and 1934 Acts, applying 

them generally to all securities,60 whether or not the securities are exempt 

from registration and periodic reporting requirements. Typically, these 

antifraud provisions are triggered by the use of an instrumentality of interstate commerce.61 Under this expansive view of jurisdiction, even a 

face-to-face conversation may be subject to the broadest antifraud provision—SEC Rule 10b-562—if the conversation is part of a transaction that 

uses some instrumentality of interstate commerce.63 The universally accepted rule appears to be that a misrepresentation need not be communi-

§ 79y (repealed in 2005); Trust Indenture Act of 1939, § 322(b), 15 U.S.C. § 77vvv(b); 

Investment Company Act of 1940, § 44, 15 U.S.C. § 80a–43; Investment Advisers Act of 

1940, § 214, 15 U.S.C. § 80b–14.

59. Securities Act of 1933, § 9, 15 U.S.C. § 77i; Securities Exchange Act of 1934, § 25, 

15 U.S.C. § 78y; Public Utility Holding Company Act of 1935, § 24, 15 U.S.C. § 79x (repealed in 2005); Trust Indenture Act of 1939, § 322(a), 15 U.S.C. § 77vvv(a); Investment 

Company Act of 1940, § 43, 15 U.S.C. § 80a–42; Investment Advisers Act of 1940, § 213, 

15 U.S.C. § 80b–13.

A state court does not have the power to interfere with SEC proceedings. First Jersey 

Sec., Inc. v. SEC, 476 A.2d 861 (N.J. 1984), appeal dismissed, 501 A.2d 893 (1985).

60. The securities laws’ antifraud provisions (as amended in 2000) also extend to 

security-based swap agreements. See 1933 Act § 17(a), 1934 Act § 10(b), 15 U.S.C. 

§§ 77q(a), 78j(b).

61. E.g., 1933 Act § 12, 15 U.S.C. § 77l (rendering unlawful offers and sales 

“mak[ing] use of any means or instrumentality of transportation or communication in 

interstate commerce or of the mails to sell such security” unless the security is registered 

or exempt); 1934 Act § 10(b), 15 U.S.C. § 78j(b) (“by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities 

exchange”).

62. 17 C.F.R. § 240.10b-5.

63. E.g., Franklin Sav. Bank of N.Y. v. Levy, 551 F.2d 521, 524 (2d Cir. 1977) (jurisdiction found for claim based on § 12(a)(2) of 1933 Act; “[T]he sales here consisted primarily of the manual delivery of the note and the receipt of payment, neither of which 

occasioned the use of the mails. After delivery of the note and receipt of the payment, 

however, [defendant] mailed a letter to [plaintiff] confirming the sale.”); Leitner v. Kuntz, 

655 F. Supp. 725 (D. Utah 1987) (mailing of financial statement plus use of telephone to 

change date of face-to-face meeting were sufficient for jurisdictional purposes).
Federal Securities Law

18

cated through an instrumentality of interstate commerce, provided there 

is a connection between the fraud and the use of interstate commerce.64 A 

broad reading of the securities laws’ jurisdictional requirements appears 

further warranted by a Supreme Court decision involving federal mail 

and wire fraud. In Carpenter v. United States,

65 the Supreme Court found 

a violation of the mail fraud statute where the defendants did not themselves use the requisite instrumentality, but the scheme was dependent on 

someone else using the mail. The defendants were convicted of trading 

on advance knowledge of columns that were to appear in the Wall Street 

Journal; the mailing of the Journal was held to satisfy the jurisdictional 

means.

The jurisdictional scope of the 1934 Act’s regulatory provisions varies. A few provisions apply only to exchange-listed securities and not to 

over-the-counter securities. Section 9, for example, prohibits manipulative activity only in connection with securities that are traded on a national securities exchange.66 In contrast, § 15(c)67 of the 1934 Act gives the 

SEC the power to promulgate rules prohibiting brokers and dealers from 

participating in manipulative, deceptive, or fraudulent acts or practices in 

connection with sales or attempts to induce sales, and is not limited to 

securities traded on the registered national exchanges.

C. SEC Enforcement Powers

The SEC is empowered to investigate suspected violations of the securities laws. Most investigations are conducted with a view toward initiation 

of SEC administrative proceedings, initiation of SEC enforcement actions 

brought in federal court, or referral to the Department of Justice for 

criminal prosecution. In addition to a normal investigation, which can 

lead to criminal prosecution, civil litigation, or administrative action under § 21(a) of the 1934 Act, the SEC is empowered to issue public reports 

64. E.g., Kline v. Henrie, 679 F. Supp. 464 (M.D. Pa. 1988); United States v. Pray, 452 

F. Supp. 788 (M.D. Pa. 1978); Harrison v. Equitable Life Assurance Soc’y, 435 F. Supp. 

281 (W.D. Mich. 1977); Levin v. Marder, 343 F. Supp. 1050 (W.D. Pa. 1972).

65. 484 U.S. 19 (1987).

66. 15 U.S.C. § 78k.

67. Id. § 78o(c).
II. Scope and Reach of Securities Laws

19

of its findings.68 This power is rarely invoked and from time to time has 

raised considerable controversy.69

The SEC has direct prosecutorial authority to enforce the 1934 Act in 

court with civil suits for injunctions and ancillary relief against alleged 

violators. Should a criminal violation exist, the SEC Division of Enforcement refers the case to the Department of Justice for criminal prosecution. Where appropriate, the SEC may choose to address a securities law 

violation with administrative sanctions. With regard to market professionals (broker–dealers, investment bankers, investment companies, and 

investment advisers), the SEC can initiate adjudicatory proceedings that 

lead to possible sanctions, ranging from censure to suspension or revocation of the right to act as a securities professional.

The SEC has “cease and desist” power, conferred by the Securities 

Enforcement Remedies and Penny Stock Reform Act of 1990.70 A cease 

and desist order may be appealed to the full Commission or directly to a 

federal court. The 1990 legislation also added § 21(d)(2) to the 1934 Act71

(and parallel provisions of the other securities laws), which empowers the 

SEC to obtain a court order barring a person from serving as an officer or 

director if that person’s conduct demonstrates “substantial unfitness.” 

The legislation also gives the SEC power to issue civil penalties and, in 

administrative proceedings, to require disgorgement of ill-gotten profits 

resulting from securities law violations. It requires additional disclosures 

by dealers in certain low-priced stocks, frequently referred to as penny 

stocks. Penny stocks are securities that are generally unlisted—OTC 

stocks not traded on a national exchange or through an automated quotation system. Penny stocks are sold at under $5 a share. They are frequently subject to abuse because (1) they can be sold in large volume, 

frequently to unsophisticated investors, generating enormous profits for 

unscrupulous broker–dealers; (2) they are usually issued by smaller, little-known companies that attract little attention outside that generated 

by the offering broker–dealer; and (3) there is no reliable quotation sys68. Id. § 78u.

69. For an example of criticism of the publication of investigations, see In re Spartek, 

Inc., [1979 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 81,961, Exchange Act Release No. 

34-15567 (Feb. 14, 1979) (Karmel, dissenting).

70. Pub. L. No. 101–429 (1990). See H.R. Rep. No. 101–617, 101st Cong. (1990).

71. 15 U.S.C. § 78u(d)(2).
Federal Securities Law

20

tem for the non-NASDAQ OTC market, providing an opportunity for 

decreased supervision and increased abuse.72 Additional disclosures are 

required about both the market value of penny stocks and the people selling the stocks. Furthermore, the SEC is directed to adopt rules limiting 

the use of the proceeds of penny stock sales, providing a right of rescission to purchasers and facilitating development of a quotation system 

providing volume and last-sale information.73

The SEC does not have jurisdiction to adjudicate disputes between 

private parties.74 However, it can order disgorgement of profits in administrative proceedings and has adjudicatory responsibility with regard to 

regulation of market professionals.75

D. Relation to Other Federal Laws

A number of related statutes may supplement the federal securities laws: 

the Foreign Corrupt Practices Act of 1977,76 enacted in response to widespread concern over the activities of domestic companies in their dealings 

abroad; the Racketeer Influenced and Corrupt Organizations Act 

(RICO), enacted to facilitate efficient law enforcement with regard to organized crime and racketeering activities; and the federal Mail Fraud and 

Wire Fraud Acts.77 The SEC is involved in the administration of some of 

these laws when they involve securities regulation.

72. See Exchange Act Release No. 27,160 (Aug. 22, 1989).

73. See also Rules 15g-1 through 15g-8. These penny stock rules replaced Rule 15c2-

6, an antifraud provision designed to combat the “unscrupulous, high pressure sales tactics of certain broker–dealers by imposing objective and readily reviewable requirements 

that condition the process by which new customers are induced to purchase low-priced 

stocks.” Exchange Act Release No. 27,160 (Aug. 22, 1989).

74. Cf. The Commodity Futures Trading Commission’s reparations proceedings. 

Commodity Exchange Act § 14, 7 U.S.C. § 18.

75. Pursuant to Rule 102(e) of its Rules of Practice, the SEC can institute proceedings 

to suspend or otherwise discipline individuals admitted to practice before it. Rule 102(e) 

has been used on several occasions against lawyers and accountants. Section 307 of the 

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 (July 30, 2002), requires the SEC to 

promulgate rules defining what constitutes proper legal representation of a public company, including defining when a lawyer having evidence of corporate wrongdoing must 

report that to the board of directors.

76. 15 U.S.C. §§ 78m(b)(2), 78dd-1, 78dd-2.

77. 18 U.S.C. §§ 1341, 1343.
II. Scope and Reach of Securities Laws

21

For certain regulated industries, the securities of issuers may be subject to regulation by other federal administrative agencies, either in addition to or sometimes in place of SEC regulation. The latter situation occurs where the federal securities laws have created an exemption for securities and/or issuers subject to regulation by both the SEC and another 

government agency. The rationale behind these exemptions is to avoid 

“double regulation,” especially where the regulation provided by the 

other agency is more subject-specific than that of the SEC. The Comptroller of the Currency, for example, has jurisdiction over the distribution 

of securities issued by national banks.78 A similar arrangement exists with 

regard to securities of savings and loan associations, which are subject to 

regulation by the Federal Home Loan Bank Board.79 Other examples include securities of common carriers, regulated by the Interstate Commerce Commission, and securities of eleemosynary organizations, governed by regulations of the Internal Revenue Service.

Banks and securities firms compete directly in a number of areas, 

including providing financing for corporations and managing pooled

investment funds.80 Banks and the federal banking agencies generally take 

an “entity regulation” approach under which anything a bank does is 

78. 12 U.S.C. §§ 51–51c; see also 1933 Act § 3(a)(2), which provides an exemption 

from registration.

79. 12 U.S.C. §§ 1461–1470; see also 1933 Act § 3(a)(5), which provides an exemption from registration.

80. With the enactment of the Gramm-Leach-Bliley Act of 1999 (Pub. L. No. 106-

102, 1999 U.S.C.C.A.N. (113 Stat.) 1338), Congress repealed the Glass-Steagall Act and its 

“Maginot line” between investment and commercial banking. The Glass-Steagall Act, 12 

U.S.C. §§ 24 & 378, was adopted in 1933 to bar commercial banks from the investment 

banking business and securities firms from the commercial banking business. During the 

last three decades of the twentieth century, the prohibitions were continually eroded by 

administrative interpretation. Gramm-Leach-Bliley permits integrated financial services 

companies that previously were prohibited by Glass-Steagall. It provides for functional 

regulation with oversight by the Federal Reserve Board. This means, for example, that the 

SEC regulates securities activities; the Office of the Comptroller of the Currency or appropriate state banking agency regulates banking activities; and state insurance commissioners continue to regulate insurance-related activities. Gramm-Leach-Bliley permits 

bank holding companies to engage in increased securities and insurance activities. It also 

created a category known as a financial holding company, which can engage in a wide 

variety of financial activities, including investment banking, commercial banking, and 

insurance.
Federal Securities Law

22

subject to regulation only by banking agencies. Securities firms and the 

SEC generally take a “functional regulation” approach under which any 

entity that engages in securities dealings is subject to regulation by the 

SEC.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced significant reforms.

81 It imposed many changes on 

the operation of financial institutions, including the so-called “Volcker 

Rule,”82 which limits certain activities that are “high-risk or which create 

significant conflicts of interest between these institutions and their customers.”83 For example, with specified exemptions, including one for activities outside the United States, the Dodd-Frank Act amended the Bank 

Holding Company Act to outlaw proprietary trading by banks and nonbank financial institutions.84 Granting the same exemptions, the DoddFrank Act also prohibits banks and nonbank financial companies from 

sponsoring, acquiring, or retaining any equity, partnership, or other 

ownership interest in a private equity or hedge fund.85 There are various 

other provisions of the Dodd-Frank Act that impact banks and lending 

activities.

81. Dodd-Frank Wall Street Reform & Consumer Protection Act, Pub. L. 111-203, 

H.R. 4173, 111th Cong. (2d sess. 2010).

82. The Volcker Rule is named after former Federal Reserve Board Chairman Paul 

Volcker, who urged that beneficiaries of the federal financial safety net—deposit insurance guarantees and discount window borrowing—be prohibited from engaging in highrisk activities. See S. Rep. No. 111–176, at 91, 111th Cong. (2d sess. 2010).

83. S. Rep. No. 111-176, at 8, 111th Cong. (2d sess. 2010). These limitations were 

designed to “reduce potential taxpayer losses at institutions protected by the federal safety 

net, and reduce threats to financial stability, by lowering their exposure to risk.” Id. They 

are also meant to “reduce the scale, complexity, and interconnectedness of those banking 

entities and nonbank financial companies that are now actively engaged in proprietary 

trading, or have hedge fund or private equity exposure” and to “reduce the possibility that 

banking entities and nonbank financial companies will be too big or too complex to resolve in an orderly manner should they fail.” Id. at 9.

84. Bank Holding Co. Act § 13(h)(4), 12 U.S.C. § 1851(h)(4), as added by § 619 of 

the Dodd-Frank Act.

85. Bank Holding Co. Act § 13(h)(5), 12 U.S.C. § 1851(h)(5), as added by § 619 of 

the Dodd-Frank Act. A “hedge fund” or “private equity fund” is (1) any fund that would 

be an investment but for the exemptions provided by § 3(c)(1) or § 3(c)(7) of the Investment Company Act of 1940, and (2) any similar fund as the applicable regulators may 

determine.
II. Scope and Reach of Securities Laws

23

Because securities are included in the definition of commodity in the 

Commodity Exchange Act, “futures contracts” on individual securities 

and stock market and other financial indexes are regulated by the Commodity Futures Trading Commission (CFTC) as well as by the SEC.86 In 

2000, the Commodity Exchange Act (CEA) was amended to permit, for 

the first time, futures on individual equity securities.87 Prior to that Act,

the only individual securities (as opposed to indexes or baskets of securities) that could form the basis of futures contracts were federal government securities, such as treasury bonds. Options trading on outstanding 

securities, which has mushroomed in recent years following the development of organized option exchanges, is fully subject to SEC regulation. 

Contracts for future delivery of securities, however, were developed by, 

and are traded on, commodity exchanges rather than securities exchanges. The Commodity Futures Modernization Act of 200088 codified 

the existence of unregulated OTC derivatives markets for eligible sophisticated participants. Hundreds of billions of dollars in credit default 

swaps were among the contracts traded in the unregulated OTC derivatives markets. In the wake of the 2008 credit crisis and financial meltdown, numerous proposals emerged to regulate these markets. As a result 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 

2010, most swap transactions are now subject to CFTC or SEC regulation 

and central clearing requirements.89 Security-based swap transactions are 

subject to SEC jurisdiction, while other swaps are regulated by the CFTC. 

The Dodd-Frank Act sets forth a broad definition of swap transaction.

90

86. For an opinion analyzing the often difficult question of whether a novel financial 

instrument should be considered a futures contract or a security, see Chicago Mercantile

Exchange v. SEC, 883 F.2d 537 (7th Cir. 1989). See also Bd. of Trade v. SEC, 187 F.3d 713 

(7th Cir. 1999).

87. See Commodity Futures Modernization Act of 2000, Pub. L. No. 106-554, 114 

Stat. 2763 (Dec. 21, 2000).

88. Pub. L. No. 106–554, 114 Stat. 2763 (Dec. 21, 2000), codified in various sections 

of the Commodity Exchange Act (7 U.S.C. §§ 1 et seq.) and the securities laws (15 U.S.C. 

§§ 77a et seq.).

89. Dodd-Frank Wall Street Reform & Consumer Protection Act, Pub. L. No. 111-

203, H.R. 4173, 111th Cong. (2d sess. 2010).

90. CEA § 1a(47)(A), 7 U.S.C. § 1a(47). This broad definition of swap includes: 

(1) any form of option for the transfer of a thing of value or that tracks the value of that 

thing; (2) any agreement where performance depends on a contingency associated with a 
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24

There are several exclusions from the definition of swap, including futures contracts, options on futures contracts, and “any sale of a nonfinancial commodity or security for deferred shipment or delivery, so long 

as the transaction is intended to be physically settled.”91 The extent of 

swap regulation will not be determined until the SEC and CFTC complete their rule-making obligations under the Dodd-Frank Act.

E. Relation to State Laws

The broad reach of the federal securities laws often brings them into contact, or conflict, with provisions of state laws, other federal laws, and foreign laws. State securities laws, commonly known as “blue sky” laws, generally provide for registration of broker–dealers, registration of securities 

to be offered or traded in the state, and sanctions against fraudulent activities. States’ securities laws are still characterized by great diversity of 

language and interpretation. The Uniform Securities Act (USA), designed 

to bring uniformity to state regulation of securities, relates to the registration of broker–dealers, agents, advisers, and securities, and has been substantially or partially adopted in more than thirty states.92

Prior to 1996, federal securities laws specifically preserved the jurisdiction of state commissions to regulate securities transactions, so long as 

their regulation did not conflict with federal law. With the enactment of 

the National Securities Markets Improvement Act (NSMIA) in 1996,93

Congress preempted a significant portion of state regulation of securities 

offerings. The NSMIA bars states from regulating offerings of securities 

listed on major stock exchanges or the National Association of Securities 

Dealers’ national market system; securities issued by investment companies; securities sold to “qualified purchasers” (as defined by the SEC); and 

potential financial, economic, or commercial consequence; (3) any agreement calling for 

payment based on the value or level of a referenced thing but without entitling either 

party to ownership of the thing; or (4) any other instrument “commonly known to the 

trade” as a swap.

91. CEA § 1a(47)(B), 7 U.S.C. § 1a(47).

92. There have been several versions of the Uniform Securities Act as recommended 

by the National Conference of Commissioners on Uniform State Laws. For the most recent version, as amended in 2002, see http://www.abanet.org/buslaw/newsletter/0009/

materials/uniformsecure.pdf.

93. Pub. L. No. 104-290, 110 Stat. 3416, 104th Cong. (1996).
II. Scope and Reach of Securities Laws

25

securities sold in certain types of transactions exempted from registration 

under the Securities Act of 1933, §§ 3 and 4. States remain free to bring 

antifraud proceedings, require filing of notices, and collect fees with respect to such transactions. Section 15(h) of the Securities Exchange Act of 

193494 preempts state regulation of capital, custody, margin, financial 

responsibility, and record keeping of registered broker–dealers, as well as 

certain qualification requirements for associated persons. Investment 

advisers with more than $25 million of assets under management that are 

registered with the SEC are exempt from state regulation.95 Investment 

advisers with less than $25 million under management and regulated by 

their home states are exempt from SEC regulation.

The internal affairs of corporations, the rights of their shareholders, 

and the liabilities of their officers and directors are generally governed by 

the law of the state of incorporation. However, certain provisions of federal securities law create liabilities that interact or overlap with provisions 

of state corporation law. Examples from the 1934 Act are § 14,96 which 

regulates the solicitation of proxies in connection with shareholder meetings; § 16,97 which imposes liability on officers, directors, and large 

shareholders for their profits on short-swing trading in the corporation’s 

shares; and § 10(b), which imposes liability for a variety of “fraudulent or 

deceptive” acts.98 Another example is SEC Rule 10b-5,99 which also imposes liability for “fraudulent or deceptive” acts.

Many state laws regulate corporate takeovers, generally imposing 

greater obstacles to such takeovers than are found in the federal Williams 

Act.100 The validity of such laws under the Supremacy Clause and the 

Commerce Clause has been considered in a number of cases.101 The state 

94. 15 U.S.C. § 78o.

95. See Investment Advisers Act § 203A, 15 U.S.C. § 80b-3a.

96. 15 U.S.C. § 78n.

97. Id. § 78p.

98. Id. § 78j(b).

99. 17 C.F.R. § 240.10b-5.

100. Codified in §§ 13(d), 13(e), 14(d), 14(e), and 14(f) of the 1934 Act.

101. See, e.g., CTS v. Dynamics, 481 U.S. 69 (1987); Edgar v. MITE, 457 U.S. 624 

(1982); Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496 (7th Cir. 

1989).
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26

takeover laws that have passed constitutional scrutiny are those that are 

part of the corporate law, focusing on corporate governance issues.

Insurance companies are regulated only by state law, and life insurance policies and annuities are specifically exempted from the registration provisions (but not the antifraud provisions) of the federal securities 

laws.102 It is unlikely that traditional insurance policies and annuities 

would be deemed to be securities even in the absence of such an exemption. However, the Supreme Court has held that when insurance companies issue “variable” annuities or insurance policies in which the rate of 

return varies with the profitability of an investment portfolio, such instruments are securities subject to the provisions of the federal securities 

laws.103

The financial crisis that emerged in 2008 triggered many proposals 

for increased regulation of financial institutions. As noted earlier, the 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

introduced heightened regulation of financial institutions, the details of 

which await agency rule making. As a result, it is likely that there will be a 

completely new landscape for the regulation of banking institutions. 

Those changes are likely to have minimal impact, if any, on those aspects 

of securities regulation addressed in this monograph.

102. 1933 Act § 3(a)(8), 1934 Act § 3(a)(10), 15 U.S.C. §§ 77c(a)(8) & 78c(a)(10).

103. See SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959); SEC v. United 

Benefit, 387 U.S. 202 (1967). In 1987, the SEC adopted Securities Act Rule 151, a safeharbor rule specifying the characteristics that would cause annuity contracts to be classified as exempt securities within the meaning of § 3(a)(8) of the 1933 Act.
27

III. Regulating Distribution of Securities—

Securities Act of 1933

A. Structure of 1933 Act

The Securities Act of 1933 regulates the distribution of securities. There 

are two basic ways that securities can be distributed. The first is by a primary offering (or distribution): Stock is sold from the issuer to the stockholder, usually for the purpose of raising capital. The second type is a 

secondary distribution: A shareholder or group of shareholders owning a 

large number of shares sells stock to someone else. In this case, the proceeds go not to the corporation (or other primary issuer), but to the selling shareholder. The 1933 Act regulates both primary and secondary distributors, since it covers distributions of securities by issuers, underwriters, and sellers.

If a transaction is covered by the 1933 Act, registration is required as 

a precondition to offers and sales. There is a basic “road map” for determining whether a transaction falls under the statute. Section 2(a)(1) defines a security. If the interest or instrument in question is a security, the 

next step is to determine whether the security qualifies for one of the exemptions from registration found in § 3. Section 4 lists certain transactions that are exempt, even if the security itself does not qualify for a § 3 

exemption. In addition, pursuant to § 28, the SEC has general exemptive 

authority to supplement the statutory exemptions. If the security or 

transaction at issue does not fall under one of these three provisions, registration is required under § 5, which also establishes limitations on offers 

and sales. Sections 6 and 8 set forth the procedure for registration; §§ 7 

and 10 list the disclosure requirements. If any of these sections are violated, there are civil liabilities under §§ 11 and 12. Additionally, there is a 

general antifraud provision regulating these transactions in § 17, violation of which may result in SEC or criminal prosecution.

B. Registration Process Under 1933 Act

Section 5 of the 1933 Act breaks down the registration process into three 

periods, based on the filing and effective dates of the registration statement. The “prefiling” period begins months before the filing of the regis-
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28

tration statement and lasts until the filing date. The “waiting” period runs 

from the filing date until the effective date.104 The “post-effective” period 

starts at the effective date of the registration statement.

Pursuant to § 8 of the Act, the registration statement becomes effective twenty days from the date of the original filing or of the filing of the 

most recent amendment, whichever is last.

Section 5 limits the type of selling efforts that may be used and places 

various restrictions on the dissemination of information throughout the 

registration process.105 No offer to buy or sell may be made before the 

registration statement is filed. Once the registration statement is filed, any 

offers to buy and sell (as well as confirmation sales) must meet certain 

requirements. No sales may take place until after the registration statement becomes effective.

In 2005, the SEC introduced a number of reforms to its public offering rules.106 The reforms were an attempt to bring the rules in line with 

current practices and with technological developments. Among other 

things, these offering reform rules introduced a relaxation of the restrictions on offers for larger public companies known as Well-Known Seasoned Issuers (“WKSIs”).107 Another important innovation was the SEC’s 

104. The waiting period can be several months or longer. In terms of actual practice, 

the waiting period is usually much longer than the statutory twenty days for first-time 

issuers and for complicated offerings because of SEC review practices. Under § 8, the 

effective date of deficient registration statements can be delayed by a stop order or refusal 

order. Formal § 8 orders are the exception, since the SEC generally responds to deficient 

registration statements with a letter of comment suggesting changes. The letter of comment is frequently followed by a delaying amendment filed by the prospective issuer, putting off the effective date until the deficiencies are corrected. When appropriate, the effective date can be accelerated (see SEC Rule 461).

105. By virtue of §§ 4(1) and 4(4) of the 1933 Act, § 5 does not apply to persons 

other than issuers, underwriters, and dealers; nor does it apply to unsolicited brokers’ 

transactions.

106. See Securities Offering Reform, Securities Act Release No. 33–8591; Exchange 

Act Release No. 34–52056; Inv. Co. Act Release No. IC–26993, 70 Fed. Reg. 44722–01, 

2005 WL 1811282 (SEC Aug. 3, 2005).

107. As defined in SEC Rule 405 (17 C.F.R. § 230.405), a WKSI is a company that 

qualifies for registration on 1933 Act Form S–3 or F–3 and either (1) as of a date within 

60 days of the determination date, has a worldwide market value of its outstanding voting 

and nonvoting common equity held by nonaffiliates of $700 million or more; or (2a) as of 

a date within 60 days of the determination date, has issued in the last three years at least 
III. Regulating Distribution of Securities—Securities Act of 1933

29

“access equals delivery” rule under which providing investors with a link 

to a website where the prospectus can be found will satisfy the 1933 Act’s 

prospectus delivery requirements.108

1. Prefiling Period

Section 5(c) prohibits all offers to sell and buy securities prior to filing 

the registration statement; it remains in effect only during the prefiling 

period.109 An offer to sell is any communication reasonably calculated to 

generate a buying interest.110 Section 5(c) applies to oral as well as written 

offers and is meant to prevent companies from “jumping the gun” in announcing offerings before the registration statement is filed.

Balanced against the desire to prevent “gun jumping” as expressed by 

the prohibitions of § 5(c) is the underlying purpose of federal securities 

regulation: affirmative disclosure. Broker–dealers, investment advisers, 

and other financial analysts generate a great deal of public information 

concerning securities.111 Therefore, there are various exemptions from 

$1 billion aggregate principal amount of nonconvertible securities, other than common 

equity, in primary offerings for cash, not exchange, registered under the Act; and (2b) will 

register only nonconvertible securities, other than common equity, and full and unconditional guarantees permitted pursuant to paragraph (1)(ii) of the WKSI definition unless, 

at the determination date, the issuer also is eligible to register a primary offering of its 

securities relying on General Instruction I.B.1 of Form S–3 or Form F–3.

108. See, e.g., Rule 173, 17 C.F.R. § 230.173, which provides that notice of the availability of a statutory prospectus will satisfy § 5(b)’s prospectus delivery requirement. See 

also Rule 172(b), 17 C.F.R. § 230.172(b).

109. 15 U.S.C. § 77e(c).

110. In re Carl M. Loeb, Rhoades & Co., 38 S.E.C. 843 (1959), is generally considered 

the leading precedent for determining the scope of the definition of offer to sell. In Loeb, 

the company at issue was planning to go public. It had made a preliminary agreement 

with a group of underwriters. The lead underwriter issued a press release providing many 

specific details about the forthcoming offering. The SEC, while recognizing that a prefiling press release may be a legitimate publicity device, ruled that this release was too explicit and was in fact designed to arouse buying interest in violation of § 5(c). Subsequently, the SEC, recognizing the informational tensions at issue, amended one of its 

rules to address prefiling publicity by an issuer. See SEC Rule 135. There remains a question as to whether Rule 135, which speaks only of issuers releasing information, is the 

exclusive list of permissible information or is simply a safe harbor.

111. For discussion of the impact of the Internet on the offering process and other 

disclosure issues, see Use of Electronic Media, Securities Act Release No. 33-7856, 72 SEC 
Federal Securities Law

30

§ 5(c)’s prohibitions in the prefiling period. For example, SEC Rule 163112

exempts prefiling communications by large public companies from 

§ 5(c)’s gun-jumping prohibitions. SEC Rules 137, 138, and 139113 (which 

also apply during the waiting and post-effective periods) provide exemptions from gun-jumping prohibitions for certain broker–dealer recommendations with regard to securities of 1934 Act reporting companies.114

Recognizing that many investment bankers have research analysts who 

are separate from the underwriting department, these rules permit the 

research department to continue with its regular business without violating the prohibitions of § 5 of the 1933 Act. These exemptions are conditioned on certain protective requirements, including that the issuer of the 

recommended securities be sufficiently large and subject to reporting requirements (which ensure that there is sufficient public information already available). At the same time, any broker’s or dealer’s recommendation to purchase a security that does not fall within the scope of these 

rules would clearly violate § 5 (unless, of course, some other exemption 

could be found).

The definition of offer to sell under § 2(a)(3) of the 1933 Act115 has 

been construed broadly: It is not limited to contract law doctrine, but 

rather includes any communication calculated to arouse investor interest 

in the securities to be offered.116 Thus press releases and other announcements about a company or its securities can violate § 5(c)’s gunjumping prohibitions. SEC Rule 135 sets forth a safe harbor for prefiling 

publicity about an upcoming securities offering so that it will not be 

treated as an illegal offer to sell. The purpose of Rule 135 and the SEC’s 

Docket 753 (Apr. 28, 2000); Use of Electronic Media for Delivery Purposes, Securities Act 

Release No. 33-7234, 60 SEC Docket 1107 (Oct. 6, 1995).

112. 17 C.F.R. § 230.163 (exemption from § 5(c) for communications on behalf of 

well-known seasoned issuers).

113. Id. §§ 230.137, 230.138, 230.139.

114. Sections 13 and 15(d) of the 1934 Act provide for periodic reporting of (1) issuers whose securities are traded on a national exchange, (2) securities that have been subject to a 1933 Act registration, or (3) issuers with more than $3 million in assets and more 

than 500 holders of a class of equity securities. 15 U.S.C. §§ 78m, 78o.

115. Id. § 77b(a)(3).

116. In re Carl M. Loeb, Rhoades & Co., 38 S.E.C. 843 (1959) (discussed supra note 

110). See also, e.g., Chris-Craft Indus., Inc. v. Bangor Punta Corp., 426 F.2d 569 (2d Cir. 

1970); Securities Act Release No. 33-5180, 1971 WL 120474 (Aug. 16, 1971).
III. Regulating Distribution of Securities—Securities Act of 1933 

31 

position generally is to allow permissible prefiling publicity about a company and its financing plans that does not unduly precondition the market and investors for the upcoming offering.117

 To permit the formation of the underwriting agreement, § 2(a)(3)’s 

definitions of the terms sale and offer to sell exclude preliminary negotiations and agreements between the issuer and the underwriter, as well as 

among underwriters in privity with the issuer. When issuers of securities 

initiate prefiling activity designed to form the underwriting group, contacting too many potential underwriters or potential members of the retail “selling group” may be viewed as improperly preconditioning the 

market, and therefore may result in a finding of illegally jumping the gun. 

Section 2(a)(3)’s exclusion balances the need for formation of the underwriting group against the desire not to have premature widespread 

generation of a buying interest. It should be noted that the final underwriting agreement is usually not executed until the eve of the offering, 

and generally only a letter of intent is signed at the prefiling stage. 

 Section 5(a)118 of the 1933 Act prohibits sales prior to the effective 

date and thus operates during both the prefiling and waiting periods: 

Subsection (a)(1) prohibits the sale (or confirmation of a sale) prior to 

the effective date; and subsection (a)(2) prohibits taking steps toward the 

sale or delivery of securities pursuant to a sale through instrumentalities 

of interstate commerce prior to the effective date. 

2. Waiting Period 

The waiting period begins once the registration statement has been filed 

and ends when the registration statement becomes effective. While 

§ 5(c)’s prohibitions on offers to sell and buy no longer apply after the 

prefiling period, § 5(a)’s prohibitions on sales of securities continue 

through the waiting period. In addition, § 5(b) “prospectus” requirements control the types of written offers to sell that may be made during 

both the waiting and post-effective periods. 

 A prospectus, as defined by § 2(a)(10),119 is any written or other permanent or widely disseminated offer to sell. For example, a telephone 

 117. See Securities Act Release No. 33-5180, 1971 WL 120474 (Aug. 16, 1971). 

 118. 15 U.S.C. § 77e(a). 

 119. Id. § 77b(a)(10). 
Federal Securities Law

32

communication is not a prospectus, but a television or radio advertisement is. Most Internet communications qualify as prospectuses.120 A 

written confirmation of a sale is expressly included in the statutory definition of a prospectus.121

A combination of statutory provisions limits the variety of permissible written offers to sell that may be used during the waiting period (and 

the post-effective period as well). While § 5 permits offers during the 

waiting period, § 5(b)(1) makes it unlawful to transmit any prospectus 

after the filing of the registration statement unless the prospectus meets 

the disclosure requirements of § 10.122 The information called for by § 10, 

however, may not be available until the underwriting agreements have 

been signed and the offering price set. The 1933 Act solves this problem 

by exempting from this path two types of written offering material: a type 

of identifying statement known as a “tombstone ad”123 and the preliminary prospectus (discussed below).

Although offers to buy are permissible (since § 5(c) does not apply 

during the waiting period), an offer to buy that leads to a premature or 

otherwise illegal sale violates § 5(a). By virtue of § 10(b), which permits 

certain prospectuses during the waiting period, and § 2(a)(10), which 

excludes certain communications from the definition of prospectus, there 

are five types of permissible offers to sell during the waiting period.

First, all oral communications are permitted, provided that no sale is 

consummated (lest there be a violation of § 5(a)).124 Since an oral com120. Information in emails and on websites clearly is subject to prospectus requirements. See Use of Electronic Media, Securities Act Release No. 33-7856, 72 SEC Docket 

753 (Apr. 28, 2000). Live Internet simulcasts (also referred to as Internet road shows) 

may, under limited circumstances, be treated in much the same manner as oral communications and thus not be subject to the prospectus requirements. Id.

121. Rule 10b-10 of the 1934 Act requires that all sales by broker–dealers be confirmed in writing.

122. 15 U.S.C. § 77e(b)(1). See 15 U.S.C. § 77j.

123. A tombstone ad is the industry term for an identifying statement that simply 

announces the offering and lists the underwriter.

124. The only prohibition is on written offers to sell, thus any (including written) 

offers to buy are permissible, provided the sale is not consummated. While there are no 

§ 5 implications, oral offers to sell are, of course, subject to the securities acts’ general 

antifraud provisions.
III. Regulating Distribution of Securities—Securities Act of 1933

33

munication is not “permanent,” it is excluded from the § 2(a)(10) definition of prospectus.

Second, an identifying statement, as defined in § 2(a)(10)(b) and 

Rule 134,125 is permissible during the waiting period. This is a relatively 

narrow category because the type of information that may be included is 

severely limited. Section 2(a)(10)(b) expressly excludes these communications from the definition of prospectus as long as the requirements of 

Rule 134 are met. Inclusion of any information not specifically permitted 

by Rule 134 renders the rule unavailable and thus may result in a prospectus that fails to comply with § 10’s requirements. This, in turn, can 

result in a violation of § 5.

Third, a preliminary (or red herring) prospectus, as defined in Rule 

430,126 is permissible during the waiting period. It must contain the information required in a full-blown statutory prospectus, except that price 

and some other terms may be omitted. Furthermore, there must be a legend explaining that it is a preliminary prospectus. This preliminary prospectus may be used only during the waiting period; it may not be used 

after the effective date.

Fourth, a preliminary summary prospectus, as defined in Rule 431,127

may be used by certain experienced issuers during the waiting period. A 

summary prospectus is a short-form prospectus that may be used by 

qualifying issuers under some circumstances. The summary prospectus 

may also be used after the effective date and, like the preliminary version, 

is available only for an issuer who is a registered reporting company under the 1934 Act. The Rule 431 summary prospectus must contain all of 

the information specified in the official SEC form accompanying the applicable registration statement form as well as a caption stating that a 

more complete prospectus will be available from designated broker–

dealers. The summary prospectus may not include any information not 

permitted in the registration statement or a tombstone ad as spelled out 

in Rule 134(a). A Rule 431 prospectus only satisfies § 5(b)(1);128 it does 

125. 15 U.S.C. § 77b(a)(10)(b); 17 C.F.R. § 230.134.

126. 17 C.F.R. § 230.430.

127. Id. § 230.431.

128. Section 5(b)(1) requires any written offer or confirmation to comply with § 10; 

a summary prospectus is valid for this purpose under § 10(b). 15 U.S.C. § 77e(b)(1).
Federal Securities Law

34

not satisfy § 5(b)(2).129 Thus, when a Rule 431 prospectus is used, a “fullblown” (or “statutory”) § 10(a) prospectus must still be delivered to all 

purchasers. This necessarily increases the record-keeping and monitoring 

activities of the underwriters.

Fifth and finally, the “free writing prospectus” is a document that 

may be used during the waiting period,

130 and it allows companies to 

supplement the information in the prospectus with additional information.131 Except for larger public companies, the free writing prospectus 

must be filed with the SEC.

3. Post-Effective Period

Once the registration statement becomes effective, § 5(a)’s prohibitions 

cease to apply and sales are permitted. Both of § 5(b)’s prospectus requirements apply. Section 5(b)(1) requires that all written or otherwise 

permanent offers to sell or confirmations of sales must be qualifying prospectuses (i.e., a § 10(a) full-blown statutory prospectus or a qualifying 

§ 10(b) prospectus). Section 5(b)(2) provides that no security may be 

delivered for sale unless accompanied or preceded by a statutory § 10(a) 

prospectus. In the case of securities held for a customer’s account by a 

broker or other custodian, the customer must still receive the prospectus 

before delivery.132

Under § 2(a)(10), “free writing” is permitted in the post-effective 

period.133 Thus, supplemental sales information may be sent to prospective purchasers provided that the information is preceded or accompanied by a prospectus that meets the requirements of § 10(a). In such a 

129. Section 5(b)(2), which applies only during the post-effective period, requires 

every person who purchases a security in the offering to receive a § 10(a) “full-blown” 

prospectus prior to delivery of that security. 15 U.S.C. § 77e(b)(2).

130. WKSIs may use the free writing prospectus during the prefiling period. See Rule 

163, 17 C.F.R. § 230.163.

131. Rule 164, 17 C.F.R. § 230.164.

132. The SEC has implemented an “access equals delivery” approach to satisfy the 

prospectus delivery requirement. See supra note 108 and accompanying text.

133. 15 U.S.C. § 77b(a)(10). This statutory free writing during the post-effective 

period predates and supplements the free writing prospectus that is now permitted under 

Rule 164 during both the waiting and post-effective periods. 17 C.F.R. § 230.164.
III. Regulating Distribution of Securities—Securities Act of 1933

35

case, free writing is limited only by the antifraud provisions of the securities laws.134

4. Shelf Registration (Rule 415)

Originally, it was assumed that effective registration meant that the covered shares were immediately on sale.135 However, as offerings became 

more sophisticated, it became clear that there were offerings that should 

be delayed136 or would be made on a continuous basis, making the existing registration system inadequate. Therefore, the SEC adopted Rule 

415,137 permitting “shelf registration.” Under this rule, a corporation that 

over a period of time has been eligible to use Form S-3 may register securities for sale from time to time over a period of up to two years. For the 

registration statement to remain effective, however, there is an ongoing 

duty to regularly update information in it.

C. Disclosure Requirements in Securities Offerings

1. Registration Forms

The primary purpose of the Securities Act of 1933 is to promote disclosure of information to potential investors so that they can make informed 

decisions. The registration statement is the basic disclosure document 

that issuers must file with the SEC for 1933 Act registration. A number of 

alternative disclosure forms may be available to issuers for registration, 

depending on the nature of the issuer, the circumstances surrounding the 

offering, and the type or types of securities offered. All registration forms 

are divided into two principal parts. The information contained in the 

first portion of the registration statement is the same information in the 

prospectus as required by § 10(a) of the 1933 Act and Schedule A. The 

Schedule A or statutory prospectus must be delivered before the con134. See also Rules 137, 138, and 139, which deal with broker–dealer recommendations of securities during the registration process. 17 C.F.R. §§ 230.137, 230.138, 230.139.

135. In fact, holding the shares off the market could be deemed a manipulative practice.

136. Such offerings include debt offerings in times of fluctuating interest rates where 

the effective date may not fall in the best climate in which to attempt to sell the covered 

securities.

137. 17 C.F.R. § 230.415.
Federal Securities Law

36

summation of any sale pursuant to a registered offering. Schedule A provides only a minimal outline of the types of disclosures required. The 

second part of the registration statement, not discussed in detail here, 

consists of additional information and exhibits that are not sent out in 

the prospectus but are available in the SEC files for public inspection. The 

specific disclosure requirements are found in the SEC’s registration forms 

and in SEC Regulations S-K and S-X. Regulation S-K describes in detail 

the ways in which the relevant information should be set forth. Regulation S-B formerly provided simplified disclosures for use, in certain instances, by small business issuers. In 2007, the SEC eliminated Regulation 

S-B and the specialized forms.138 At the same time the SEC redefined the 

concept of small business issuers in order to enable more companies to 

qualify for the new “scaled disclosure requirements” available under both 

the 1933 and 1934 Acts for smaller reporting companies. Companies with 

less than $75 million in public equity float now qualify for scaled disclosure requirements under Regulation S-K, as amended—and under the 

applicable 1933 and 1934 Act forms, as amended. Companies that do not 

have a calculable public equity float qualify for scaled disclosure if their 

revenues were below $50 million in the previous year. Regulation S-X 

addresses accounting matters in significant detail. In analyzing the sufficiency of disclosures in a registered offering (or any disclosure requirements for that matter), it is necessary to consult not only the applicable 

registration form but also Regulations S-K and S-X.

The SEC uses an integrated disclosure system139 for registration of 

securities under the 1933 Act. The three-tiered system of registration and 

138. See Smaller Reporting Company Regulatory Relief and Simplification, Securities 

Act Release No. 33–8876, Exchange Act Release No. 34–56994, Trust Indenture Act Release No. 39–2451, 2007 WL 4440393 (SEC Dec. 19, 2007). The SEC issued a guide for 

small business issuers to help them through the revised Regulation S–K and applicable 

forms. See Changeover to the SEC’s New Smaller Reporting Company System by Small 

Business Issuers and Non–Accelerated Filer Companies–A Small Entity Compliance 

Guide, available at http://www.sec.gov/info/smallbus/secg/smrepcosysguid.pdf (SEC Jan. 

25, 2008).

139. Prior to 1982, the SEC administered two parallel but uncoordinated disclosure 

systems: one for registration of public offerings under the 1933 Act and the other for periodic reporting requirements under the 1934 Act. This resulted in duplicative filings and 

unnecessary paperwork. The SEC adopted the integrated disclosure system in 1982.
III. Regulating Distribution of Securities—Securities Act of 1933

37

prospectus disclosure of registrant-oriented information140 is based on 

the registrant’s reporting history and market following. Two registration 

forms—S-1141 and S-3142—provide the basic framework for this system.

Form S-1 is the basic long-form registration generally available to 

issuers that do not qualify for one of the other forms.143 Form S-1 requires all the information on the registrant and transaction to be provided in the prospectus. As a practical matter, Form S-1 is used primarily 

for large offerings by first-time issuers and by companies with publicly 

held securities but only a limited number of shareholders.144

Form S-3 requires the least-detailed level of disclosure to investors by 

allowing for the fullest possible incorporation by reference to Exchange 

Act reporting. No registrant-oriented information is required; only the 

transaction-specific description of the offering need be disclosed in the 

prospectus. Form S-3 may be used only by issuers that have been reporting under the 1934 Act for at least one year. Furthermore, the form may 

only be used for certain kinds of offerings—secondary offerings—or 

where the registrant passes the “market following” test. The theory behind the “market following” test is that such widely held securities have a 

sufficiently large “informed market” following, making more detailed 

disclosure unnecessary.

In examining completed registration statements, the SEC has pinpointed a number of areas particularly susceptible to inadequate or misleading disclosures.145 For example, shortcomings in management’s 

140. The transaction-specific matters (information specific to the securities issuance) 

should always be disclosed in the registration statement and prospectus.

141. 17 C.F.R. § 239.11.

142. Id. § 239.13.

143. Specialized registration forms geared toward more specific situations include 

Form S-4 for certain mergers and other business combinations involving public companies (17 C.F.R. § 239.25); Form S-6 for registration of securities or units in certain investment trusts (17 C.F.R. § 239.16); Form S-8 for employee stock purchase plans (17 

C.F.R. § 239.16b); and Form S-11 for securities issued by certain real estate investment 

companies (17 C.F.R. § 239.18).

144. The SEC rescinded Form S-2 (formerly available for smaller public companies). 

Public companies not qualifying for Form S-3 can use Form S-1 to take advantage of integrated disclosure with 1934 Act requirements.

145. See, e.g., In re Universal Camera Corp., 19 S.E.C. 648 (1945). In this case, the 

SEC identified six common problems in the first-time registration made by the defendant: 
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statements have led to requirements146 seeking more detailed information 

with respect to the following: the company’s plan of operations (in the 

case of companies going public for the first time); competitive conditions 

in the company’s industry; and dilution resulting from the disparity between the prices paid for the company’s securities by public investors and 

those paid by “insiders.”

2. Adequacy of Registration Statement Disclosures

The registration statement must include all material facts. For the purposes of a 1933 Act registration statement, Rule 405 defines material as 

“matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.” This definition encompasses, but is not limited to, financial information.147 Under § 8 of the 1933 Act, the SEC may issue a 

stop order to prevent the issuance of an offering if it believes the registration statement misstates or omits a material fact. Moreover, civil liability 

may arise when a security is sold under a registration statement that misstates or omits a material fact.

(1) failure to adequately explain the issuer’s prior adverse trends in sales and income; 

(2) failure to divide into product lines information about past performance and to explain 

whether past performance is a reasonable guide to the future; (3) failure to give a detailed 

description of the use of the proceeds from the offering at issue; (4) failure to disclose and 

explain transactions involving management and/or affiliated entities (including underwriting discounts, loans to officers, and other potential conflicts of interest); (5) failure to 

use charts and graphs to explain the disclosures and make the prospectus more readable 

for potential investors; and (6) insufficient introduction to the registration statement 

(note that the SEC will also challenge an introduction that is overly verbose).

146. See Items 101(a)(2), 101(c)(x), and 506 of Regulation S-K, 17 C.F.R.

§§ 229.101(a)(2), 229.101(c)(x), and 229.506.

147. For example, material has been construed to include the professional and personal integrity of management. See SEC v. Jos. Schlitz Brewing Co., 452 F. Supp. 824 

(E.D. Wis. 1978) (professional integrity), and Franchard Corp., 42 S.E.C. 163 (1964) (personal integrity). But see Gaines v. Haughton, 645 F.2d 761 (9th Cir. 1981), cert. denied, 

454 U.S. 1145 (1982) (holding materiality does not extend to corporate bad judgment or 

corruption).
III. Regulating Distribution of Securities—Securities Act of 1933

39

SEC policy has been to encourage disclosure,148 as evidenced by Rule

175’s safe-harbor rule for “forward-looking statements.” Under Rule 175 

(and in the courts generally), the issuer is under no duty to provide soft 

information, but if it chooses to do so the information is presumed nonfraudulent and the burden is on the challenger to show either that there 

was no reasonable basis for the statement or that it was not made in good 

faith. The Seventh Circuit has held that the issuer may, but need not, disclose the underlying assumptions behind a challenged projection, increasing further the burden on the challenger.149

Section 27A of the 1933 Act150 and § 21E of the 1934 Act151 codify the 

earlier case law and provide a safe harbor for forward-looking statements 

and the “bespeaks caution” doctrine created by the federal courts. The 

safe harbor allows corporate management to disclose forward-looking 

information and projections to investors with a presumption that there 

was a reasonable basis152 for the projections.153 The “bespeaks caution” 

148. In its early years, however, the SEC took the position that only “hard” information (i.e., provable, demonstrable facts) should be contained in the registration statement. 

For discussions of this position, see, e.g., Harry Heller, Disclosure Requirements under 

Federal Securities Regulation, 16 Bus. Law. 300 (1961); Homer Kripke, The SEC, the Accountants, Some Myths and Realities, 45 N.Y.U. L. Rev. 1151 (1970).

149. Wielgos v. Commonwealth Edison, 892 F.2d 509 (7th Cir. 1989). See also, e.g., 

Roots P’ship v. Land’s End, Inc., 965 F.2d 1411 (7th Cir. 1992).

150. 15 U.S.C. § 77z-2.

151. Id. § 78u-5(c).

152. See, e.g., In re 2The Mart.com, Inc. Sec. Litig., [1999–2000 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 91,037 (C.D. Cal. 2000) (projections that online auction site would 

soon be operational lacked reasonable basis where there were no agreements to design or 

construct site).

153. See SEC Rules 175 and 3b–6, 17 C.F.R. §§ 230.175, 240.3b–6. The Private Securities Litigation Reform Act of 1995 (Pub. L. No. 104-67, 109 Stat. 737, H.R. 1058, 104th 

Cong. (1995)) does not present an insurmountable obstacle to actions based on projections. See, e.g., In re N2K Inc. Sec. Litig., 202 F.3d 81 (2d Cir. 2000), aff’g 82 F. Supp. 2d 

204 (S.D.N.Y. 1999) (cautionary language in prospectus concerning likelihood of continued losses was sufficient); Cherednichenko v. Quarterdeck Corp., [1998 Transfer Binder] 

Fed. Sec. L. Rep. (CCH) ¶ 90,108 (C.D. Cal. 1997) (plaintiffs adequately alleged existence 

of facts contradicting optimistic projections); Erin M. Hardtke, Comment, What’s Wrong 

With the Safe Harbor for Forward-Looking Statements? A Call to the Securities and Exchange 

Commission to Reconsider Codification of the Bespeaks Caution Doctrine, 81 Marq. L. Rev. 

133 (1997). See also P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 47 F. Supp. 2d 546 
Federal Securities Law

40

doctrine provides that specific cautionary language can render inaccurate 

projections not actionable.154 In addition to the encouragement of forward-looking information and the “bespeaks caution” doctrine, the SEC 

requires that management discuss and analyze known trends and uncertainties that could have a material impact on the company’s operations.155

These safe harbors were designed to encourage companies to make

projections and disclose future plans without undue worry about lawsuits 

if things happen to turn out differently than planned.

D. Exemptions from Registration Under 1933 Act

Section 5 of the 1933 Act applies to any offer or sale of any security unless 

an exemption exists. Exemptions under the 1933 Act are based on the 

type of security involved or on the type of transaction. “Security” exemptions are generally covered by § 3,156 while “transaction” exemptions are

generally covered by § 4157 and various SEC rules promulgated thereunder.158 Both types of exemptions are exemptions from registration, not

from the antifraud provisions.

(D.N.J. 1999) (forward-looking statements concerning desire to complete merger covered 

by Act’s safe-harbor provisions).

154. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994); Kline v. 

First W. Gov’t Sec., Inc., 24 F.3d 480 (3d Cir. 1994); Rubinstein v. Collins, 20 F.3d 160 

(5th Cir. 1994); In re Donald J. Trump Casino, 7 F.3d 357 (3d Cir. 1993); Sinay v. Lamson 

& Sessions Co., 948 F.2d 1037 (6th Cir. 1991); I. Meyer Pincus & Assoc. v. Oppenheimer 

& Co., 936 F.2d 759 (2d Cir. 1991); Romani v. Shearson Lehman Hutton, 929 F.2d 875 

(1st Cir. 1991); Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986); see also Committee on Securities Regulation, A Study of Current Practices: Forward-Looking Statements and Cautionary Language After the 1995 Private Securities Litigation Reform Act, 53 Record 725 (1998); 

and Thomas W. Kellerman et al., Update on Forward-Looking Statements and the Reform 

Act Safe Harbor, 32 Rev. Sec. & Commod. Reg. 129 (June 23, 1999). Cf. N2K, 202 F.3d 81 

(sufficient cautionary language that financial performance might fall below analysts’ expectations).

155. Item 303 of Regulation S-K, 17 C.F.R. § 229.303 (management discussion and 

analysis). See also Iowa Pub. Employees’ Ret. Sys. v. MF Global, Ltd., 620 F.3d 137 (2d 

Cir. 2010) (rejecting application of “bespeaks caution” doctrine to statement containing 

both historical and forward-looking elements).

156. 15 U.S.C. § 77c.

157. Id. § 77d.

158. Section 28 of the 1933 Act gives the SEC broader exemptive power than is found 

in § 3 or § 4 of the Act. 15 U.S.C. § 77z-3. Specifically, the SEC can exempt by rule or 
III. Regulating Distribution of Securities—Securities Act of 1933

41

The burden of establishing an exemption falls on the claimant; exemptions are strictly construed. Thus, transactions must be carefully 

structured and documented to qualify for an exemption. As a general 

proposition, a single violation in the course of a planned exempt transaction can destroy the entire exemption.159 The consequences of losing an 

exemption are dire, ranging from § 12(a)(1)160 liability for rescission of 

any sale to possible criminal liability.

1. Exempt Securities

Section 3 of the 1933 Act authorizes exemptions from § 5’s registration 

requirements based on the nature of the security involved. Section 

3(a)(2) exempts bank securities, insurance policies, and government securities because they are already regulated by some other agency more 

focused on the specific needs of the industry, and/or they are considered 

less risky to investors.161

Section 3(a)(3) exempts short-term commercial paper from registration.162 This provision was enacted to exempt “short term paper of the 

type available for discount at a Federal Reserve bank and of a type which 

is rarely bought by private investors.”163 While these, like other exempt 

securities, are subject to the 1933 Act’s antifraud provisions, short-term 

commercial paper is excluded from the 1934 Act definition and thus is 

not subject to the 1934 Act’s antifraud provisions. Virtually all other securities exempt from 1933 Act registration remain subject to the 1934 

Act’s antifraud provisions.

regulation any person, security, or transaction that it finds to be in the public interest and 

consistent with investor protection. As of the writing of this monograph, the SEC has 

relied on this broad exemptive power only once: Rule 701’s exemption for certain offerings by nonpublic companies to their employees.

159. But see SEC Rule 508, 17 C.F.R. § 230.508, which provides that insignificant 

deviations from a term, condition, or requirement of Regulation D will not destroy the 

exemption for a transaction structured in good faith.

160. 15 U.S.C. § 77l.

161. Id. § 77c(a)(2).

162. Id. § 77c(a)(3).

163. H.R. Rep. No. 73-85, at 15 (1933).
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42

Securities of nonprofit issuers are exempt from registration under 

§ 3(a)(4).164 Generally, availability of this exemption depends on the ruling of the IRS regarding whether a contribution to the particular issuing 

institution is a proper charitable deduction. These issuers are exempt because they are already regulated and supervised by another agency. Section 3(a)(5) exempts securities issued by building and loan associations 

and similar associations, again because they are regulated more closely by 

another agency. Case law has narrowly defined this exemption: Substantially all of the issuer’s business must entail making loans to its members.165

A rather narrow category—interests in railroad equipment trusts—is 

also exempt from 1933 Act registration by virtue of § 3(a)(6).166 Another 

exemption of relatively narrow applicability is found in § 3(a)(7),167 exempting trustees’ certificates issued in bankruptcy, provided they have 

been issued with court approval. Congress saw little reason for securities 

law supervision of a receiver already under court supervision—beyond 

the antifraud provisions, of course.

Section 3(a)(8) exempts insurance policies and annuities from 1933 

Act registration.168 This provision does not exempt insurance company 

stock or other securities apart from such policies and annuities contracts. 

Further, certain annuity contracts (such as variable fund annuities) may 

not be exempt in light of the leading case decided by the Supreme Court 

under the Act’s definition of security.

169

Although the following five § 3 exemptions—§§ 3(a)(9), 3(a)(10), 

3(a)(11), 3(b), and 3(c)—are labeled security exemptions, they operate 

more like transaction exemptions when viewed functionally. Therefore, 

absent another exemption, all later transactions or “downstream” public 

resales of these securities by persons having acquired them under this 

exemption must be registered. In these instances, the real rationale for 

the exemptions is the characteristics of the offers, not the characteristics 

of the securities.

164. 15 U.S.C. § 77c(a)(4).

165. See, e.g., SEC v. Am. Int’l Sav. & Loan Ass’n, 199 F. Supp. 341 (D. Md. 1961).

166. 15 U.S.C. § 77c(a)(6).

167. Id. § 77c(a)(7).

168. Id. § 77c(a)(8).

169. See, e.g., SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959).
III. Regulating Distribution of Securities—Securities Act of 1933

43

a. Exemptions for Certain Exchanges of Securities: Sections 3(a)(9) and 

3(a)(10)

Certain voluntary exchanges between an issuer and its existing security 

holders are exempt from registration under § 3(a)(9),170 although this 

exemption is relatively narrow in scope. To qualify, no remuneration 

may be paid or given to any underwriter or any other person soliciting 

the exchange; the issuer of both the securities to be issued and the securities to be exchanged must be the same; and no part of the offering may be 

made to persons other than existing security holders. The rationale behind this exemption is that the offerees are already shareholders, and presumably in possession of adequate information about the issuer, so no 

new information need be given.

Judicially or administratively approved exchanges of securities are 

also exempt from 1933 Act registration by virtue of § 3(a)(10),171 again 

because the transaction is already supervised in a proceeding where the 

fairness of the exchange is considered.

b. Intrastate Exemption: Section 3(a)(11)

Section 3(a)(11) of the 1933 Act, the intrastate exemption, exempts from 

registration the issuance of securities where the offering is solely within 

the confines of a single state and other conditions are also met. This exemption focuses on the nature of the transaction rather than the securities themselves; its availability depends not only on the attributes of the 

security or issuer but also on the form, scope, and extent of the transactions consummated pursuant to the offering. However, unlike most of 

the true transaction exemptions discussed below, with a § 3(a)(11) exemption there are no limitations on (1) the aggregate dollar amount of 

the securities to be offered; (2) the number or nature of offerees or purchasers so long as all offerees are residents of the state of the offering; 

(3) the manner of offering;172 or (4) resale, so long as the securities have 

“come to rest” within the state—or in other words, provided there have 

170. 15 U.S.C. § 77c(a)(9).

171. Id. § 77c(a)(10).

172. A general solicitation may, however, trigger state securities law registration 

requirements.
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44

been no out-of-state “downstream” resales.173 The exemption is relatively 

narrow since all aspects of the entire offering must take place within a 

single state.

Section 3(a)(11) is not drafted in a precise and detailed manner. 

Prior to the promulgation of Rule 147 in 1974, relatively little judicial 

precedent and few SEC interpretive releases and rules were available relating to the intrastate exemption. Most guidance was found in SEC noaction letters, which by their nature are expressly confined to the facts as 

given. Statutory construction made clear, however, that certain requirements must be met for § 3(a)(11) to be applicable. The issuer must be a 

resident of the state. If the issuer is a corporation, it must be incorporated 

under the laws of the state in addition to having its principal place of 

business there. In addition, courts read the exemption so narrowly as to 

require that a corporate issuer derive substantially all of its income from 

operations within the state and use substantially all of the proceeds of the 

offering within the state.174 Furthermore, to retain the exemption, case 

law requires that the issue come to rest in the hands of state residents.175

Rule 147 provides a “safe harbor” for those hoping to utilize the intrastate exemption. Rule 147 is available only to issuers, although the 

statute is not so limited and could be applied to secondary transactions as 

well. In other respects, Rule 147 provides a good guideline to the elements of the statutory exemption. Its availability requires compliance 

with every element of the rule. The issuer must be a resident of and doing 

business within the state of the offering. If the issuer is a corporation, it 

must be incorporated in the state of the offering, and it must make and 

use 80% of its profits within the state. All offerees and purchasers must be 

residents of the state of the offering. There are limitations on resales for a 

period of nine months after the last sale that is “part of an issue.” “Part of 

an issue” is defined in subsection (b) of Rule 147 and is the rule’s counterpart to the “integration doctrine” for telescoping multiple transactions 

173. Certain out-of-state downstream resales (i.e., before the securities have “come 

to rest”) may destroy the intrastate exemption. See 1 Thomas Lee Hazen, Treatise on the 

Law of Securities Regulation § 4.12 (6th ed. 2009).

174. See, e.g., SEC v. McDonald Inv. Co., 343 F. Supp. 343 (D. Minn. 1972).

175. See, e.g., Busch v. Carpenter, 827 F.2d 653 (10th Cir. 1987).
III. Regulating Distribution of Securities—Securities Act of 1933

45

into one. Rule 147 is only a safe harbor, and thus noncompliance raises 

no inference as to the unavailability of the intrastate exemption.

Even a limited number of resales to nonresidents before the issue has 

come to rest will render the exemption inapplicable to the entire offering.176 In such a case, the resident purchasers can claim that the securities 

they purchased were sold in violation of § 5, thus giving them a right of 

rescission under § 12(a)(1) of the Act.177 Whether the issue has come to 

rest within a single state is a highly fact-specific determination when there 

have been subsequent out-of-state resales. Certainly, time is a factor. Rule 

147 prohibits resales to nonresidents until nine months from the date of 

the last sale by the issuer of a security of the type for which the exemption 

is sought. Of course, because this is only a safe-harbor rule, nine months 

may not be necessary. The Tenth Circuit held that resale to nonresidents 

within seven months of the initial offering did not violate the “coming to 

rest” requirement based on the facts of that case.178 On the other hand, 

mere technical compliance with the safe-harbor period of nine months is 

not sufficient if it is a sham merely to avoid registration. While certainly 

all purchasers will not be required to hold their securities for an infinite 

amount of time, the courts have held that evidence of investment intent 

(or lack thereof) on the part of the resident purchasers is a relevant consideration.

c. Small-Issue Exemptions: Sections 3(b) and 3(c)

Section 3(b) of the 1933 Act empowers the SEC to provide additional 

small-issue exemptions by promulgating appropriate rules.179 This section is not self-executing: It requires “enabling rules” developed and 

promulgated by the SEC. Thus, the SEC has the freedom to create the 

exemptions it believes necessary or appropriate in light of policy considerations. Currently, such exemptions are limited to offerings of 

$5 million or less. The exemptions emanating from § 3(b) include those 

found in Regulation A, as well as Rules 504 and 505 of Regulation D.180

The SEC had proposed legislation to raise § 3(b)’s ceiling to $10 million, 

176. See, e.g., Hillsborough Inv. Corp. v. SEC, 276 F.2d 665 (1st Cir. 1960).

177. Securities Act Release No. 33-4434 (Dec. 6, 1961).

178. Busch, 827 F.2d at 657.

179. 15 U.S.C. § 77c(b).

180. 17 C.F.R. §§ 230.501–230.508.
Federal Securities Law 

46 

but the proposal became moot when Congress enacted § 28’s general exemptive authority, which does not place a dollar limit on exemptions. 

The SEC has raised the $5 million ceiling only with respect to Rule 701’s 

exemption for certain offerings by nonpublic companies to its employees. 

 Section 3(c) authorizes the SEC to exempt securities issued by small 

business investment companies organized under the Small Business Investment Act of 1958, provided that enforcement of the 1933 Act “with 

respect to such securities is not necessary in the public interest and for 

the protection of investors.”181 The SEC has exercised this power by 

promulgating Regulation E, which provides an exemption for small business investment companies. By definition, the § 3(c) exemption is not 

available to the vast majority of public issuers of securities. 

2. Exempt Transactions 

a. Transactions Not Involving Issuer, Underwriter, or Dealer: Section 4(1) 

Section 4 of the 1933 Act describes the types of transactions that are exempt from the registration requirements of § 5. Transaction exemptions 

rise and fall with both the form and substance of the transaction and the 

nature of the participants. These exemptions, once available, can be destroyed when purchasers under the exemption resell the securities. 

Downstream sales have the potential to eradicate an existing exemption. 

 Section 4(1) provides a transaction exemption for persons other than 

an issuer, underwriter, or dealer. Issuer and dealer are defined in the 1933 

Act182 and have been interpreted as ordinary parlance, not terms of art. 

Underwriter, by contrast, has become a term of art subject to significant 

SEC and judicial construction. 

 Section 2(a)(11) of the 1933 Act defines an underwriter as 

any person who has purchased from an issuer with a view to, or offers 

or sells for an issuer in connection with, the distribution of any security, 

or participates or has a direct or indirect participation in any such un-

 181. 15 U.S.C. § 77c(c). 

 182. Id. § 77d(1). Issuer is defined in § 2(a)(4) as “every person who issues or proposes to issue any security.” Id. § 77b(a)(4). Dealer is defined in § 2(a)(12) as “any person 

who engages either for all or part of his time, directly or indirectly . . . in the business of 

offering, buying, selling, or otherwise dealing or trading in Securities issued by another 

person.” Id. § 77b(a)(12). 
III. Regulating Distribution of Securities—Securities Act of 1933 

47 

dertaking. . . . As used in this paragraph the term “issuer” shall include, 

in addition to an issuer, any person directly or indirectly controlling or 

controlled by the issuer, or any person under direct or indirect common control with the issuer.183

 Determining who is included in this definition has required substantial interpretation. Underwriter status is not dependent on a formal underwriting agreement or even compensation for serving as an underwriter. Any intermediary between the issuer and the investor that is an 

essential cog in the distribution process may be a statutory underwriter.184

By definition, underwriters include participants in relatively large transactions who may unwittingly become “underwriters” and thus subject to 

the proscriptions of § 5.185 The Act’s definition encompasses persons who 

purchase or otherwise obtain a large amount of securities directly from 

the issuer (or a control person186) and then resell the securities.187

 It is not sufficient that the putative underwriter was a significant factor in the transaction. As the Second Circuit explained, 

the text, case law, legislative history, and purpose of the statute demonstrate that Congress intended the participation clause of the underwriter definition to reach those who participate in purchasing securities 

with a view towards distribution, or in offering or selling securities for 

an issuer in connection with a distribution, but not further.188 

 183. Id. § 77b(a)(11). 

184. See, e.g., SEC v. Chinese Consol. Benevolent Ass’n, 120 F.2d 738 (2d Cir.), cert. 

denied, 314 U.S. 618 (1941) (holding even though Chinese Benevolent Association had no 

formal agreement or contract with government of China and received no remuneration, it 

was nevertheless deemed underwriter because it was engaged in systematic, continuous 

solicitation, collection, and remission of funds to purchase bonds, the securities at issue). 

 185. See, e.g., In re Ira Haupt & Co., 23 S.E.C. 589 (1946). 

 186. See infra text accompanying notes 303–06 (1933 Act) and 544 (1934 Act). 

 187. See, e.g., United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968), cert. denied, 394 

U.S. 946 (1969) (defendant purchased securities from issuer); SEC v. Guild Films Co., 279 

F.2d 485 (2d Cir.), cert. denied, 364 U.S. 819 (1960) (defendant-bank accepted stock as 

collateral, knowing substantial likelihood that loan recipient would default and bank 

would foreclose and sell stock). 

 188. In re Lehman Bros. Mortgage-Backed Sec. Litig., 2011 WL 1778726 (2d Cir. 

2011). 
Federal Securities Law

48

Underwriter status attaches when an individual or an entity plays an essential role in the distribution of securities.189

Initially, guidelines for the definition of underwriter arose from judicial and SEC interpretations, and tended to be subjective. In determining 

whether a person is a statutory underwriter, a key question was whether 

the would-be underwriter had sufficient investment intent at the time of 

purchase to qualify as an investor. Purchasers frequently drafted letters of 

“investment intent” at the time of their purchase in an attempt to avoid 

underwriter status, but these letters were deemed mere evidence of intent 

and not determinative, especially when the stock was held for a short period of time.190

Over time, determining investment intent became, in large part, an 

objective question of how long the securities are held before resale. The 

consensus now is that holding the securities for two to three years or 

more is ordinarily sufficient to show investment intent.191 The SEC shortened the safe harbor period in its Rule 144 to one year and six months in 

the case of a publicly held company.192

However, passage of time alone may not be enough to prevent underwriter status. Section 2(a)(11) speaks in terms of taking the securities 

with the intent to distribute. Courts and the SEC also look at the circumstances surrounding the downstream sale. This is the appropriate approach because the statute is written in terms of the seller’s intent.193

189. See id. (relying on SEC v. Kern, 425 F.3d 143, 152 (2d Cir. 2005) and United 

States v. Abrams, 357 F.2d 539, 547 (2d Cir. 1966)). See also SEC v. Platforms Wireless 

Int’l Corp., 617 F.3d 1072, 1086 (9th Cir. 2010); In re Refco, Inc. Sec. Litig., No. 05 Civ. 

8626 (GEL), 2008 WL 3843343 at *4 (S.D.N.Y. Aug. 14, 2008).

190. Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir.), cert. denied, 361 U.S. 896 

(1959) (although investment letter existed, ten-month holding period insufficient to show 

investment intent).

191. See, e.g., United States v. Sherwood, 175 F. Supp. 480, 483 (S.D.N.Y. 1959) (investment intent shown where defendant held stock for two years).

192. 17 C.F.R. § 230.144.

193. Many corporate and securities lawyers believed the seller’s intent could be used 

to shorten the necessary holding period. By proving an unforeseen change in circumstances for the would-be underwriter, planners thought the holding period should be 

shortened. Although the SEC consistently refused to issue no-action letters based on this 

“change of circumstances” defense, planners frequently relied on the defense in permit-
III. Regulating Distribution of Securities—Securities Act of 1933

49

Rule 144 applies to all sales by control persons, all sales by affiliates of 

the issuer,194 and all resales of restricted securities (generally restricted to 

preserve the original exemption) by nonaffiliates. As explained below, in 

many respects Rule 144 applies differently to affiliates as compared to 

nonaffiliates of the company.195

There are five basic requirements for satisfying the provisions of Rule 

144. First, the issuer must make publicly available accurate, current information such as that contained in the reporting requirements of the 

Securities Exchange Act of 1934.196

Second, the seller of the “restricted securities” must have beneficially 

owned them for at least one year.197 As a result of amendments in 2008, 

the one-year holding period was shortened to six months with respect to 

securities of a public company filing periodic reports under the 1934 

Act.198 The one-year holding period begins to run from the latest date the 

securities were purchased from the issuer or affiliates: Thus, nonaffiliates 

are permitted to “tack” holding periods. Rule 144(d)(3) provides eight 

special rules for computing the holding period for certain types of transactions.199 The full purchase price must be paid for at least one year prior 

ting transactions without registration. The availability of the “change of circumstances” 

defense remains uncertain even in the face of Rule 144’s safe harbor.

194. Rule 144(a)(1) defines affiliate as “a person that directly, or indirectly through 

one or more intermediaries, controls, or is controlled by, or is under common control 

with, such issuer.” 17 C.F.R. § 230.144(a)(1).

195. Affiliates include control persons, officers, and directors of the company. See 

Rule 144, 17 C.F.R. § 230.144. See also, e.g., SEC v. M & A West, Inc., 538 F.3d 1043, 1053 

(9th Cir. 2008) (“Where a single transaction accomplishes both a change in status from an 

affiliate to a non-affiliate and a transfer of stock from that person or entity, the transfer 

must be viewed as a transfer from an affiliate for the purposes of determining Rule 144(k) 

eligibility.”).

196. Rule 144(c), 17 C.F.R. § 230.144(c).

197. Rule 144(d), 17 C.F.R. § 230.144(d). When Rule 144 was adopted, the holding 

period was two years.

198. See Revisions to Rules 144 and 145, Securities Act Release No. 33-8869 (SEC 

Dec. 6, 2007).

199. Specifically, these rules apply to stock dividends, splits, and recapitalizations; 

conversions; contingent issuance of securities; pledged securities; gifts of securities; trusts; 

estates; and Rule 145(a) transactions.
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to the sale. The “change in circumstances” defense200 is not available for 

anyone choosing to rely on Rule 144. Since Rule 144 is nonexclusive, the 

change-in-circumstances defense arguably survives for those not choosing to rely solely on the safe harbor. However, the SEC has taken the position that the change-in-circumstances defense has been abolished for all 

cases.201

The third requirement is that all sales of the issuer’s securities by a 

Rule 144 seller who is an affiliate of the company and other specified related individuals comply with prescribed volume limitations.202 Specifically, sales by these persons within the preceding three months may not 

exceed the greater of the average weekly trading volume during the preceding four weeks or 1% of the issuer’s outstanding shares of that class. 

Nonaffiliates no longer have to comply with this volume limitation. Sales 

by affiliates must always comply with the volume limitations. Furthermore, all sales of securities of the issuer, restricted or not, are counted 

together: If the aggregate exceeds the Rule 144(e) limitation, the sales are 

not exempt.

The fourth requirement for a Rule 144 exemption is that the sales 

must be § 4(4) unsolicited brokers’ transactions, executed in the usual 

and customary manner, without special commissions or solicitations.203

Fifth, notice of the Rule 144 sales must be transmitted to the SEC on 

Form 144204 unless the number of shares to be sold is less than 500 and

their market value is less than $50,000.

b. Transactions by Issuer Not Involving Public Offering: Section 4(2)

Section 4(2) of the 1933 Act exempts private placements and other 

“transactions by an issuer not involving any public offering.”205 This exemption was enacted to permit offerings by issuers for isolated sales to 

particularly sophisticated persons wherein there is no need for the Act’s 

protections. Although the statutory language is somewhat vague, after 

200. See, e.g., Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir.), cert. denied, 361 

U.S. 896 (1959).

201. Securities Act Release No. 33-5223 (Jan. 11, 1972).

202. Rule 144(e), 17 C.F.R. § 230.144(e).

203. Rule 144(g), 17 C.F.R. § 230.144(g). See 15 U.S.C. § 77d(4).

204. 17 C.F.R. § 230.144.

205. 15 U.S.C. § 77d(2).
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51

years of SEC decisions, interpretive releases,206 and judicial scrutiny, the 

Supreme Court identified four key factors in distinguishing a private offering from a public offering.207

First, the number of offerees is an important factor: the fewer the offerees, the greater likelihood that a § 4(2) exemption applies.208 Likewise, 

the size of the offering is a factor: The smaller the offering, the greater the 

chance for an exemption. Second, each offeree should have access to the 

type of information that would be disclosed should the issuer be required 

to undertake a full-fledged registration. Third, each offeree should be sophisticated with respect to business and financial matters, as well as with 

respect to the particular investment being offered.209 Fourth, the manner 

of the offering should be limited to those who have a privately expressed 

interest rather than be a general solicitation. Other case law suggests that 

each offeree must be provided an opportunity to ask questions and verify 

information through access to the issuer’s books and in face-to-face 

meetings.210

c. “Section 4(11⁄2)” Exemption

Section 4(2)’s nonpublic offering exemption is limited by its terms to 

transactions by an issuer. Conceptually, a sale by a person other than an 

issuer that meets the requirements of § 4(2) should be similarly exempt. 

However, sometimes it is difficult to point to the statutory provision that 

would provide the equivalent exemption. For example, when the security 

has not been held for two years, the Rule 144 exemption is not available. 

Furthermore, if it is a large block of stock, the § 4(1) exemption may not 

be available.

Although not formally codified by the SEC, what has become known 

as the “section 4(11⁄2)” exemption finds support in SEC no-action let206. See, e.g., Securities Act Release No. 33-285 (Jan. 24, 1935).

207. See also, e.g., SEC v. Ralston Purina Co., 346 U.S. 119 (1953); Securities Act 

Release No. 33-5487 (Jan. 23, 1974).

208. See Ralston Purina Co., 346 U.S. at 125. The Court expressly refused to adopt a 

“numbers test” as determinative, however.

209. See also Doran v. Petroleum Mgmt. Corp., 545 F.2d 893 (5th Cir. 1977).

210. Hill York Corp. v. Am. Int’l Franchises, Inc., 448 F.2d 680 (5th Cir. 1971). Several eminent commentators have suggested that, as a safety device, each offeree should 

receive an offering circular containing full disclosure.
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ters,211 interpretive releases,212 judicial decisions,213 and commentators’ 

writings.214 Unfortunately, the SEC no-action letters do not provide a 

consistent statement of what is necessary to satisfy the exemption.215 A 

reading of the applicable no-action letters reveals five main considerations in the creation of a § 4(11⁄2) exemption. First, each purchaser must 

have access to information similar to that which would be made available 

through a registration statement. Second, each purchaser must meet the 

§ 4(2) qualifications, such as sophistication of the investor or the investor’s representative. Third, any general solicitation of purchasers destroys 

the exemption. Fourth, too many § 4(11⁄2) sales within a given time frame 

could be found to be a distribution, which would destroy the exemption. 

Fifth, the seller must make clear that the proceeds are going to the selling 

shareholder, not the issuer.

Rule 144A permits unlimited resales of securities that have never 

been registered under the 1933 Act as long as all such sales are made to 

“qualified institutional buyers.”216 The SEC promulgated Rule 144A in 

1992 to help create a secondary market for institutional investors to trade 

privately placed securities. The rule, a relatively narrow exemption, operates more as an experimental adoption of the concept behind the § 4(11⁄2) 

exemption than as a meaningful safe harbor. Rule 144A applies only to 

211. See, e.g., Sidney Stahl, SEC No-Action Letter, 1981 WL 24892 (Apr. 23, 1981); 

Illinois Capital Inv. Corp., SEC No-Action Letter, 1975 WL 10071 (Apr. 14, 1975); Elwill 

Dev., Ltd., SEC No-Action Letter, 1974 WL 11054 (Dec. 5, 1974).

212. See, e.g., Securities Act Release No. 33-6188 n.178, 1 Fed. Sec. L. Rep. (CCH)

¶ 1051, 19 SEC Docket 465 (Feb. 1, 1980); Securities Act Release No. 33-5452, Fed. Sec. L. 

Rep. (CCH) ¶ 79,633, at 83,698, 3 SEC Docket 449 (Feb. 1, 1974).

213. See, e.g., Ackerberg v. Johnson, 892 F.2d 132 (8th Cir. 1989); Stoppelman v. 

Owens, [1982–1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,208 (D.D.C. 1984); 

Neuwirth Inv. Fund, Ltd. v. Swanton, 422 F. Supp. 1187 (S.D.N.Y. 1975); Value Line Income Fund, Inc. v. Marcus, Fed. Sec. L. Rep. (CCH) ¶ 91,523 (S.D.N.Y. 1965).

214. See, e.g., ABA Committee on Federal Regulation of Securities, The Section 

“4(11⁄2)” Phenomenon: Private Resales of Restricted Securities, 34 Bus. Law. 1961 (1971); 

Christopher Olander & Margaret Jacks, The Section 4(11⁄2) Exemption—Reading Between 

the Lines of the Securities Act of 1933, 15 Sec. Reg. L.J. 339 (1988); Carl Schneider, Section 

4(11⁄2)—Private Resales of Restricted or Control Securities, 49 Ohio St. L.J. 501 (1988).

215. Olander & Jacks, supra note 214, at 353.

216. Additionally, there are informational requirements unless the issuer is either a 

reporting company or a foreign issuer. Rule 144A(d)(4)(i), 17 C.F.R. § 230.144A(d)(4)(i).
III. Regulating Distribution of Securities—Securities Act of 1933

53

sales of securities of a class not publicly traded in the United States.217

Simultaneously with its adoption of Rule 144A, the SEC approved the 

establishment of the computerized PORTAL218 system to facilitate trading 

and provide a more liquid market for Rule 144A securities.

d. Exemption for Certain Dealer Transactions: Section 4(3)

Section 4(3) provides an exemption from the prospectus delivery requirements for certain transactions by dealers.219 This exemption is directed generally to the aftermarket, after primary distribution has occurred. Section 4(3)(A) exempts dealer transactions taking place more 

than forty days after the first date on which the securities were bona fide 

offered to the public.220 If a registration statement has been filed, 

§ 4(3)(B) provides that the exemption applies during the first forty 

days221 after (1) the securities were offered to the public or (2) the effective date, whichever is later.222 Since the vast majority of day-to-day 

transactions occur more than forty (or ninety) days after the securities 

have been offered to the public, § 4(3) covers most transactions. While 

§ 4(3) is available to underwriters no longer acting as such, § 4(3)(C) 

makes clear that there is no exemption for transactions in securities that 

constitute all or part of an unsold allotment or subscription by a dealer 

who is a participant in the distribution.

217. This class of securities includes small companies, nonconvertible preferred 

stock, and foreign companies that cannot or will not comply with federal securities laws 

but seek a U.S. market.

218. Private Offerings, Resales, and Trading through Automated Linkages.

219. In this context, dealer may be understood to include underwriters no longer 

acting as underwriters (those who have sold their entire allotment).

220. This was intended to cover unregistered offerings and to protect nonparticipating dealers with regard to subsequent transactions, for it permits dealers to trade in a 

security illegally offered to the public without registration after a lapse of forty days from 

the time the offering was made. Kubik v. Goldfield, 479 F.2d 472 (3d Cir. 1973).

221. If the registration statement pertains to the issuer’s first registered offering, the 

period is ninety days.

222. Since § 4(3)’s exemption is limited to the prospectus delivery requirements and 

comes into existence some time after the effective date (or bona fide offering date), it has 

no bearing on the following: prefiling gun-jumping violations of § 5(c); § 5(a)’s prohibitions against sales prior to the effective date; or § 5(b)(1)’s prospectus delivery requirements during the waiting period.
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SEC Rule 174 provides further exemptions under § 4(3) for nonparticipating dealers under certain circumstances by shortening or eliminating the period during which a prospectus need be delivered.223 Additionally, Rule 174(d) shortens to twenty-five days the “quiet period,” in 

which stock is listed on a national securities exchange or qualifies for inclusion on the National Association of Securities Dealers Automated 

Quotation system (NASDAQ).

e. Exemption for Unsolicited Brokers’ Transactions: Section 4(4)

Section 4(4) of the Act exempts unsolicited brokers’ transactions. There 

is no explicit definition of broker in either the 1933 Act or the rules 

promulgated thereunder; however, the Act’s definition of dealer clearly 

includes brokers. Thus, unless exempted under § 4(3), and in the absence 

of § 4(4), brokers’ transactions would come within § 5’s purview by virtue of the operation of § 4(1). The § 4(4) exemption is limited to unsolicited customer orders and is designed to apply to day-to-day transactions 

where there is no potential for § 5 abuse. The exemption does not apply, 

however, to transactions so large that they are susceptible to characterization as a distribution,224 in which case a registration statement would be 

required unless another exemption is available.

f. Exemption for Certain Small and Limited Offerings: Regulation D

Regulation D consists of three separate private-offering and smalloffering exemptions: Rules 504 and 505, exclusive harbors; and Rule 506, 

a safe harbor.225 Rules 504 and 505 are § 3(b) exemptions, while Rule 506 

is promulgated under § 4(2)’s nonpublic offering exemption. These three 

exemptions are all governed by Rules 501, 502, 503, 507, and 508. The 

exemptions, of course, are only from registration—not from the 

223. Under Rule 174, a prospectus need not be delivered to offerees or purchasers 

(1) if the registration statement is on Form F-6 (for foreign issuers); (2) if the company 

was a public reporting company before the registration statement was filed and is current 

in its 1934 Act reporting; or (3) in the case of most offerings based on Rule 415 shelf registration. 17 C.F.R. § 230.174. See 17 C.F.R. § 230.415.

224. See, e.g., In re Ira Haupt & Co., 23 S.E.C. 589 (1946).

225. Because Rule 506 is a safe harbor, a transaction that does not meet the requirements of Rule 506 may nevertheless be exempt under the statutory § 4(2) exemption. In 

contrast, Rules 504 and 505 are dependent on strict compliance with their terms, as there 

is no statutory exemption to fall back on.
III. Regulating Distribution of Securities—Securities Act of 1933

55

antifraud or civil liability sections of the federal securities laws—and do 

not relieve the issuer of the obligation to comply with state securities 

laws. Regulation D exemptions are available only to the issuer of securities, not to affiliates or purchasers of securities initially acquired under 

Regulation D offerings.

Rule 501 defines the terms used in Regulation D. Particularly important is the definition of accredited investor.

226 Rule 501(e) provides rules 

for computation of the number of purchasers.227

Rule 502 provides general conditions that must be met in order to 

qualify for the exemptions provided by Rules 504, 505, and 506. Rule 

502(a) provides an integration safe harbor to prevent other offerings 

from being integrated into the initial offering and thereby destroying the 

exemption (e.g., by exceeding the offering price ceiling).228 Rule 502(b) 

sets forth informational requirements that must be met for exemptions 

relying on Rules 505 and 506.229 In general, the larger the offering, the 

more information that must be furnished. Rule 502(b) states that the required information must be provided to all unaccredited investors. Formerly, the SEC required that such information be furnished to all investors if there were any unaccredited offerees; this practice is still recommended by the SEC. Rule 502(c) prohibits the offer or sale of securities 

226. 17 C.F.R. § 230.501(a). There are eight categories that investors may fall within 

to be an accredited investor. Generally, the categories include institutional investors; individuals with a net worth (or joint net worth) of more than $1 million; individuals with 

annual income in excess of $200,000 (or $300,000 joint income with spouse) in each of 

the two most recent years; and directors, executive officers, and general partners of the 

issuer. See also 1933 Act § 2(a)(15), Rule 215 for other definitions of accredited investor. 

15 U.S.C. § 77b(a)(15); 17 C.F.R. § 230.215. As part of the Dodd-Frank Act, Congress 

mandated that the SEC periodically reexamine the $1 million net worth threshold.

227. This provision is only relevant to Rules 505 and 506 (which are limited to 

thirty-five purchasers), as Rule 504 has no purchaser limit. Rule 501(e) excludes accredited investors and most related purchasers from the number of purchasers counted.

228. Under Rule 502(a), offers made more than six months before or after the offering at issue may be excluded from integration with Regulation D transactions. (Rules 504 

and 505, however, extend this period to twelve months before the offering if the other 

offering is reliant on an exemption under § 3(b) or illegally offered without registration in 

violation of § 5(a).)

229. No information is required under Rule 504 unless state law requires it.
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56

by general solicitation or general advertising.230 Finally, Rule 502(d) sets 

forth limitations on the resale of securities acquired in a Regulation D 

transaction.231 Since these exemptions are only transaction exemptions, 

any securities acquired pursuant to Regulation D cannot be resold unless 

the resale is registered or has an independent exemption. The issuer is 

required by Rule 502(d) to exercise reasonable care to ensure that the 

purchasers do not unwittingly become underwriters as defined by 

§ 2(a)(11).232

Rule 508 provides that insignificant deviations from a term, condition, or requirement of Regulation D will not destroy the exemption for a 

good-faith transaction. This is not designed as a new method of compliance, but rather as a defense in a suit where noncompliance was de minimus. To qualify for this defense, the issuer must show (1) that the failure 

to comply did not affect the complainant; (2) that it was an insignificant 

violation with respect to the offering as a whole; and (3) that a reasonable 

good-faith attempt to comply was made.

Rule 503 provides that Regulation D requires filing of notices of sales 

with the SEC. Moreover, Rule 507, added by the SEC in 1989, provides 

that Regulation D is not available to persons who have been enjoined 

from violating Rule 503’s notice-of-sales requirement. The SEC may, 

however, waive this provision in an individual case upon a showing of 

good cause.

Offerings up to $1 million—Rule 504. Under Rule 504, an issuer that is 

not an investment company or a 1934 Act reporting company may have 

an exemption for small offerings. Offerings with an aggregate price over 

230. General solicitation includes, but is not limited to, advertising, general meetings, general letters, and circulars. In the limited situation in which the exemption being 

relied on is Rule 504 and all sales are pursuant to state registration in states that require 

delivery of a disclosure document, general solicitation is permitted.

231. Again, in the limited situation in which the transaction is relying on Rule 504 

for exemption and all sales are pursuant to registration in a state (or states) requiring 

delivery of a disclosure document, resales need not be restricted.

232. Rule 502(d) contains examples of the requisite reasonable care, such as placing 

an appropriate legend on the stock certificate. 17 C.F.R. § 230.502(d).
III. Regulating Distribution of Securities—Securities Act of 1933

57

$1 million do not qualify for this exemption.233 All securities offered 

within the past twelve months under a § 3(b) exemption and all securities 

offered in violation of § 5 within the past twelve months are included in 

calculating the aggregate offering price.234 General solicitations of purchasers are permitted and no resale restrictions are required, but only if 

the offering is registered under applicable state securities (or blue sky) 

law provisions.

Offerings up to $5 million—Rule 505. Rule 505, which is also a § 3(b) 

exemption, exempts certain offerings up to $5 million by issuers that are 

not investment companies.235 The offering must be limited to thirty-five 

purchasers, but related purchasers and accredited investors do not count 

in the limit. No general solicitation is permitted. There are no limitations 

on the nature of the purchasers; however, there are informational requirements if any of the offerees are not accredited. As with Regulation A 

offerings, Rule 505 offerings are subject to the “bad boy” disqualification 

provisions of Rule 262.236 Resales of the securities relying on this exemption are subject to restrictions.237

Safe harbor for nonpublic offerings by issuers—Rule 506. Rule 506, the 

final exemption in Regulation D, is a safe harbor for a § 4(2) exemption. 

There is no limit on the dollar amount of an offering under Rule 506. 

General solicitation of purchasers is not permitted, and the offering is 

233. Only $500,000 of the securities may be attributable to offers and sales of securities not registered under state securities laws. However, the SEC has proposed allowing up 

to $1 million regardless of state registration.

234. This makes the planning and timing of offerings very important. For example, 

an issuer cannot have a $500,000 Rule 504 offering following within one year of a $1 million Regulation A offering, since Rule 504 puts a $1 million ceiling on § 3(b) offerings 

within the preceding twelve months. On the other hand, an issuer can have a $500,000 

Rule 504 offering followed by a $1 million Regulation A offering, since Rule 254 would 

permit it as within Regulation A’s $1.5 million ceiling on § 3(b) offerings within twelve 

months.

235. The method of calculation is similar to Rule 504 and Regulation A: include all 

securities offered within the past twelve months under a § 3(b) exemption (i.e., Regulation A or Rule 504) plus those offered in violation of § 5.

236. See infra text accompanying note 246.

237. Rule 502(d) requires that resales be made in compliance with Rule 144.
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limited to thirty-five unaccredited purchasers.238 Moreover, all of the unaccredited purchasers must be knowledgeable, sophisticated, and able to 

evaluate and bear the risks of the prospective investment.239 Additionally, 

the purchasers must have access to the information as required by Rule 

502(b), and the issuer must affirmatively disclose such information if 

there are any unaccredited purchasers. Rule 506, like Rule 505, is subject 

to the limitations on resale imposed by Rule 502(d), and downstream 

sales are similarly governed by Rule 144.

g. Other Exemptions

Rule 701 provides not merely a safe harbor, but an exclusive harbor for 

employee and consultant compensation plans. It is available only to issuers, and the issuer may not be a 1934 Act reporting company or an investment company. This exemption may be used for stock purchase 

plans, option plans, bonus plans, stock appreciation rights, profit sharing, 

thrift plans, incentive plans, or similar plans. However, the plan must be 

written, and it may not be used to compensate underwriters or most 

promoters. There is a limitation on the dollar amount of the compensation; the limitation varies depending on the size and assets of the company and the stock outstanding.240 There are restrictions on resale; thus 

any downstream sales must be in accordance with Rule 144. Notice of 

sales relying on this exemption must be filed with the SEC. Failure to 

comply may disqualify the issuer from using the exemption.

Regulation S contains two safe-harbor exemptions from registration 

for certain offshore offers and sales. It is relatively complex and requires 

238. Related purchasers and accredited investors are excluded from the calculation of 

the number of purchasers.

239. Rule 146, the former safe-harbor rule for § 4(2), used to require this qualification for each offeree. Although this requirement is not specifically stated in Rule 506, 

disputes over whether a prohibited general solicitation has taken place frequently arise 

when this qualification is not met. See, e.g., Doran v. Petroleum Mgmt. Corp., 545 F.2d 

893 (5th Cir. 1977).

240. Any nonpublic issuer may rely on the Rule 701 exemption for offerings of at 

least $1 million. The ceiling on the offering is the greater of $1 million per year, or 15% of 

the issuer’s total assets, or 15% of the aggregate value of the outstanding shares of the 

securities to be offered in the Rule 701 offering.
III. Regulating Distribution of Securities—Securities Act of 1933

59

not only that the offering process take place outside the United States but 

also that the securities so offered remain offshore.241

Section 4(5) (formerly § 4(6))

242 exempts offerings made solely to 

accredited investors where the aggregate amount of securities sold does 

not exceed the dollar limit of § 3(b) (currently $5 million). Accredited 

investors, as defined in § 2(a)(15) of the 1933 Act, include institutional 

investors and individuals with a large net worth. Rule 215, promulgated 

in 1982, expands the definition of accredited investor to include other 

individuals who are considered sophisticated, who have access to information concerning the issuer, or who are sufficiently affluent to not require the Act’s protection in the transaction.243 Sales under this exemption must be made only to accredited investors, there must be no public 

advertising or solicitation, and appropriate notice of reliance on the exemption (Form D)

244 must be filed with the SEC.

Under the authority of § 3(b) of the 1933 Act, the SEC promulgated 

Regulation A245 to exempt certain small issues. Regulation A is limited to 

issuers in the United States or Canada that are not investment companies, and it applies to issues with an aggregate offering price of $5 million 

or less within a one-year period for issuer transactions and $1.5 million 

for secondary transactions. Regulation A contains “bad boy” disqualification provisions that render the exemption unavailable in most cases if a 

participant in the offering has been subject to SEC disciplinary proceedings or convicted of a violation of relevant laws in the last five years.246

Regulation A is not a complete exemption, but rather is conditioned

on what is comparable to a “mini” registration. The issuer must file an 

offering circular with the SEC. Offers to sell can be made only by way of 

this offering circular. Copies of all sales materials must be filed with the 

241. Rules 901–904, 17 C.F.R. §§ 230.901–230.904. See 6 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 17.4 (6th ed. 2009).

242. Former § 4(5), repealed as part of the Dodd-Frank Act of 2010, was of relatively 

narrow utility, exempting from registration certain real estate mortgage notes secured by 

a first lien on a single parcel of real estate consisting of land and either a residential or 

commercial structure.

243. 17 C.F.R. § 230.215.

244. Id. § 239.500.

245. Rules 251–264, 17 C.F.R. §§ 230.251–230.264.

246. Rule 262, 17 C.F.R. § 230.262.
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SEC. The alternative disclosure requirements for a Regulation A offering 

are found in Form 1-A.247 Finally, the issuer must file reports of all sales 

with the SEC (Form 2-A).248 In general, the advantages of a Regulation A 

filing are that the information disclosed may be less detailed, the filing

does not require audited financial statements, and the filing does not subject the issuer to periodic reporting requirements.

3. General Exemptive Authority

Section 28 of the 1933 Act provides that the SEC may exempt transactions, securities, and persons if in the public interest and consistent with 

investor protection.249 This virtually unlimited exemptive power frees the 

SEC from the more rigid parameters of the specific exemptions set forth 

in §§ 3 and 4 of the Act.250

4. Integration of Transactions

The integration doctrine permits the telescoping of two or more purportedly separate transactions into one transaction. Under the integration 

doctrine,251 the SEC and the courts examine multiple offerings to deter247. 17 C.F.R. § 239.90.

248. Id. § 239.91.

249. 15 U.S.C. § 77z-3 (adopted in 1996). The SEC may exercise this exemptive 

authority by rule or regulation, and the exemption may extend to any person, security, or 

transaction and may be subject to whatever conditions the SEC imposes so long as the 

exemption is considered necessary or appropriate, is in the public interest, and is consistent with the protection of investors. Id. In contrast to its general exemptive authority 

under the 1933 Act, the parallel provision of the 1934 Act gave the SEC authority to provide an exemption by administrative order in addition to providing for an exemption in 

its rules and regulations. See 1934 Act § 36, 15 U.S.C. § 78mm(a).

250. The SEC has proceeded cautiously. In 1998, it proposed eliminating the $5 million ceiling on Rule 701 benefit plan offerings. Securities Act Release No. 33–7511, 63 Fed. 

Reg. 10785 (Mar. 5, 1998).

251. The integration doctrine first emerged in connection with the intrastate offering 

exemption in the context of determining which transactions constitute “part of an issue” 

(emphasis added). The “part of an issue” concept applies to § 3(b) exemptions, such as 

Regulation A. Similarly, the issue concept has been carried over to the § 3(a)(9) exemption for exchanges of securities exclusively with existing securities holders. The integration doctrine has also been applied to the § 3(a)(10) exemption for administratively approved reorganizations.
III. Regulating Distribution of Securities—Securities Act of 1933

61

mine whether they should be treated as a single transaction. The integration doctrine can also be used to integrate a would-be exempt offering 

with a registered offering where some of the offers or sales in the registered offering would destroy the availability of the exemption.252 It is possible that two or more exempt offerings, when combined, will lose the 

attributes that entitled them to protection.

The SEC has made it clear that integration applies to the transaction 

exemptions under § 4, and in particular the § 4(2) exemption for transactions not involving a public offering. The SEC has developed the following five-factor test253 to determine whether the integration doctrine 

should be applied to two or more transactions:

1. Are the sales part of a single plan of financing?

2. Do the sales involve issuance of the same class of securities?

3. Were the sales made at or about the same time?

4. Is the same type of consideration received?

5. Are the sales made for the same general purpose?

The SEC has not given much guidance on how these factors should 

be weighted. Accordingly, it would appear that in a particular case any 

one or more of the five factors could be determinative. (Thus, for example, the absence of a prearranged single plan of financing is likely to preclude integration.)

The integration doctrine essentially depends on the facts and nuances 

of each situation. Therefore, it is often difficult to glean any knowledge 

from the sparse precedent that exists. Much of the relevant precedent is 

based on no-action letters, which by their nature are persuasive but not 

binding.254 To decrease the uncertainty in some situations, the SEC has 

developed integration safe-harbor rules, such as Rule 502(a) for Regulation D offerings and Rule 147(b)(2) for offerings relying on the intrastate 

exemption.

252. SEC Rule 155 sets forth safe harbors from integration for an abandoned public 

offering followed by an exempt private offering, and for an abandoned private offering 

followed by a registered public offering. 17 C.F.R. § 230.155.

253. Securities Act Release No. 33-4434 (Dec. 6, 1961).

254. In 1979, the Commission suspended its practice of rendering no-action advice 

on integration questions, but it resumed the practice in 1985.
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E. Liabilities Under 1933 Act

Under the 1933 Act, deficiencies in registration materials can result in 

administrative action by the SEC, criminal sanctions, injunctive relief, 

and, in some cases, private remedies.

1. SEC Administrative Remedies

In order to prevent a deficient registration statement from becoming effective, the SEC can institute formal proceedings for issuing a refusal order. Refusal-order proceedings must be instituted within ten days of the 

registration statement’s filing, and the order may be issued only after the 

registrant has been given notice and an opportunity for a hearing. Alternatively, when faced with material deficiencies in the registration statement, the SEC may commence formal stop-order proceedings at any 

time.255 Again, the order can be issued only after formal notice and an 

opportunity for a hearing. However, both of these formal proceedings are 

rather drastic measures and not a part of the normal process for dealing 

with deficient registration materials. Instead, the normal process generally involves the use of deficiency letters256 and other communications 

between the issuer and the SEC staff, as well as amendments voluntarily 

delaying the proposed effective date by the issuer until the deficiencies are 

corrected. In addition to § 8 proceedings, § 8A gives the SEC the authority to issue cease and desist orders.

2. Private Rights of Action

The 1933 Act has three sections prohibiting fraud and misstatements: 

§§ 11, 12, and 17. Sections 11 and 12 create private rights of action, while 

§ 17(a) is a more generalized antifraud provision used primarily by the 

SEC and by the Department of Justice in criminal actions. Each of the 

private rights of action under the 1933 Act must be examined in conjunc255. See 1 Hazen, supra note 241, § 2.2; William McLucas, Stop Order Proceedings 

Under the Securities Act of 1933: A Current Assessment, 40 Bus. Law. 515 (1985).

256. Deficiency letters are letters from the SEC staff advising the issuer that the 

Commission would like to see certain changes in the registration statement. For greater 

detail, see generally 1 Hazen, supra note 241, § 3.7[1]; Richard Jennings & Harold Marsh, 

Securities Regulation 174–75 (5th ed. 1982).
III. Regulating Distribution of Securities—Securities Act of 1933

63

tion with Rule 10b-5 of the 1934 Act and its general antifraud remedy for 

fraud in connection with the purchase or sale of a security.257 Most state 

securities class actions are federally preempted by the Private Securities 

Litigation Reform Act (PSLRA).

258

Any material deficiencies in the registration statement that carry over 

to the prospectus will result in violations of the § 5(b) prospectus delivery 

requirements, which call for an accurate and up-to-date prospectus.259

Any violation of § 5 gives rise to possible criminal sanctions as well as 

judicially secured SEC equitable sanctions. Furthermore, private remedies may exist for aggrieved persons under §§ 11 and 12 of the 1933 Act. 

Purported waivers of 1933 Act claims are invalid, except in connection 

with settlement of threatened or pending litigation.260 The applicable 

statutes of limitations for private remedies under the 1933 Act are set 

forth in § 13.261

257. 17 C.F.R. § 240.10b-5. The implied private right of action under 1934 Act Rule 

10b-5 is cumulative with the express remedies set forth in the 1933 Act. Herman & MacLean v. Huddleston, 459 U.S. 375 (1983). Although Rule 10b-5 is broader than the 1933 

remedies, it imposes a higher standard of culpability than the 1933 Act by requiring a 

showing of scienter. For a more detailed discussion of Rule 10b-5, see infra text accompanying notes 480–535.

258. The PSLRA is discussed more fully infra text accompanying notes 317–50. The 

preemption applies to any class action involving misrepresentations, omissions, deception, or manipulation in connection with the purchase or sale of a publicly traded security. 1933 Act § 16(b), 15 U.S.C. § 77p(b); 1934 Act § 28(f)(1), 15 U.S.C. § 78bb(f)(1). 

The 1934 Act includes enhanced pleading requirements applicable to fraud actions. 1934 

Act § 21D(b), 15 U.S.C. § 78u-4(b). The litigation reform legislation also included some 

substantive amendments, including those relating to apportionment of damages and liability for forward-looking statements. See 1933 Act §§ 11(f), 12(b), 27A, 15 U.S.C. 

§§ 77k(f), 77l(b), 77z-2.

259. See, e.g., SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082 (2d Cir. 1972) (holding that delivery of an uncorrected prospectus, which was not an accurate statement as of 

date of delivery, was a violation of § 5(b)(2), subjecting the dealer who delivered the prospectus to liability under § 12(a)(1)).

260. 1933 Act § 14. See Meyers v. C & M Petroleum Producers, Inc., 476 F.2d 427 

(5th Cir.), cert. denied, 414 U.S. 829 (1973).

261. Actions under §§ 11 and 12(a)(2) must be brought within one year of discovery 

of the misstatement or omission. Notwithstanding a longer delay in discovery, actions 

under these sections must be brought within three years after the security was first offered 

to the public. An action under § 12(a)(1) must be brought within one year of discovery of 

the registration violation and within three years of the sale. In 2002, Congress added 15 
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64

a. Misrepresentations and Omissions in Registration Statements: Section 11

Section 11 imposes express civil liability on persons preparing and signing materially misleading registration statements. Section 11 is the only 

liability provision expressly limited to registered public offerings.262 It 

imposes broader liability than other antifraud provisions because the aggrieved purchaser need only show that she bought the security and there 

was a material misrepresentation in the registration statement. There is 

no requirement under § 11 that purchasers show that they relied on the 

misstatement. Section 11 does not require scienter and has been held by 

most courts not to implicate the enhanced pleading requirements that 

apply to fraud actions.263 However, there are two standards of liability 

imposed by § 11. The first is on the issuer, who generally is strictly liable 

once the plaintiff has proved that she bought the stock and that there was 

a material misstatement in the registration statement. The only “affirmative” defenses for the issuer are (1) to show that the person acquiring the 

security knew of the untruth or omission in the registration statement at 

the time of the acquisition, (2) lack of materiality, or (3) expiration of the 

statute of limitations.

The second standard of liability applies to nonissuers who may raise 

defenses not available to issuers. For all persons other than the issuer,264

U.S.C. § 1658, which provides that in actions for securities fraud, the applicable limitations period is two years from the discovery of the facts constituting the violation, but in 

no event more than five years after the violation. Since the remedies provided in §§ 11 

and 12 of the 1933 Act do not speak in terms of fraud, it is doubtful that these longer 

periods prevail over the one-year/three-year periods mentioned in § 13 of the 1933 Act.

262. Although not expressly contained in the statute, the Supreme Court has “read” 

a public offering limitation into actions under § 12(a)(2). Gustafson v. Alloyd Co., 513 

U.S. 561 (1995). Although the Court has thus limited § 12(a)(2) to public offerings, it is 

not limited to registered offerings.

263. See, e.g., Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363 (5th Cir. 

2001) (Rule 9(b)’s particularity requirements do not apply in actions under either § 11 or 

§ 12 of the 1933 Act); In re Ultrafem, Inc. Sec. Litig., 91 F. Supp. 2d 678 (S.D.N.Y. 2000) 

(particularity requirements did not apply to either § 11 or § 12(a) claims). But see, e.g., 

Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir.), cert. denied, 506 U.S. 934 (1992) 

(when § 11 and § 12 claims are grounded in fraud rather than negligence, particularity 

requirements apply).

264. Persons liable include all signers of the registration statement (which must include principal executive and financial officers, issuer, and majority of directors), all di-
III. Regulating Distribution of Securities—Securities Act of 1933

65

§ 11(b) provides three additional possible affirmative defenses. The first 

two defenses relate to someone who discovers the material misstatement 

or omission and takes appropriate steps to prevent the violation. A potential § 11 defendant may be relieved of liability by resigning or taking 

steps toward resignation, and by informing the SEC and the issuer in 

writing that he has taken such action and disclaims all responsibility for 

the relevant sections of the registration statement. Alternatively, if the 

registration statement becomes effective without the defendant’s knowledge, upon becoming aware of the effectiveness the potential § 11 defendant may be relieved of liability by taking appropriate steps toward resignation, informing the SEC as above, and giving reasonable public notice 

that the registration statement became effective without the defendant’s 

knowledge.

The third defense, contained in § 11(b)(3), is the most frequently 

used. It absolves defendants from liability if they had reasonable grounds 

for believing, and did in fact believe, that there was no omission or material misstatement. Since assertions of actual belief are generally difficult 

to disprove, the test for this defense centers on what are “reasonable 

grounds” for believing that no violation occurred. Section 11(c) establishes the appropriate standard of care: “[T]he standard of reasonableness 

shall be that required of a prudent man in the management of his own 

property.” Thus, this defense is often described as the “due diligence” 

(although that phrase does not appear in the statute) and reasonable investigation defense.

The courts have not articulated a bright-line test as to what satisfies 

the due diligence and reasonable investigation standard of care.265 What 

has emerged, however, is a sliding scale of culpability depending on the 

defendant’s knowledge, expertise, and status with regard to the issuer, its 

rectors (including people not yet directors but agreeing to be named as about to become 

directors), experts (e.g., certifying accountant), and underwriters. See §§ 11(a)(1)–

11(a)(5) for a list of these persons. 15 U.S.C. §§ 77k(a)(1)–77k(a)(5).

265. See, e.g., In re WorldCom Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 

638268 (S.D.N.Y. Mar. 21, 2005); Escott v. BarChris Constr. Corp., 283 F. Supp. 643 

(S.D.N.Y. 1968); Feit v. Leaseco Data Processing Equip. Corp., 332 F. Supp. 544 (E.D.N.Y. 

1971); In re Flight Transp. Corp. Sec. Litig., 593 F. Supp. 612 (D. Minn. 1984); Draney v. 

Wilson, Morton, Assaf & McElligott, 592 F. Supp. 9 (D. Ariz. 1984); In re Fortune Sys. 

Sec. Litig., [1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,390 (N.D. Cal. 1987).
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66

affiliates, or its underwriters, as well as the degree of the defendant’s actual participation in the registration process and in preparing registration

materials.266 In an effort to clarify its position, the SEC promulgated Rule 

176, which sets forth factors to be considered, reinforces the judicial sliding scale of culpability, and further provides for the necessity of a caseby-case, highly fact-specific analysis. Rule 176 provides the following:

In determining whether or not the conduct of a person constitutes a 

reasonable investigation or a reasonable ground for belief meeting the 

standard set forth in section 11(c), relevant circumstances include, with 

respect to a person other than the issuer:

(a) the type of issuer;

(b) the type of security;

(c) the type of person;

(d) the office held when the person is an officer;

(e) the presence or absence of another relationship to the issuer when 

the person is a director or proposed director;

(f) reasonable reliance on officers, employees, and others whose duties should have given them knowledge of the particular facts (in the 

light of the functions and responsibilities of the particular person with 

respect to the issuer and the filing);

(g) when the person is an underwriter, the type of underwriting arrangement, the role of the particular person as an underwriter, and the 

availability of information with respect to the registrant; and

(h) whether, with respect to a fact or document incorporated by reference, the particular person had any responsibility for the fact or 

document at the time of the filing from which it was incorporated.267

It is appropriate to consider not only the positions held but also any special expertise the person might have.

Damages under § 11 depend on whether or not the security is sold 

prior to judgment. The critical dates are the date of sale (if the security 

has been sold prior to the lawsuit), the date the lawsuit is filed, and the 

date of the judgment. If the security is sold before the suit is filed, damages are based on the amount paid less the amount for which the security 

sold. If the security is sold between the date the suit is filed and the date 

of judgment, the plaintiff is entitled to the lesser of (1) the amount paid 

266. For more detail, see 2 Hazen, supra note 241, § 7.4.

267. 17 C.F.R. § 230.176.
III. Regulating Distribution of Securities—Securities Act of 1933

67

less the price for which the security sold or (2) the amount paid less the 

value of the security at the time the suit was filed. If the security is held 

until the date of the judgment, the plaintiff is entitled to the amount paid 

less the value of the security at the time the suit was filed. Furthermore, 

defendants are liable only for damages caused by the misleading statement; they have the right to attempt to reduce the damages they must pay 

by attempting to prove that the decrease in value is the result of something other than their misleading statement. However, § 11 gives the 

court discretion to award the plaintiff costs and attorneys’ fees as part of 

the damage award. Liability under § 11 is joint and several268 subject to 

two exceptions. First, underwriters of the public offering are not liable 

under § 11 beyond their proportionate participation in the offering.269

Second, outside directors may seek contribution from more culpable § 11 

defendants.270

b. Securities Sold in Violation of Section 5, and Securities that Contain 

Material Misstatements or Omissions: Section 12

Section 12 of the 1933 Act imposes liability in two contexts: when a person sells a security in violation of § 5 (failure to register or meet an exemption) and when a security is sold by means of a prospectus or oral 

communication that contains a material misstatement or omission. Unlike § 11, § 12 by its terms applies to any transaction, whether or not it is 

subject to the registration provisions of the 1933 Act.271 A major issue in 

many § 12 cases is whether the defendant is a permissible one—that is, 

whether he is a “seller” for purposes of § 12. Issuers and underwriters 

generally are not sellers within the meaning of § 12 unless they actively 

268. 1933 Act § 11(e), 15 U.S.C. § 77k(e).

269. Id.

270. 1933 Act § 11(f), 15 U.S.C. § 77k(f). The Supreme Court has also recognized an 

implied right of contribution for damages based on 1934 Act Rule 10b-5. Musick, Peeler 

& Garrett v. Employers Ins. of Wausau, 508 U.S. 286 (1993).

271. For a violation of the federal securities law to occur, some means or instrument 

of interstate commerce must be used. The Supreme Court held that a § 12(a)(2) action 

cannot be brought in connection with an isolated sale, but can apply only in the context 

of a public offering. Gustafson v. Alloyd Co., 513 U.S. 561 (1995). This reading of the 

statute does not seem justified either by the language of the Act or by its legislative history. See 2 Hazen, supra note 241, § 7.6.
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68

participate in the negotiations with the plaintiff/purchaser.272 Similarly, 

an attorney’s having worked on the offering circular will not make him or 

her a seller.273 On the other hand, a broker who deals directly with the 

plaintiff is a § 12 seller.274

Section 12 appears to require privity between the plaintiff and the 

defendant.275 Traditional agency principles that would give rise to a finding of privity in a normal contract situation apply with equal force in the 

securities context.276 The Supreme Court delineated two factors for consideration in identifying a seller under § 12: whether the defendant received direct remuneration or benefit as a result of the sale, and whether 

the defendant’s role in the solicitation and purchase was intended to 

benefit the seller (or owner) of the security.277

Civil liability for sales in violation of section 5—section 12(a)(1). Anyone who offers or sells a security in violation of § 5 is liable in a civil action under § 12(a)(1) to the person “purchasing such security from him.” 

In order to recover under this section, the plaintiff need only show that 

the defendant sold the security to the plaintiff and that the security was 

unregistered. The defendant then must either show that an exemption 

existed or establish the in pari delicto (or equal fault) defense. While initially it was believed that the in pari delicto defense was unavailable in an 

272. See Foster v. Jesup & Lamont Sec. Co., Inc., 759 F.2d 838 (11th Cir. 1985). See 

also Pinter v. Dahl, 486 U.S. 622 (1988) (holding that to be seller in action under 

§ 12(a)(1), defendant must have been both immediate and direct seller; substantial participation alone will not suffice).

273. E.g., Abell v. Potomac Ins. Co., 858 F.2d 1104 (5th Cir. 1988), cert. denied, 492 

U.S. 918 (1989); Stokes v. Lokken, 644 F.2d 779 (8th Cir. 1981).

274. E.g., Quincy Co-Operative Bank v. A.G. Edwards & Sons, Inc., 655 F. Supp. 78 

(D. Mass. 1986).

275. The seller “shall be liable to the person purchasing such security from him . . . ” 

(emphasis added). See, e.g., Pinter, 486 U.S. 622; Collins v. Signetics Corp., 443 F. Supp. 

552 (E.D. Pa. 1977), aff’d, 605 F.2d 110 (3d Cir. 1979); Unicorn Field, Inc. v. Cannon 

Group, Inc., 60 F.R.D. 217 (S.D.N.Y. 1973). While there has been some suggestion that 

the Pinter decision may dispense with the privity requirement, the correct view is that it 

does not. E.g., In re Craftmatic Sec. Litig., 703 F. Supp. 1175, 1183 (E.D. Pa.), modified on 

other grounds, 890 F.2d 628 (3d Cir. 1989). But see Scotch v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 709 F. Supp. 95 (M.D. Pa. 1988) (privity not required under 

§ 12(a)(2) with regard to open-market transaction).

276. See Buchholtz v. Renard, 188 F. Supp. 888 (S.D.N.Y. 1960).

277. Pinter, 486 U.S. 622.
III. Regulating Distribution of Securities—Securities Act of 1933

69

action under § 12(a)(1) (since liability imposed under this section is 

“strict liability”), the Supreme Court has held that the defense is available 

in private actions under any provision of the federal securities laws.278

Relying on an earlier Court decision,279 the Court laid out the two-prong 

test for the in pari delicto defense: First, the plaintiff must be at least 

equally at fault for the underlying illegality; and second, preclusion of the 

suit must not offend the “underlying statutory policies.”280 Applying the 

test to § 12(a)(1) violations (i.e., securities sold in violation of § 5), the 

Court held that “the in pari delicto defense may defeat recovery in a section 12(a)(1) action only where the plaintiff’s role in the offering or sale 

of nonexempted, unregistered securities is more as a promoter than as an 

investor.”281

Under § 12(a)(1), the successful plaintiff is entitled to rescission and 

return of purchase price. If the security has already been sold, damages 

under § 12(a)(1) are based on the loss comprising the difference between 

the plaintiff’s purchase price and sale price. Since § 12(a)(1) does not require a causal connection between the violation and any decline in price, 

a successful plaintiff is entitled to rescission even when the price of the 

security drops as a result of a change in the issuer’s circumstances or 

market factors wholly unrelated to the § 5 action.282 Also, at least one 

court has held that even where a violation of the § 5(b)(1) prospectus 

delivery requirement is followed by the purchaser’s receipt of a complete 

statutory prospectus prior to the delivery of the security, the legal sale 

does not cure the illegal offer, and the purchaser is entitled to maintain 

an action under § 12(a)(1).283

Liability of sellers for material misstatements or omissions—section

12(a)(2). Section 12(a)(2) of the 1933 Act creates an express private rem278. Id.

279. Bateman, Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985).

280. Pinter, 486 U.S. at 638.

281. Id. at 639. See also Mark Klock, Promoter Liability and In Pari Delicto Under 

Section 12(1), 17 Sec. Reg. L.J. 53 (1989).

282. This is in contrast to §§ 11 and 12(a)(2), which require a causal connection 

between the misstatement and the plaintiff’s loss. 1933 Act §§ 11(e), 12(b), 15 U.S.C. 

§§ 77k(e), 78l(b). Similarly, 1934 Act Rule 10b-5 imposes a causation requirement. 17 

C.F.R. § 240.10b-5.

283. Diskin v. Lomasney & Co., 452 F.2d 871 (2d Cir. 1971).
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70

edy for a purchaser against the seller of a security for material misstatements or omissions284 in connection with the offer and sale. Section 

12(a)(2) does not require scienter, and thus most courts have held that 

§ 12 does not implicate the enhanced pleading requirements that apply to 

fraud actions.285 The statutorily mandated enhanced pleading requirements appear in the 1934 Act, but not in the 1933 Act.286 A number of 

courts, however, have applied the enhanced pleading standards to 

§ 12(a)(2) claims, at least when the claims sound in fraud.287

As is the case with § 12(a)(1), § 12(a)(2) is limited to liability of sellers and thus imposes a privity requirement. Once the privity requirement 

is satisfied, the plaintiff must establish only that there was a material misstatement or omission in the prospectus or oral communication. There is 

no requirement that the plaintiff prove reliance; it will be presumed.288

The plaintiff also need not have read the misstatement in question.289

However, if the plaintiff knew of the untruth or omission prior to purchase, the § 12(a)(2) claim should be dismissed.290

The defendant may also be absolved of liability if “he did not know, 

and in the exercise of reasonable care could not have known, of such untruth or omission.”291 Section 12(a)(2)’s “reasonable care” requirement 

imparts some sort of negligence standard, and the purchaser need not 

show any type of scienter on the seller’s part.292 Indeed, the § 12(a)(2) 

standard of reasonable care may impose a duty to investigate in some 

284. 15 U.S.C. § 77l(a)(2).

285. Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363 (5th Cir. 2001); In 

re Ultrafem, Inc. Sec. Litig., 91 F. Supp. 2d 678 (S.D.N.Y. 2000); Yuan v. Bayard Drilling 

Techs., Inc., 96 F. Supp. 2d 1259 (W.D. Okla. 1999) (particularity requirements do not 

apply to either § 11 or § 12(a)(2) claims).

286. See 1934 Act § 21D(b), 15 U.S.C. § 78u-4(b).

287. Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir.), cert. denied, 506 U.S. 934 

(1992); Sears v. Likens, 912 F.2d 889, 892–93 (7th Cir. 1990).

288. Currie v. Cayman Res. Corp., 835 F.2d 780 (11th Cir. 1988); Austin v. Loftsgaarden, 675 F.2d 168 (8th Cir. 1982); In re Conner Bonds Litig., [1988–1989 Transfer 

Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,969 (E.D.N.C. 1988).

289. Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980), cert. denied, 450 

U.S. 1005 (1981).

290. See Mayer v. Oil Field Sys. Corp., 803 F.2d 749 (2d Cir. 1986).

291. Id. at 755 (quoting 15 U.S.C. § 77l(2)).

292. See, e.g., Wigand v. Flo-Tek, 609 F.2d 1028 (2d Cir. 1979).
III. Regulating Distribution of Securities—Securities Act of 1933

71

circumstances.293 Certain factors can be used to determine whether the 

defendant exercised reasonable care: (1) the quantum of decisional and 

facilitative participation, such as designing the deal and contacting and 

attempting to persuade potential investors; (2) access to source material 

against which the truth of the representations could be tested; (3) relative 

skill in “ferreting out the truth”; (4) pecuniary interest in the transaction’s completion; and (5) the existence of a relationship of trust between 

the investor and the alleged seller.294

Unlike § 11 or Rule 10b-5, damages under § 12(a)(2), like those under § 12(a)(1), are limited to either rescission and return of purchase 

price or, if the purchaser no longer owns the security, damages based on 

the difference between the purchase price and sale price. As with § 11 

damages, damages under § 12(a)(2) will not include any decline in the 

value of the security that can be attributed to factors other than the material misrepresentation or omission in question.295

3. SEC Actions and Criminal Prosecutions: Section 17

Section 17(a) of the 1933 Act prohibits fraud, material misstatements, 

and omissions of fact in connection with the offer or sale of securities.296

Section 17(a) applies regardless of whether the securities are registered or 

exempt from registration under § 3. However, unlike its 1934 Act counterpart (Rule 10b-5), § 17(a) applies only to sales of and offers to sell se293. Sanders, 619 F.2d 1222.

294. Davis v. Avco Fin. Servs., Inc., 739 F.2d 1057 (6th Cir. 1984), cert. denied, 472 

U.S. 1012 (1985).

295. 1933 Act § 12(b), 15 U.S.C. § 77l(b).

296. Section 17(a) provides:

It shall be unlawful for any person in the offer or sale of any securities or any 

security-based swap agreement (as defined in section 206B of the GrammLeach-Bliley Act) by the use of any means or instruments of transportation or 

communication in interstate commerce or by the use of the mails, directly or 

indirectly—(1) to employ any device, scheme, or artifice to defraud, or (2) to 

obtain money or property by means of any untrue statement of a material fact 

or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, 

not misleading, or (3) to engage in any transaction, practice, or course of 

business which operates or would operate as a fraud or deceit upon the purchaser.

15 U.S.C. § 77q(a).
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72

curities. It covers activities of the offeror or seller, but not fraud by the 

purchaser. The Supreme Court has held that scienter must be shown in 

order to establish a violation of § 17(a)(1), but not for either § 17(a)(2) 

(the language of which was found “devoid of any suggestion whatsoever 

of a scienter requirement”) or § 17(a)(3) (which “focuses upon the effect 

of particular conduct on members of the investing public, rather than 

upon the culpability of the person responsible”).297 The vast majority of 

decisions hold that private plaintiffs do not have an implied remedy under § 17(a) of the 1933 Act.298

Section 17(b) prohibits disseminating information about a security 

without disclosing any consideration received or to be received, directly 

or indirectly, in connection with sales of the security. Like § 17(a), 

§ 17(b) applies to securities whether registered or exempt under § 3. Section 17(b) is designed to prevent the misleading impression of impartiality in certain recommendations. Section 17(b) has been held applicable 

even to periodicals receiving compensation for favorable recommendations, notwithstanding a challenge that such regulation violates First 

Amendment rights of free speech.299 It has also been held that § 17(b) is 

not limited to securities distributions but applies both to new and outstanding securities.300

Violations of § 17 may result in both criminal sanctions and an SEC 

civil suit. Although a few cases recognize an implied private right of action under § 17(a), the overwhelming majority of decisions do not.301 In 

fact, the nonexistence of an implied right under § 17(a) is so clear that at 

297. Aaron v. SEC, 446 U.S. 680, 697 (1980).

298. See 4 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 12.22 

(6th ed. 2009).

299. SEC v. Wall St. Publ’g Inst., Inc., 851 F.2d 365 (D.C. Cir. 1988), cert. denied, 489 

U.S. 1066 (1989).

300. Id. (relying on S. Rep. No. 73-47, at 4 (1933) and H.R. Rep. No. 73-85, at 6 

(1933)).

301. See, e.g., Schlifke v. Seafirst Corp., 866 F.2d 935 (7th Cir. 1989); Newcome v. 

Esrey, 862 F.2d 1099 (4th Cir. 1988); Krause v. Perryman, 827 F.2d 346 (8th Cir. 1987); 

Landry v. All Am. Assurance Co., 688 F.2d 381 (5th Cir. 1982). Additional cases are collected in 4 Hazen, supra note 298, § 12.22.
III. Regulating Distribution of Securities—Securities Act of 1933

73

least one court imposed sanctions under Federal Rule of Civil Procedure 

11 for claims brought under such a theory.302

4. Secondary Liability Under 1933 Act

a. Controlling-Person Liability

Both the 1933 and 1934 Acts provide for controlling-person liability. Section 15 of the 1933 Act imposes joint and several liability on controlling 

persons for the actions of persons under their control. The term control

(including the terms controlling, controlled by, and under common control 

with) means “the possession, direct or indirect, of the power to direct or 

cause the direction of the management and policies of a person, whether 

through the ownership of voting securities, by contract, or otherwise.”303

A controlling person is sometimes referred to as an affiliate.304 Section 15 

also provides that controlling-person liability will not be imposed if “the 

controlling person had no knowledge of or reasonable grounds to believe 

in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.” However, this “lack of knowledge” exception is generally narrowly construed and limited to the basic facts underlying the course of business; lack of knowledge of the particular transaction does not preclude controlling-person liability.305 The clear majority of the federal courts of appeals hold that statutorily imposed controlling-person liability does not preclude application of either the common302. Crookham v. Crookham, 914 F.2d 1027 (8th Cir. 1990) ($10,000 sanction for 

bringing suit under § 17(a) of the 1933 Act).

303. 17 C.F.R. § 230.405. See, e.g., United States v. Wolfson, 405 F.2d 779 (2d Cir. 

1968), cert. denied, 394 U.S. 946 (1969).

304. “An affiliate of, or person affiliated with, a specified person, is a person that 

directly, or indirectly through one or more intermediaries, controls or is controlled by, or 

is under common control with, the person specified.” 17 C.F.R. § 230.405.

305. S.F.–Okla. Petroleum Exploration Corp. v. Carstan Oil Co., 765 F.2d 962 (10th 

Cir. 1985). Likewise, controlling-person liability does not require the controlling person’s 

participation in the wrongful conduct. See, e.g., G.A. Thompson & Co. v. Partridge, 636 

F.2d 945 (5th Cir. 1981); Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985); Steinberg v. 

Ill. Co., 659 F. Supp. 58 (N.D. Ill. 1987). But see Durham v. Kelly, 810 F.2d 1500 (9th Cir. 

1987) (corporate president’s wife exercised some control but was not held liable, since she 

did not induce misstatements in question); Buhler v. Audio Leasing Corp., 807 F.2d 833 

(9th Cir. 1987) (broker–dealer not liable for failure to supervise off-book sales).
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74

law principle of respondeat superior or the agency concepts of actual or 

apparent authority.306

b. Aiding and Abetting Liability

Aside from the provisions on controlling-person liability, neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 expressly 

imposes liability on secondary participants in securities violations. The 

courts nevertheless applied common-law principles of aiding and abetting to reach many such offenders. Although there is scattered authority 

to the contrary, the vast majority of cases have held that aiding and abetting principles do not apply to broaden the range of defendants in private 

actions under §§ 11 and 12 of the 1933 Act. The Supreme Court has 

made it clear that there is no private remedy against aiders and abettors;307 however, every court of appeals that has faced the issue has recognized aiding and abetting as a proper basis for liability under the generalized antifraud provisions, which can give rise to SEC actions and criminal 

prosecutions under § 17(a).308 Congress reaffirmed the government’s 

306. See, e.g., Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990), cert. 

denied, 111 S. Ct. 1621 (1991); Henricksen v. Henricksen, 640 F.2d 880 (7th Cir.), cert. 

denied, 454 U.S. 1097 (1981); Paul F. Newton & Co. v. Tex. Commerce Bank, 630 F.2d 

1111 (5th Cir. 1980); Marbury Mgmt., Inc. v. Kohn, 629 F.2d 705 (2d Cir. 1980), cert. 

denied, 449 U.S. 1011 (1981); Commerford v. Olson, 794 F.2d 1319 (8th Cir. 1986) (decided under 1934 Act § 20, the equivalent controlling-person liability provision under 

Exchange Act); In re Atl. Fin. Mgmt., Inc., 784 F.2d 29 (1st Cir. 1986), cert. denied, 481 

U.S. 1072 (1987) (also decided under 1934 Act § 20). But see, e.g., Rochez Bros., Inc. v. 

Rhoades, 527 F.2d 880 (3d Cir. 1975); Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 

1981). A different rule applies, however, to actions complaining of insider trading. See

1934 Act § 21A(b)(1).

307. Cent. Bank of Denver v. First Interstate Bank of Denver, 508 U.S. 959 (1993) 

(rejecting aiding and abetting liability in private suit). See also, e.g., SEC v. Tambone, 597 

F.3d 436 (1st Cir. 2010) (underwriter not primary violator); Stoneridge Inv. Partners, 

LLC v. Scientific–Atlanta, Inc., 552 U.S. 148 (2008) (refusing to apply expansive definition of primary liability). There is no liability in a private suit unless the statements can be 

attributed to the defendant, and there thus is some basis for the plaintiff’s reliance on the 

defendant’s participation. See, e.g., Stoneridge, 552 U.S. 148; Affco Invs. 2001 LLC v. 

Proskauer Rose L.L.P., 625 F.3d 185 (5th Cir. 2010); Pac. Inv. Mgmt. Co. LLC v. Mayer 

Brown LLP, 603 F.3d 144 (2d Cir. 2010).

308. See, e.g., Cleary v. Perfectune, 700 F.2d 774 (1st Cir. 1983); Armstrong v. 

McAlpin, 699 F.2d 79 (2d Cir. 1983); Woodward v. Metro Bank of Dallas, 522 F.2d 84 
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75

ability to recognize aiding and abetting claims as part of the Dodd-Frank 

Act.309 Dodd-Frank also contained a mandate to study the question of 

whether to allow private claims against aiders and abettors.

There is broad agreement among the circuits on the elements necessary to establish aider and abettor liability. First, the court must find a 

primary violation of the securities laws.310 Second, the aider and abettor 

must be found to have a “general awareness” that his role was part of an 

overall plan of wrongdoing.311 Finally, the aider and abettor must have 

given knowing and substantial assistance to the person perpetrating the 

primary violation.312

The courts are split on whether a person can be held liable as an aider 

and abettor when her sole assistance was through silence and inaction. 

Some courts have held that “aider and abettor” liability can arise when 

the person remained silent with the conscious intent of furthering the 

fraud.313 Other courts have found aider and abettor liability for silence 

and inaction only where the person had an independent duty to disclose 

the securities violation.314 Alternatively, the Fifth Circuit has found aider 

(5th Cir. 1975); SEC v. Coffey, 493 F.2d 1304 (6th Cir. 1974), cert. denied, 420 U.S. 908 

(1975); Hochfelder v. Midwest Stock Exch., 503 F.2d 364 (7th Cir.), cert. denied, 419 U.S. 

875 (1974).

309. 15 U.S.C. § 77o(b), as added by the Dodd-Frank Wall Street Reform & Consumer Protection Act § 929M, Pub. L. No. 111-203, H.R. 4173, 111th Cong. (2d sess. 

2010).

310. See, e.g., Coffey, 493 F.2d at 1314. But see Kaliski v. Hunt Int’l Res. Corp., 609 F. 

Supp. 649 (N.D. Ill. 1985) (although “lulling” activities can constitute primary violation 

of securities laws, they are not sufficient to establish aiding and abetting liability).

311. See, e.g., Coffey, 493 F.2d at 1314. See also Buffo v. Graddick, 742 F.2d 592 (11th 

Cir. 1984); In re Gas Reclamation, Inc. Sec. Litig., 659 F. Supp. 493 (S.D.N.Y. 1987); Antinore v. Alexander & Alexander Serv., Inc., 597 F. Supp. 1353 (D. Minn. 1984).

312. See, e.g., Coffey, 493 F.2d at 1314. See also Kilmartin v. H.C. Wainwright & Co., 

580 F. Supp. 604 (D. Mass. 1984); SEC v. Rogers, 790 F.2d 1450 (9th Cir. 1986); Rudolph 

v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir. 1986), cert. denied, 480 U.S. 946 

(1987); Mishkin v. Peat, Marwick, Mitchell & Co., 658 F. Supp. 271 (S.D.N.Y. 1987).

313. See, e.g., IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980); Rochez Bros. v. Rhoades, 

527 F.2d 880 (3d Cir. 1975); Coffey, 493 F.2d 1304; Martin v. Pepsi-Cola Bottling Co., 639 

F. Supp. 931 (D. Md. 1986).

314. See, e.g., Kerbs v. Fall River Indus., Inc., 502 F.2d 731 (10th Cir. 1974); Quintel 

Corp., N.V. v. Citibank, N.A., 589 F. Supp. 1235 (S.D.N.Y. 1984); Dahl v. Gardner, 583 F. 
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and abettor liability when the aider and abettor either acted with the specific intention of furthering the fraud or had an independent duty to disclose the facts underlying the violation.315 In 2010, Congress clarified that 

reckless conduct is sufficient to sustain aiding and abetting liability.316

F. Securities Class Actions

Congress amended the Securities Act of 1933 and the Securities Exchange 

Act of 1934 in 1995 and again in 1998. The Private Securities Litigation 

Reform Act of 1995 and the Securities Litigation Uniform Standards Act 

of 1998—enacted in part to curb abusive securities litigation—

introduced requirements and procedures relating to the conduct of securities class-action litigation.

1. Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act of 1995 (PSLRA)317 implemented substantive changes relating to pleading, discovery, liability, and 

the awarding of fees and expenses in cases brought under the federal securities laws. The PSLRA reforms were an attempt to decrease frivolous 

securities class action lawsuits in federal courts by making it more difficult for shareholders to bring derivative suits based merely on allegations 

that subsequent stock prices were lower than predicted.

The PSLRA imposes qualifications on lead plaintiffs beyond those 

imposed for federal class actions generally. In particular, it creates a presumption in favor of the shareholder with the largest financial interest as 

lead plaintiff; this is designed to encourage the appointment of institutional investors as lead plaintiffs. Section 27 of the 1933 Act and § 21D of 

the 1934 Act318 require that a “lead plaintiff” be appointed as the representative party in all class-action suits, presumably to encourage substanSupp. 1262 (D. Utah 1984); SEC v. Nat’l Student Mktg. Corp., 457 F. Supp. 682 (D.D.C. 

1978).

315. See, e.g., Woodward v. Metro Bank of Dallas, 522 F.2d 84 (5th Cir. 1975).

316. 15 U.S.C. § 77o.

317. Pub. L. No. 104-67, 109 Stat. 737 (H.R. 1058, 104th Cong. (1995)).

318. 15 U.S.C. § 78u-4. See also § 27 of the Securities Act of 1933. 15 U.S.C. § 77z-1.
III. Regulating Distribution of Securities—Securities Act of 1933

77

tial investors (and institutional investors in particular319) to gain control 

of suits and discourage lawyer-driven suits.320 The lead plaintiff must file 

a sworn certification with the complaint stating that she (1) has reviewed 

the complaint; (2) did not purchase the securities to participate in the 

lawsuit or at the instruction of an attorney; (3) is willing to serve as the 

class representative; (4) has provided information on all personal transactions in the security that is the subject of complaint; (5) has identified all 

other securities actions within the past three years in which she has served 

as representative party; and (6) will not accept any payment beyond her

pro rata share in the suit. The lead plaintiff’s share of any recovery is to be 

determined on a pro rata basis of the final judgment or settlement. The 

lead plaintiff is prohibited from serving in a lead plaintiff capacity more 

than five times in three years.321 The trial court’s order appointing a lead 

plaintiff cannot be appealed on an interlocutory basis by disappointed 

would-be lead plaintiffs.322

A plaintiff filing a class action asserting a securities claim under the 

1934 Act is required to provide notice to potential class members in a 

widely circulated business publication or wire service within twenty days 

319. The preference for institutional investors as plaintiffs does not mean, however, 

that they will always prevail in their quest to act as lead plaintiff. See Netsky v. Capstead 

Mortg. Corp., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,020 (N.D. Tex. 

2000) (appointing group of investors rather than one of two institutional investors as lead 

plaintiff).

320. S. Rep. No. 104–98, at 11 (1995) (stating “[t]he Committee intends to increase 

the likelihood that institutional investors will serve as lead plaintiffs” and that “increasing 

the role of institutional investors in class actions will ultimately benefit the class and assist 

the courts”). See also H.R. Conf. Rep. No. 104–369, at 33 (1995) (stating amendments

were intended to “effectively discourage the use of professional plaintiffs”); S. Rep. No. 

104–98, at 10 (1995) (“‘One way of addressing this problem is to restore lawyers and clients to their traditional roles by making it harder for lawyers to invent a suit and then 

attach a plaintiff.’” (quoting testimony of Mark E. Lackritz)).

321. However, it has been held that the limit of five cases was not intended to apply 

to institutional investors, since the purpose of the Act was to encourage institutional investors to act as plaintiffs in securities class actions. See, e.g., In re McKesson HBOC, Inc. 

Sec. Litig., 97 F. Supp. 2d 993 (N.D. Cal. 1999) (selecting between one of two institutional 

investors seeking to become lead plaintiff).

322. Z-Seven Fund, Inc. v. Motocar Parts & Accessories, 231 F.3d 1215 (9th Cir. 

2000); Fla. State Bd. of Admin. v. Brick, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 90,758, 2000 WL 178416 (6th Cir. 2000) (unpublished op.).
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of filing a complaint.323 The notice must provide information about the 

claim and inform any potential class members that they may move to 

serve as lead plaintiff within sixty days of the publication of the notice. 

Not later than ninety days after the publication of the notice, the court 

must appoint a lead plaintiff based on factors that include (1) whether 

the plaintiff filed the complaint or made a motion in response to the notice; (2) which plaintiff has the largest financial interest in the suit; and 

(3) whether the plaintiff otherwise complies with Federal Rule of Civil 

Procedure 23 concerning class representation. Most courts permit multiple lead plaintiffs when appropriate.324

The PSLRA expressly permits courts to classify a number of individual plaintiffs as a “group” for the purposes of determining the largest 

shareholder for lead plaintiff status.325 Although the appointment of a 

group may not be commonplace, it is appropriate when the identity of 

interests required by the statute exists.326 Where there are multiple plaintiffs but different groups allege different securities law claims, the appointment of separate groups is appropriate.327 Alternatively, the court 

323. See Burke v. Ruttenberg, 102 F. Supp. 2d 1280 (N.D. Ala. 2000) (notice inadequate). Failure to give the required notice can result in disqualification as lead counsel. 

King v. Livent, 36 F. Supp. 2d 187 (S.D.N.Y. 1999).

324. See, e.g., Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52 (2d Cir. 

2000); In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992). See also 

In re Conseco, Inc. Sec. Litig., [2000–2001 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 91,234 (S.D. Ind. 2000) (appointing two municipal retirement funds as lead plaintiffs 

but rejecting investment management fund as lead plaintiff because it engaged in arbitrage strategies not representative of class); Saddleback Partners, Ltd. v. Hiatt, [1999–2000 

Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,051, 2000 WL 1182793 (S.D.N.Y. 2000) 

(sophistication of plaintiff did not render him atypical class representative; fact that plaintiff gave conflicting testimony in two depositions did not render him inadequate class 

representative).

325. See, e.g., In re Tyco Int’l Ltd. Sec. Litig., No. 00-MD-1335-B, 2000 WL 1513772 

(D.N.H. Aug. 17, 2000). See also Local 144 Nursing Home Pension Fund v. Honeywell 

Int’l, Inc., [2000–2001 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,261, 2000 U.S. Dist. 

LEXIS 16712 (D.N.J. Nov. 16, 2000) (appointing group of five largest institutional investors as lead plaintiff).

326. In re Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803 (N.D. Ohio 1999) (rejecting 

two groups but accepting third group as lead plaintiffs).

327. In re Nanophase Techs. Sec. Litig., [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,686, 1999 WL 965468 (N.D. Ill. 1999).
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79

may decide to accept the group that represents the largest aggregate losses 

from the alleged violations in question.328 Courts have held that an overly 

liberal interpretation of the group concept is contrary to the intent of the 

PSLRA in limiting lead plaintiffs.329 Accordingly, courts will not recognize 

a group as the largest shareholder for lead plaintiff purposes if the members of the group do not truly have an identity of interests.330 Where a 

member of a group is atypical of most class members, the entire group 

may be disqualified for certification as lead plaintiff.331

Issues also arise as to how to select the most appropriate lead counsel. 

For example, a conflict of interest will disqualify an attorney from serving 

as lead counsel. A lawyer may not be able to represent two different 

classes suing the same defendant but may represent two different classes 

in two different actions where each action is naming different defen328. In re Ribozyme Pharms., Inc. Sec. Litig., 192 F.R.D. 656 (D. Colo. 2000) (two 

competing groups qualified to serve as lead plaintiff; court selected group with larger 

aggregate loss).

329. Telxon, 67 F. Supp. 2d 803. See also Bowman v. Legato Sys., Inc., 195 F.R.D. 655 

(N.D. Cal. 2000) (subset of plaintiffs selected by lawyer did not qualify as group appropriate to act as lead plaintiff); Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999) 

(refusing to aggregate plaintiffs into group); In re Nice Sys., Ltd. Sec. Litig., 188 F.R.D. 206 

(D.N.J. 1999) (unpublished op.) (rejecting appointment of nine lead plaintiffs but certifying five lead plaintiffs as group); Switzenbaum v. Orbital Scis. Corp., 187 F.R.D. 246 (E.D. 

Va. 1999) (group of investors did not satisfy requirements for appointment as group to 

serve as lead plaintiff); In re Baan Co. Sec. Litig., 186 F.R.D. 214 (D.D.C. 1999) (agreeing 

with SEC’s contention that triumvirate of lead plaintiffs is good way to deal with unrelated investors, but refusing to appoint group of twenty investors); Tumolo v. Cymer, 

Inc., No. 98-CV-1599TW, 1999 U.S. Dist. LEXIS 22105 (S.D. Cal. Jan. 22, 1999) (refusing 

to appoint 339 investors as lead plaintiffs).

330. Sakhrani v. Brightpoint, Inc., 78 F. Supp. 2d 845 (S.D. Ind. 1999). See also Tyco, 

2000 WL 1513772 (appointing group of three substantial shareholders as lead plaintiffs); 

Burke v. Ruttenberg, 102 F. Supp. 2d 1280 (N.D. Ala. 2000) (group of 300 unrelated investors could not serve as lead plaintiff under PSLRA, but court appointed committee 

consisting of state pension fund’s investment manager and three individual investors as 

lead plaintiff); Takeda v. Turbodyne Techs., Inc., 67 F. Supp. 2d 1129 (C.D. Cal. 1999) 

(group of unrelated individuals not appropriate group; instead court appointed bona fide 

investor group as lead plaintiffs).

331. Seamans v. Aid Auto Stores, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 90,902 (E.D.N.Y. 2000) (one of three members of group was market-maker, and 

not typical class representative).
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80

dants.332Also, misconduct by lead counsel can result in disqualification.333

The PSLRA provides that “[t]he most adequate lead plaintiff shall, subject to the approval of the court, select and retain counsel to represent the 

class.”334 The court is thus given considerable discretion in determining 

whether the lead plaintiff’s choice of representative best suits the needs of 

the class.335 In exercising this discretion, courts should consider both the 

quality and the cost336 of the legal representation. As one court explained, 

“[i]t is reasonable to assume that given the opportunity, absent class 

members would try to secure the most qualified representation at the 

lowest cost.”337 Courts may also take into account a firm’s experience, 

size, and financial resources.338

332. See Dietrich v. Bauer, 192 F.R.D. 119 (S.D.N.Y. 2000).

333. Cf. Stearns v. Navigant Consulting Corp., 89 F. Supp. 2d 1014 (N.D. Ill. 2000) 

(co-lead counsel who contacted class members of another lead counsel “narrowly” 

avoided being disqualified).

334. 15 U.S.C. § 78u-4(a)(2)(A)(v). See also id. § 77z-1(a)(3)(B)(v).

335. See, e.g., Griffin v. GK Intelligent Sys., Inc., 196 F.R.D. 298 (S.D. Tex. 2000) 

(denying certification, since petitioning lead plaintiffs were neither typical nor representative of class); In re Cendant Corp. Litig., 182 F.R.D. 144, 149 (D.N.J. 1998) (“in contrast 

to the strictly defined procedures and considerations that prescribe the determination of 

lead plaintiff, here the Court’s approval is subject to the discretionary judgment that lead 

plaintiff’s choice of representative best suits the needs of the class”). Accord Sherleigh 

Assocs., LLC v. Windmere–Durable Holdings, Inc., 186 F.R.D. 669 (S.D. Fla. 1999). See 

also Koppel v. 4987 Corp., 191 F.R.D. 360 (S.D.N.Y. 2000) (lead plaintiff’s partial recall 

not sufficient to render him inadequate; his alleged animosity with one of the defendants 

did not disqualify him); Miller v. Material Scis. Corp., 31 Sec. Reg. & L. Rep. (BNA) 1007 

(N.D. Ill. 1999) (fact that plaintiff purchased shares from husband did not make her 

atypical so as to disqualify her as class-action plaintiff).

336. See, e.g., Tarica v. McDermott Int’l, Inc., [1999–2000 Transfer Binder] Fed. Sec. 

L. Rep. (CCH) ¶ 90,946, 2000 WL 377817 (E.D. La. 2000) (appointing co-lead counsel 

plus third firm as liaison counsel, provided arrangement did not result in higher legal 

fees).

337. Cendant Corp., 182 F.R.D. at 149. See also Raftery v. Mercury Fin. Co., No. 

97C624, 1997 WL 529553 (N.D. Ill. Aug. 7, 1997).

338. See, e.g., Wenderhold v. Cylink Corp., 191 F.R.D. 600 (N.D. Cal. 2000). A few 

courts in securities class actions have relied on a “free market” approach to counsel selection and have conducted an auction, soliciting bids from attorneys seeking to act as lead 

counsel. E.g., In re Lucent Techs., Inc. Sec. Litig., 194 F.R.D. 137 (D.N.J. 2000); In re Cendant Corp. Prides Litig., 98 F. Supp. 2d 602 (D.N.J. 2000); Wenderhold v. Cylink Corp., 

188 F.R.D. 577 (N.D. Cal. 1999); Sherleigh Assocs., 186 F.R.D. 669; Cendant Corp., 182 
III. Regulating Distribution of Securities—Securities Act of 1933

81

Section 21D(a)(6) of the Securities Act of 1934339 states that attorneys’ fees in class-action cases are limited to a reasonable amount, and 

that discretion in determining what is reasonable is left to the courts. 

Class-action settlements are subject to court approval, as is the allocation 

of attorneys’ fees out of the settlement fund. The PSLRA does not mandate a particular method of calculating attorneys’ fees.340 Attorneys’ fees 

may be calculated according to the lodestar approach—multiplying an 

attorney’s hours by a reasonable hourly fee and increasing the amount for 

any risk or other relevant factors.341

Section 21D(b)(3) of the 1934 Act342 provides that discovery be 

stayed during the pendency of a motion to dismiss or motion for summary judgment in order to alleviate discovery expenses of defendants.343

The stay is mandatory.344 However, the mandatory discovery stay does 

not apply to certification of the class.345 The certification may be decided 

before resolving a motion to dismiss. During a stay of discovery, the 

F.R.D. 144; In re Wells Fargo Sec. Litig., 156 F.R.D. 223 (N.D. Cal. 1994). See also, In re

Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190 (N.D. Ill. 1996).

339. 15 U.S.C. § 78u-4(a)(6). See also 15 U.S.C. § 77z-1(a)(6).

340. Powers v. Eichen, 229 F.3d 1249 (9th Cir. 2000) (§ 21D of 1934 Act does not 

mandate that fees be based on net recovery rather than gross amount).

341. See, e.g., Williams v. MGM–Pathe Commc’ns Co., 129 F.3d 1026 (9th Cir. 1997) 

(attorneys’ fees out of settlement fund should be based on entire settlement fund or on 

lodestar rather than class members’ claims against fund); In re F & M Distribs., Inc. Sec. 

Litig., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,621 (E.D. Mich. 1999) 

(approving fee award of $6,075,000 as 30% of settlement fund in light of “excellent performance” of attorneys). See also In re Cendant Corp. Prides Litig., 51 F. Supp. 2d 537 

(D.N.J. 1999) (awarding law firm 5.7% of stock acquisition rights available to class). Cf.

Wininger v. SI Mgmt., L.P., 33 F. Supp. 2d 838, 846–47 (N.D. Cal. 1998) (attorney’s advancing client costs of proxy solicitation to counteract alleged misleading proxy solicitation by defendant not part of attorneys’ fees within meaning of PSLRA).

342. 15 U.S.C. § 78u-4(b)(3).

343. S. Rep. No. 104–98, at 14 (1995) (finding that discovery costs often force defendants to settle securities class-action suits). The discovery stay is subject to two statutory 

exceptions: when particularized discovery is necessary to either preserve evidence or prevent undue prejudice to the moving party. 1934 Act § 21D(b)(3)(B).

344. SG Cowen Sec. Corp. v. U.S. Dist. Ct., 31 Sec. Reg. & L. Rep. (BNA) 1199 (9th 

Cir. 1999) (limited discovery order improper in light of mandatory stay of all discovery).

345. In re Diamond Multimedia Sys., Inc. Sec. Litig., [1997 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 99,561, 1997 WL 773733 (N.D. Cal. 1997).
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82

court may impose sanctions on defendants who willfully destroy evidence. Additionally, by virtue of § 21D(d), in suits for money damages 

where the plaintiff must establish that the defendant acted with a particular state of mind, the defendant may ask that written interrogatories be 

submitted to the jury as to each defendant’s state of mind at the time of 

the violation.346

Notice of final or proposed settlement agreements in class actions 

must be provided to class members.347 A summary of the agreement must 

appear on the cover page of the notice. The notice must also include the 

following: the average amount of damages per share that will be recovered; an explanation of attorneys’ fees and costs; the name, address, and 

telephone number of the lead counsel; and a statement outlining the reasons for settlement. As with class actions generally, courts will review settlements to determine fairness to class members.348

In private suits involving class-action claims, courts may require an 

undertaking from the attorneys for the plaintiff or defendant, the parties 

themselves, or both. Equitable principles may be used to ascertain 

whether to require an undertaking and to determine the relevant proportions.

In order to dissuade abusive litigation, § 21D(b)(1) of the 1934 Act349

directs courts to perform a mandatory review at the final adjudication of 

the action to determine whether any party or attorney violated Federal 

Rule of Civil Procedure 11(b). If review reveals any violation by an attorney or party, the Act directs the court to impose Rule 11 sanctions on the 

attorney or party unless the violator can establish a proper basis for the 

346. 15 U.S.C. § 78u-4(d).

347. See, e.g., Krangel v. Golden Rule Res., Inc., [1999–2000 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 91,025 (E.D. Pa. 2000) (notice adequate).

348. See, e.g., In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454 (9th Cir. 2000) (approving class-action settlement); Neuberger v. Shapiro, [1999–2000 Transfer Binder] Fed. Sec. 

L. Rep. (CCH) ¶ 91,061 (E.D. Pa. 2000) (approving settlement as reasonable); Krangel

(approving settlement); In re Blech Sec. Litig., [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,978, 2000 WL 661680 (S.D.N.Y. 2000) (same); In re Ikon Office Solutions, Inc. Sec. Litig., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,972 (E.D. 

Pa. 2000) (same).

349. 15 U.S.C. § 78u-4(b)(1).
III. Regulating Distribution of Securities—Securities Act of 1933

83

sanctions not being imposed. The court must give the attorney or party 

notice and an opportunity to respond.

In the event that the court finds a plaintiff or attorney has violated 

Rule 11 in filing a complaint, there is a rebuttable presumption in favor 

of awarding all attorneys’ fees and costs incurred in the action to the defendant. Similarly, when a party’s responsive pleading or dispositive motion violates Rule 11(b), there is a rebuttable presumption in favor of 

awarding attorneys’ fees and costs incurred as a direct result of the violation to the prevailing party. Once a Rule 11 violation has been found and 

the statutory presumptions come into play, the 1934 Act requires that the 

court give the violator an opportunity to offer rebuttal evidence in order 

to show that an award of attorneys’ fees and costs is unreasonable or that 

the Rule 11 violation was de minimis. If the rebuttal evidence is not persuasive, sanctions are to be imposed pursuant to the standards set forth 

in Rule 11. To warrant the imposition of sanctions, the complaint must 

have been frivolous.350 Once a party moves for the imposition of Rule 11 

sanctions, by virtue of the PSLRA a court cannot deny the motion without making explicit findings regarding compliance with Rule 11(b).

2. Securities Litigation Uniform Standards Act

The Securities Litigation Uniform Standards Act of 1998 (Uniform Standards Act or SLUSA)351 mandates that class actions involving publicly 

traded securities be brought in federal court.352 The preemptive provisions of SLUSA apply only to covered class actions involving “covered” 

350. See, e.g., Richter v. Achs, 174 F.R.D. 316 (S.D.N.Y. 1997) (sanctions denied under PSLRA even though plaintiff failed to identify any instance in which defendant allegedly violated securities laws; while claims were unconvincing, they were not frivolous). 

Compare, e.g., Inter-County Res., Inc. v. Med. Res., Inc., 49 F. Supp. 2d 682 (S.D.N.Y. 

1999) (Rule 10b-5 damage claim brought by person who was neither purchaser nor seller 

was frivolous and thus supported sanctions), with Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157 (2d Cir. 1999) (claim for injunctive relief by 

plaintiff who was neither purchaser nor seller was not frivolous, but Rule 10b-13 claim 

was frivolous).

351. Pub. L. No. 105-353, 112 Stat. 3227 (1998).

352. 15 U.S.C. § 78bb(f); 1933 Act § 16(f), 15 U.S.C. § 77p(f).
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securities under the 1934 Act.353 Covered securities under the Act are securities registered with the SEC and traded on the New York Stock Exchange, American Stock Exchange, the NASD National Stock Market, or 

other national markets designated by the SEC, as well as securities issued 

by investment companies registered under the Investment Company Act 

of 1940.354 The preemption applies to any class action involving misrepresentations, omissions, deception, or manipulation in connection with the 

purchase or sale of a covered security.355

SLUSA contains its own definition of a covered class action: a single 

lawsuit or group of joined or consolidated lawsuits for damages brought 

on behalf of more than fifty persons.356 SLUSA thus does not preclude 

individual actions, derivative suits,357 or suits on behalf of fifty or fewer 

persons from being brought in state court. Class actions by states or their 

political subdivisions, as well as class actions by state pension plans, are 

not subject to SLUSA’s preemptive effect.358 This exclusion requires that 

all class members fit within one of these categories so as to prevent private parties from circumventing the Act. Furthermore, SLUSA does not 

apply to investigations and enforcement actions by state securities ad353. 1934 Act § 27, 15 U.S.C. § 77aa. While jurisdiction over 1934 Act claims is exclusively federal, private actions under §§ 11 and 12 of the 1933 Act can be brought in 

either federal or state court. 1933 Act § 22(a), 15 U.S.C. § 77v(a).

354. 1933 Act § 16(f)(3), 15 U.S.C. § 77p(f)(3); 1934 Act § 28(f)(5)(E), 15 U.S.C. 

§ 78bb(f)(5)(E). This definition in turn refers to § 18 of the 1933 Act, 15 U.S.C. § 77r, 

which preempts those securities from state registration requirements.

355. 1934 Act § 28(f)(1), 15 U.S.C. § 78bb(f)(1) (defining class action or constructive 

class action as brought “by any private party alleging an untrue statement or omission of a 

material fact in connection with the purchase or sale of a covered security, or . . . that the 

defendant employed any manipulative or deceptive device or contrivance in connection 

with the purchase or sale of a covered security”). Accord 1933 Act § 16(b), 15 U.S.C. 

§ 77p(b).

356. 1934 Act § 28(f)(5)(B), 15 U.S.C. § 78bb(f)(5)(B); 1933 Act § 16(f)(2), 15 

U.S.C. § 77p(f)(2).

357. Derivative actions are expressly excluded from the category of covered class 

actions. 1934 Act § 28(f)(5)(C), 15 U.S.C. § 78bb(f)(5)(C); 1933 Act § 16(f)(3), 15 U.S.C. 

§ 77p(f)(3).

358. 1934 Act § 28(f)(3)(B), 15 U.S.C. § 78pp(f)(3)(B); 1933 Act § 16(d)(2), 15 

U.S.C. § 77p(d)(2).
III. Regulating Distribution of Securities—Securities Act of 1933

85

ministrators; and it does not apply to class actions seeking to enforce a 

contractual agreement under a trust indenture for a debt security.359

SLUSA preempts class actions based on state law causes of action for 

misrepresentation or fraud.360 The preemption also applies to covered 

class actions involving any liability under the 1933 Act361 (provided the 

class action involves fifty or more plaintiffs). Presumably simple breach 

of contract362 or conversion363 actions can be brought under state law. Of 

course, class actions involving securities that are not publicly traded may 

remain in state court.

SLUSA preserves state court actions brought in the issuer’s state of 

incorporation by shareholders challenging management’s statements or 

recommendations in connection with corporate transactions, claiming a 

breach of fiduciary duty, or asserting statutory appraisal rights.364 Often 

referred to as the “Delaware carve out”—although not expressly limited 

to Delaware—the preservation of these state law claims is designed to 

preserve remedies under state laws governing breaches of fiduciary duty 

and disclosures to existing shareholders in corporate transactions.

Any covered class action involving a covered security brought in state 

court is removable to federal court.365 The action will be remanded to 

state court only if it is determined that SLUSA’s preemptive provisions 

do not apply.366 Since a federal court’s decision to remand is jurisdic359. 1934 Act §§ 28(f)(3)(B), (C), 15 U.S.C. §§ 78pp(f)(3)(B), (C); 1933 Act 

§§ 16(d)(2), (3), 15 U.S.C. §§ 77p(d)(2), (3).

360. 1933 Act § 27(b)(4), 15 U.S.C. § 77z-1(b)(4); 1934 Act § 21D(b)(3), 15 U.S.C. 

§ 78u-4(b)(3).

361. 1933 Act § 22(a), 15 U.S.C. § 77v(a).

362. Green v. Ameritrade, Inc., 120 F. Supp. 795 (D. Neb. 2000) (breach of contract 

claim not preempted). In fact, the Uniform Standards Act explicitly excludes covered class 

actions brought to enforce a contractual agreement between the issuer and an indenture 

trustee. 1933 Act § 16(d)(3), 15 U.S.C. § 77p(d)(3); 1934 Act § 28(f)(3)(C), 15 U.S.C. 

§ 78u-4(f)(3)(C).

363. Burns v. Prudential Sec., 116 F. Supp. 2d 917 (N.D. Ohio 2000).

364. 1934 Act § 28(f)(3)(A), 15 U.S.C. § 78pp(f)(3)(A); 1933 Act § 16(d)(1), 15 

U.S.C. § 77p(d)(1).

365. 1934 Act § 28(f)(2), 15 U.S.C. § 78pp(f)(2); 1933 Act § 16(c), 15 U.S.C. 

§ 77p(c).

366. 1934 Act § 28(f)(4)(D), 15 U.S.C. § 78pp(f)(4)(D); 1933 Act § 16(d)(4), 15 

U.S.C. § 77p(d)(4). See, e.g., In re Lutheran Bhd. Variable Ins. Prods. Co., 105 F. Supp. 2d 
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86

tional, there is no right of appeal to a federal court of appeals.367 In addition SLUSA empowers a federal court to stay discovery in any state court 

action if deemed to aid in the federal court’s jurisdiction.368

1037 (D. Minn. 2000) (variable annuities were covered securities; McCarran-Ferguson 

Act, which prevents federal law from interfering with state insurance regulation, did not 

alter this fact, and thus claims were removed to federal court without remand to state 

court).

367. Kircher v. Putnam Funds, 547 U.S. 633, 643 (2006). The Court also held that 

the state court on remand is then free to make its own decision with regard to SLUSA 

preemption. The state court’s ruling would then be reviewable by the Supreme Court.

368. 1934 Act § 21D(b)(3), 15 U.S.C. § 78u-4(b)(3); 1933 Act § 27(b)(4), 15 U.S.C. 

§ 77z-1(b)(4). See, e.g., In re Bankamerica Corp. Sec. Litig., 95 F. Supp. 2d 1044 (D. Mo. 

2000) (staying state court class action that “threatened the orderly conduct of the federal 

case,” which represented more than twenty-six times the dollar amount in claims than 

state court proceeding that was stayed).
87

IV. Regulating Issuers, Securities Professionals, 

and Securities Markets—Securities Exchange 

Act of 1934

A. Scope of 1934 Act

The Securities Exchange Act of 1934 presents a broad umbrella of regulation. In addition to market and financial regulation, it imposes disclosure 

and other obligations on issuers of securities. The three principal targets 

of the 1934 Act are issuers, markets, and market professionals. Securities 

markets and market professionals are overseen directly by the SEC and by 

systems of self-regulation, which also are overseen by the SEC.

The 1934 Act has a much broader scope than the 1933 Act in its regulation of securities distributions—the 1934 Act’s scope includes regulation of day-to-day trading. The 1934 Act has an issuer registration requirement apart from the one found in the 1933 Act. Registration of securities is not triggered by a particular transaction (such as a public offering), but rather applies to virtually all publicly traded securities in the 

United States. The 1934 Act also regulates proxy solicitations, tender offers, other control-related transactions, and insider transactions involving 

companies that are registered under the Act. Registration under the 1934 

Act in turn triggers periodic reporting requirements. There are some instances in which issuers who do not have to register securities under the 

1934 Act will nevertheless be subject to its periodic reporting provisions. 

While most of the 1934 Act’s regulation applies only to registered and 

reporting companies, there are two important provisions that are not so 

limited: (1) the general antifraud provisions of § 10(b) and, in particular, 

SEC Rule 10b-5; and (2) the tender offer antifraud provision found in 

§ 14(e).

There are two jurisdictional bases for regulation of securities and the 

companies issuing the securities under the 1934 Act. The first basis of 

jurisdiction is triggered by use of an instrumentality of interstate commerce—this is the basis for jurisdiction under SEC Rule 10b-5 and 

§ 14(e) of the 1934 Act. The second basis for jurisdiction is found in the 

registration provisions of § 12 and the periodic reporting provisions of 

§§ 13 and 15(d).
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88

Section 12 of the 1934 Act requires registration of most publicly 

traded securities. Under § 12(a), any security that is traded on a national 

exchange must be registered under the 1934 Act.369 In addition to the 

New York and American stock exchanges (and the various regional exchanges), NASDAQ’s national stock market has been registered with the 

SEC as a national securities exchange since 2007. Section 12(a) covers 

exchange-traded equity securities (stock and securities convertible into 

stock), exchange-traded options (puts and calls),370 and exchange-traded 

debt securities (bonds). Section 12’s registration provisions further apply 

to equity securities that are publicly traded through NASDAQ,371 rather 

than on a more traditional stock exchange. Section 12(g)(1), as modified 

by SEC Rule 12g-1, requires registration of certain equity securities (i.e., 

stock and securities convertible into stock) that are not listed on a national securities exchange. Section 12(g)(1) applies on its face to companies that have a class of equity securities held by 500 or more shareholders of record372 and have more than $1 million in assets. However, the 

SEC narrows the number of companies subject to 1934 Act registration. 

Rule 12g-1 exempts an issuer if the company has less than $10 million in 

gross assets.373 The registration and consequent periodic reporting obligations cease if, on the last day of each of the issuer’s last three fiscal years, 

369. The 1934 Act’s registration requirement is set forth in § 12(g) and differs significantly from that of the 1933 Act. A corporation that has registered a class of securities 

under the 1934 Act will still have to register each particular offering of that class of securities under the 1933 Act.

370. Options are included in the definition of equity securities because options are 

convertible into equity securities.

371. For more background, see supra § I.D, Self-Regulation.

372. Section 12(a) and the applicable SEC rules count only the number of shareholders of record as listed on the company’s stock records. The computation does not look 

through to the true beneficial owners with respect to the millions of shares held by centralized depositaries or by brokerage firms in their street name.

373. There is an exemption from 1934 Act registration for securities of foreign issuers, over-the-counter American Depositary Shares, and American Depositary Receipts 

representing such securities. 1934 Act § 12(g)(3), SEC Rule 12g3-2. The exemption requires the issuer to annually furnish the SEC with all information that must be disclosed 

according to the laws of the issuer’s domicile. This exemption was modified in 1983 and is 

no longer available for NASDAQ-listed securities; however, securities qualifying prior to 

the modification retain their exempt status.
IV. Regulating Issuers, Securities Professionals, and Securities Markets—

Securities Exchange Act of 1934

89

the issuer (1) has had fewer than 300 shareholders of record of that class 

of securities or (2) has had assets not exceeding $10 million.

374 In such 

cases, the issuer may withdraw its registration.

Registration under the 1934 Act brings with it periodic disclosure 

obligations. Section 13 sets forth the periodic reporting requirements. 

The Act mandates quarterly public filings supplemented by interim filings based on certain triggering events or developments. The basic reports that must be filed with the SEC are Form 10-K, an annual report;375

Form 10-Q, a quarterly report;376 and Form 8-K, an interim “current report.”377 Form 8-K’s mandated interim reporting requirements formerly 

were quite limited378 but were significantly expanded by SEC rule making 

in the wake of a mandate contained in the Sarbanes-Oxley Act of 2002.379

Even with the expansion of reporting requirements, mandatory Form 8-

K interim disclosures are limited to a discrete set of events and circumstances. Absent a “line item” disclosure mandate in an SEC form, pub374. SEC Rule 12h-3, 17 C.F.R. § 240.12h-3.

375. 17 C.F.R. § 249.310.

376. Id. § 249.308a.

377. Id. § 249.308.

378. Prior to expansion in 2004, only the following items had to be disclosed on 

Form 8-K: (1) changes in control of the registrant (within fifteen calendar days of the 

change); (2) acquisition or disposition of a significant amount of assets, not in the ordinary course of business, by the issuer or any of its majority-owned subsidiaries (within 

fifteen calendar days of the event); (3) bankruptcy or receivership (within fifteen calendar 

days of the event); (4) change of certifying accountant (within five days of the event); 

(5) any other events not called for by this form but that the registrant deems important; 

(6) resignation of directors (within five days of the event); and (7) change in fiscal year 

(within fifteen calendar days of the decision).

379. Public Company Accounting Reform & Investor Protection Act of 2002, Pub. L. 

107-204, 116 Stat. 745, as codified in 18 U.S.C. §§ 1341, 1343, 1512, 1513, 3553, and 994. 

Those additional disclosure items include the following: entry into a material nonordinary course agreement; termination of a material non-ordinary course agreement;

creation of a material direct financial obligation or a material obligation under an offbalance sheet arrangement; triggering events that accelerate or increase a material direct 

financial obligation or a material obligation under an off-balance sheet arrangement; 

material costs associated with exit or disposal activities; material impairments; notice of 

delisting or failure to satisfy a continued listing rule or standard; transfer of listing; and 

nonreliance on previously issued financial statements or a related audit report or completed interim review (restatements).
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90

licly traded companies are not under an affirmative duty to disclose information until the next quarterly report. Nevertheless, companies frequently use Form 8-K for voluntary interim filings.

Some publicly held companies not required to register under § 12 of 

the 1934 Act are nevertheless subject to the periodic reporting requirements mentioned above. Section 15(d) of the 1934 Act provides that issuers having issued securities under a 1933 Act registration statement with 

more than 300 record holders of such securities are subject to 1934 Act 

requirements. Section 15(d) reporting companies are subject to a lower 

level of regulation than companies registered under the 1934 Act. Unlike 

companies registered under § 12 of the Act, § 15(d) reporting companies 

are not subject to the proxy regulations under § 14, the takeover and tender offer provisions of the Williams Act, or the insider trading and reporting provisions found in § 16.

B. Prohibition of Manipulative Activities

Three provisions of the 1934 Act expressly address manipulative practices. Section 9 deals with exchange-traded securities.380 Sections 10(b) 

and 15(c) give the SEC rule-making authority to define and thereby prohibit manipulative practices.381

Section 9(a) prohibits transactions entered into simultaneously 

where the purpose is to create a “misleading appearance of active trading.”382 It also prohibits any exchange-based transactions that give the 

artificial impression of active trading,383 as well as transactions entered 

380. 15 U.S.C. § 78i. 

381. Id. §§ 78j(b), 78o(c).

382. A “wash” sale is a fictitious sale where there is no change in beneficial ownership: It is a transaction without the usual profit motive and is designed to give the false 

impression of market activity when in fact there is none.

A “matched” order occurs when orders are entered simultaneously to buy and sell 

the same security. The mere fact that a broker crosses trades or enters into matched orders does not violate the 1934 Act. In fact, cross-trades can actually benefit the firm’s 

customers if the savings on commissions are passed on to the customers. However, the 

cross-trades become problematic when the cost savings are not passed on to the customer.

383. Wash sales and other manipulative acts create the appearance of liquidity that 

makes a stock more attractive.
IV. Regulating Issuers, Securities Professionals, and Securities Markets—

Securities Exchange Act of 1934

91

into for the purpose of depressing or raising the price of the securities. 

Prearranged trades as a manipulation can be used to set an artificially 

high price. Section 9 not only applies to securities transactions, it also 

applies to transactions involving security-based swap agreements. In addition, § 9(a)(6) empowers the SEC to promulgate rules prohibiting 

“pegging, fixing, or stabilizing” securities prices.384

Another type of manipulation covered by § 9 involves exchangetraded options, or put and call options.385 Section 9(b) gives the SEC rulemaking power over options transactions where there is no intent to follow through with the rights and obligations of the option with respect to 

the underlying security. The SEC has not imposed any substantive prohibitions, but rather has elected to deal with put and call options for securities by requiring an adequate disclosure document for purchasers and 

sellers.

384. The SEC addressed the problem of stabilization in Regulation M, 17 C.F.R. 

§§ 241.100–240.105. See Anti-Manipulation Rules Concerning Securities Offerings, Securities Act Release Nos. 33–7375 and 34–38067; IC–22412, 62 Fed. Reg. 520 (Jan. 3, 1997).

385. The anti-manipulation provisions relating to options do not apply to warrants 

(options issued by the issuer). Furthermore, the provisions are limited to options with 

regard to securities, not to be confused with futures contracts or options relating to commodities, which are regulated by the Commodities Futures Trading Commission.

A call option is a contract between a seller (the option writer) and a buyer under 

which the option buyer has the right to exercise the option and thereby purchase the underlying security at an agreed-on price (the “strike” or “exercise” price). The option will 

expire unexercised (and hence valueless) unless it is exercised within a specified time period, the last day of which is the expiration date. A put option, conversely, gives the option’s buyer the right to exercise the option by selling the underlying security. The putoption seller must purchase the underlying security at the agreed-on price if the option is 

exercised on or before the expiration date. If the strike price is “out of the money” in 

comparison with the price of the underlying security, so that it would not make economic 

sense to exercise the option, the option will simply expire unexercised. Option contracts 

can be used either for speculation or to hedge existing securities positions. See generally, 1 

Hazen, supra note 298, § 1.7; Thomas L. Hazen, Rational Investment, Speculation, or 

Gambling?—Derivative Securities and Financial Futures and Their Effects on the Underlying 

Capital Markets, 86 Nw. U. L. Rev. 987, 989–90 (1992).
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92

C. Shareholder Voting: Federal Regulation of Proxies and 

Proxy Solicitation

In addition to periodic reporting requirements, 1934 Act registrants are 

subject to the federal proxy rules established under § 14 of the Act. Although state corporate law governs shareholder voting rights generally, 

federal securities law regulates the proxy machinery of publicly held 

companies. There are four primary aspects of SEC proxy regulation. First, 

by virtue of § 14(a), there must be full and fair disclosure of all material 

facts with regard to any management-submitted proposals that will be 

subject to a shareholder vote. Second, material misstatements, omissions, 

and fraud in connection with the solicitation of proxies are prohibited, 

and the courts have recognized implied private remedies for injured investors.386 Third, the federal proxy regulation facilitates shareholder solicitation of proxies, since by virtue of Rule 14a-8 management is required not only to submit relevant shareholders’ proposals in its own 

proxy statements but also to allow the proponents to explain their position in the face of any management opposition. Fourth, the proxy rules 

mandate full disclosure in nonmanagement proxy materials, and thus are 

significant in control struggles and contested takeover attempts.

Under § 14 of the 1934 Act, whenever there is a proxy solicitation 

with regard to shareholder votes (or a consent to action) for holders of 

securities subject to § 12’s registration requirements, the solicitation must 

be in line with SEC disclosure requirements. Section 14(a) is limited to 

proxy solicitation materials and procedures. Accordingly, it does not apply if shareholder votes or consents by proxy are not solicited. When 

there is no proxy solicitation made by the issuer’s management, § 14(c) 

nevertheless requires management to mail a statement containing information similar to that required for a proxy solicitation to the shareholders in advance of any shareholders’ meeting.387

386. See, e.g., J.I. Case Co. v. Borak, 377 U.S. 426 (1964).

387. 15 U.S.C. § 78n(c). These informational requirements are set out in Regulation 

14C, 17 C.F.R. §§ 240.14c-1 to 240.14c-7, and Schedule 14C, 17 C.F.R. § 240.14c-101.
IV. Regulating Issuers, Securities Professionals, and Securities Markets—

Securities Exchange Act of 1934

93

The proxy rules govern disclosure but not voting mechanics or substantive voting rights.388 In Rules 14a-3 through 14a-12, the SEC sets 

forth the types of information that must be disclosed in proxy solicitations subject to the Act. The SEC distinguishes between the proxy389 and 

solicitation390 materials. All solicitations must be accompanied by or preceded by a written proxy statement containing the information required 

by Schedule 14A.391 Required disclosures include information about the 

person making the solicitation and details relating to the transactions in 

question. If the solicitation is made on the issuer’s behalf, the proxy 

statement must be accompanied or preceded by an annual report to security holders.392 The annual report must contain financial information as 

well as management’s analysis of operations.

Full disclosure regarding shareholder election of directors is part of 

the federal proxy regime. For example, all sources of financing behind the 

solicitation must be disclosed. Schedule 14A and Schedule 14B contain 

one of the more significant director election disclosure requirements—

disclosure of the nominee’s experience in office. Schedule 14B applies to 

solicitations made by persons other than the issuer. Nondisclosure of a 

director’s conduct in office may be a material omission with respect to a 

shareholder’s decision on how to cast her vote.393 As is the case with dis388. The mechanics of shareholder voting and the identification of proper matters 

for shareholder consideration are determined by state law.

389. Proxy is defined in Rule 14a-1(f) to include any shareholder’s consent or 

authorization regarding the casting of that shareholder’s vote. Requirements for the appropriate form of the proxy itself can be found in Rule 14a-4.

390. Solicitation, as defined in Rule 14a-1(l), includes the following: any request for a 

proxy; any request to execute or not to execute, or to revoke, a proxy; or any communication to shareholders reasonably calculated to result in the procurement, withholding, or 

revocation of a proxy. 17 C.F.R. § 240.14a-1(l). Rule 14a-2 lists the types of solicitations 

exempt from the proxy rules. 17 C.F.R. § 240.14a-2. Rule 14a-3 sets forth the types of 

information that must be included in proxy solicitations. 17 C.F.R. § 240.14a-3.

391. Rule 14a-3, 17 C.F.R. § 240.14a-3. See 17 C.F.R. § 240.14a-101. Five preliminary 

copies of the proxy statement, form of proxy, and any soliciting material must be filed 

with the SEC at least ten calendar days prior to the date definitive copies are sent or distributed to security holders. Rule 14a-6, 17 C.F.R. § 240.14a-6.

392. Rule 14a-3(b), 17 C.F.R. § 240.14a-3(b). See also Regulation 14C, which requires dissemination of the annual report in years when the registrant does not engage in 

a proxy solicitation.

393. Maldonado v. Flynn, 597 F.2d 789 (2d Cir. 1979).
Federal Securities Law

94

closures generally, the pertinent information relating to the composition 

of the board of directors394 and the directors’ conduct must be disclosed 

clearly and conspicuously.

The federal proxy rules also provide for shareholder access to information.395 Rule 14a-8, the shareholder proposal rule, tells management 

which shareholder proposals must be included in the proxy statement. In 

essence, any shareholder proposal that is proper for consideration under 

state law must be included in management’s proxy statement (along with 

a brief explanation of the shareholder’s reason for supporting the proposal’s adoption), provided the proposal is submitted to the issuer in a 

timely fashion. For one’s proposal to be included, a proponent must have 

owned, for at least one year, at least 1% of the company’s securities or 

$1,000 worth of the market value of such securities, and must continue to 

be a security holder through the date on which the shareholders’ meeting 

is held. The proposal submission must be timely under the requirements 

of Rule 14a-8(a)(3). Furthermore, a shareholder may submit only one 

proposal per year that qualifies for mandatory inclusion in management’s 

proxy statement. In addition to the proposal itself, the proponent may 

provide a supporting statement, subject to length limitations. The issuer 

may exclude certain proposals, even those filed properly and timely. For 

example, the issuer may exclude a proposal on the grounds that it is inconsistent with state law, that it relates to a personal grievance, or that it

is beyond the company’s power to accomplish.396 Management may exclude a shareholder proposal from its proxy statement on the basis of 

394. SEC v. Falstaff Brewing Corp., 629 F.2d 62 (D.C. Cir.), cert. denied, 449 U.S. 

1012 (1980) (proxy solicitation defective where fact that proxies sought by management 

for approval of stock sale would, in effect, transfer control of corporation to third party 

was buried in pages of minute print).

395. See Rule 14a-7, designed for nonmanagement persons intending to make a solicitation. 17 C.F.R. § 240.14a-7. Upon request, management must either supply a list of 

security holders or offer to mail the solicitation materials at a reasonable cost to the requesting party. The Seventh Circuit has held that violations of Rule 14a-7 mailing requirements can give rise to private rights of action. Haas v. Wieboldt Stores, Inc., 725 F.2d 

71 (7th Cir. 1984).

396. 17 C.F.R. §§ 240.14a-8(i)(1), (2), (4), (6). Proposals contradicting a proposal 

put forward by management may be omitted, as may duplicative proposals. 

Id. §§ 240.14a-8(i)(9), (11). If the proposal has been rendered moot, it may be excluded 

as well. Id. § 240.14a-8(i)(10).
IV. Regulating Issuers, Securities Professionals, and Securities Markets—

Securities Exchange Act of 1934

95

relevance or if it relates to the company’s ordinary business.397 However, 

if a proposal is valid under state law and is properly excludable under the 

SEC’s shareholder proposal rule, it must nevertheless be described in the 

issuer’s proxy statement.398

A shareholder proposal may be excluded if it relates to election to a 

corporate office. Under Rule 14a–8(i)(8), a proposal may be excluded if it 

“relates to an election for membership on the company’s board of directors or analogous governing body.” The proxy rules generally provide the 

ground rules for disclosures relating to contested elections, but, contrary 

to the views of many critics, the rules do not guarantee the insurgents 

access to management’s proxy statement. A shareholder proposal is not 

excludable simply because it relates to the election process but only if it 

relates to the election or removal of a person from office. After many 

years of debates within and without the SEC, and after several false starts, 

the SEC in August 2010 adopted proxy access for shareholder nominations, provided that certain conditions are met and the shareholder is not 

seeking control of the board.399 Shortly after the SEC adopted the proxy 

access rules, the U.S. Chamber of Commerce and the Business Roundtable filed suit claiming that the rule violates the First Amendment, and 

also that the rule is invalid because it is arbitrary and capricious.400 The 

SEC then granted the plaintiffs’ request for an administrative stay of the 

new rules pending resolution of the challenge to SEC rule making.401 The 

D.C. Circuit Court of Appeals invalidated the proxy access rule because 

397. 17 C.F.R. §§ 240.14a-8(i)(5), (7). Other grounds for exclusion include proposals 

that violate the proxy rules and that relate to dividends. Id. §§ 240.14a-8(i)(3), (13). Proposals may also be excluded if they are resubmissions and did not garner sufficient votes 

in previous years. Id. § 240.14a-8(i)(12). For discussion of all of the grounds for exclusion, see 3 Hazen supra note 298, § 10.8.

398. Schedule 14A, item 21, 17 C.F.R. § 240.14a-101.

399. See Facilitating Shareholder Director Nominations, Securities Act Release No. 

33-9136, Exchange Act Release No. 34- 62764, Inv. Co. Act Release No. IC-29384, 2010 

WL 3343532 (SEC Aug. 25, 2010).

400. Business Roundtable v. SEC, No. 10-1305 (D.C. Cir. filed Sept. 29, 2010). See 

Chamber, Roundtable Files Suit Challenging Proxy Access Rulemaking; Asks SEC for Stay, 

Sec. Law Daily (BNA) (Sept. 30, 2010).

401. In re Business Roundtable, Securities Act Release No. 33-9149, Exchange Act 

Release No. 34-63031, Inv. Co. Act Release No. IC-29456 (SEC Oct. 4, 2010) (order granting stay).
Federal Securities Law

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of the SEC’s failure to give a sufficient analysis of the rule’s economic impact.402

Rule 14a-9 embodies the general antifraud proscriptions applicable 

to proxy solicitations. The Supreme Court has repeatedly recognized an 

implied remedy for private parties seeking redress for violations of Rule 

14a-9’s antifraud provisions.403 In addition, other issues are litigated in 

the context of Rule 14a-9 actions, including standing, materiality, causation, the proper standard of liability, and damages.

Based on the clear implication of the language of Rule 14a-9,

404 in 

order to establish standing to sue, all a private plaintiff needs to show in a 

Rule 14a-9 action is that she was injured in connection with a proxy solicitation covered by the Exchange Act’s regulation.405 Courts have held 

that a shareholder has standing to challenge a misleading proxy statement 

by alleging direct injury notwithstanding the absence of her alleging actual reliance.406 All that is necessary is that the reliance of some shareholders on the misleading statement was likely to have affected how they

voted.

1. Materiality

A basic element of a claim based on one of the securities laws’ antifraud 

provisions is that the misstatements or omissions were “material” to the 

402. Business Roundtable v. SEC, 2011 WL 2936808 (D.C. Cir. 2011) (“Here the 

Commission inconsistently and opportunistically framed the costs and benefits of the 

rule; failed adequately to quantify the certain costs or to explain why those costs could not 

be quantified; neglected to support its predictive judgments; contradicted itself; and failed 

to respond to substantial problems raised by commenters.”).

403. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976); Mills v. Elec. AutoLite Co., 396 U.S. 375 (1970); J.I. Case Co. v. Borak, 377 U.S. 426 (1964).

404. 17 C.F.R. § 240.14a-9. 

405. See, e.g., Palumbo v. Deposit Bank, 758 F.2d 113 (3d Cir. 1985) (director has 

standing to bring suit under proxy rules); Ameribanc Investors Group v. Zwart, 706 F. 

Supp. 1248 (E.D. Va. 1989) (even issuer or target corporation has standing to sue under 

proxy rules); District 65, UAW v. Harper & Row Publishers, 576 F. Supp. 1468 (S.D.N.Y. 

1983) (plaintiff must be a shareholder at time of proxy solicitation).

406. See, e.g., Bradshaw v. Jenkins, [1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 91,645 (W.D. Wash. 1984). Cf. Atkins v. Tony Lama Co., 624 F. Supp. 250 (S.D. Ind. 

1985) (dismissing claim because allegations negated any possibility of reliance, a necessary 

element of fraud claim).
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transaction. The Supreme Court found the determination of “materiality” to be a mixed question of law and fact, and declared that

[a]n omitted fact is material if there is a substantial likelihood that a 

reasonable shareholder would consider it important in deciding how to 

vote. . . . Put another way, there must be a substantial likelihood that 

the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.407

This definition appears to have stood the test of time, having been 

adopted again by the Court in determining materiality in the context of a 

Rule 10b-5 action,408 and it was echoed in an SEC rule pertaining to materiality in the context of 1934 Act registration and reporting.409 This 

same materiality test is also applied to 1933 Act disclosure obligations (as 

well as to disclosures required under the other securities laws that are not 

discussed herein).

It is difficult to generalize with regard to issues of materiality, since 

the decisions are highly fact-specific. However, the cases do reflect, in 

large part, the common law of misrepresentation, which states that opinions, predictions, intentions, and mere statements of value are generally 

not actionable.410 Predictions, opinions, and projections will not be actionable unless they constitute a misrepresentation of fact.411 The Supreme Court has pointed out, however, that opinions of management 

407. TSC Indus., 426 U.S. at 449.

408. Basic, Inc. v. Levinson, 485 U.S. 224 (1988). The definition of materiality does 

not vary between proxy-related statements subject to § 14(a) and statements generally 

that would be subject to § 10(b) and Rule 10b-5.

409. Rule 12b-2, 17 C.F.R. § 240.12b-2.

410. See, e.g., Mendell v. Greenberg, 612 F. Supp. 1543 (S.D.N.Y. 1985), aff’d in part 

and rev’d in part, 927 F.2d 667 (2d Cir. 1991) (mere opinion is not actionable); Nutis v. 

Penn Merch. Corp., 610 F. Supp. 1573 (E.D. Pa. 1985), aff’d, 791 F.2d 919 (3d Cir. 1986) 

(failure to disclose that terms of proposed merger were “grossly unfair” held not actionable); Hahn v. Breed, 587 F. Supp. 1369 (S.D.N.Y. 1984) (expressions of opinions of future prospects held not actionable).

411. See, e.g., Krauth v. Exec. Telecard, Ltd., 890 F. Supp. 269 (S.D.N.Y. 1995). The 

“bespeaks caution” doctrine, discussed supra text accompanying notes 150–55, precludes 

liability for forward-looking statements made in good faith. 15 U.S.C. § 77z-2. See, e.g., 

Wielgos v. Commonwealth Edison, 892 F.2d 509 (7th Cir. 1989). See also Roots P’ship v. 

Land’s End, Inc., 965 F.2d 1411 (7th Cir. 1992).
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can be material facts in and of themselves.412 Complicating matters are 

the disclosures required in Management Discussion and Analysis concerning the significant trends management foresees for the company.413

Nondisclosure or inadequate disclosure of conflicts of interest frequently constitute material misrepresentations.414 However, in some contexts, nondisclosure of the directors’ motivations for supporting or opposing a particular transaction has been held not material so long as there 

was full disclosure of all relevant facts surrounding the transaction.415

2. Causation

In addition to materiality, establishing an actionable violation of the 

proxy rules requires the private plaintiff to establish causation. Causation 

under the proxy rules’ private right of action has been a somewhat elusive 

concept. A showing of cause in fact is the first step in establishing a sufficient causal nexus between the defendant’s conduct and the plaintiff’s 

injury.416 Once cause in fact has been established, it must be shown that 

the causal connection is sufficiently proximate in order to warrant recovery. In securities law, as with common-law fraud, there must be a direct 

causal connection between the act and the injury; collateral breaches of 

fiduciary duties will not be sufficient to state a claim.417 The Supreme 

Court stated that the proper test of causation in a Rule 14a-9 action is 

whether, upon full and fair disclosure, a reasonable shareholder’s voting 

412. Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) (management’s 

statement regarding fairness of transaction could be material fact and thus basis of proxy 

rule claim).

413. Reg. S–K, Item 303, 17 C.F.R. § 229.303.

414. See, e.g., Wilson v. Great Am. Indus., Inc., 855 F.2d 987 (2d Cir. 1988).

415. See, e.g., Kademian v. Ladish Co., 792 F.2d 614 (7th Cir. 1986); Morrissey v. 

Cnty. Tower Corp., 717 F.2d 1227 (8th Cir. 1983); Vaughn v. Teledyne, Inc., 628 F.2d 

1214 (9th Cir. 1980); Warner Commc’ns v. Murdoch, 581 F. Supp. 1482 (D. Del. 1984).

416. See, e.g., Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) 

(decided under Rule 10b-5).

417. See, e.g., Ketchum v. Green, 557 F.2d 1022 (3d Cir.), cert. denied, 434 U.S. 940 

(1977) (insufficient connection); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d 

Cir. 1974), cert. denied, 421 U.S. 976 (1975) (sufficient connection); In re Tenneco Sec. 

Litig., 449 F. Supp. 528 (S.D. Tex. 1978) (insufficient connection); Superintendent of Ins. 

v. Freedman, 443 F. Supp. 628 (S.D.N.Y. 1977), aff’d, 594 F.2d 852 (2d Cir. 1978) (insufficient connection).
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decision would likely have been affected.418 Alleged misstatements in 

connection with a shareholder vote that was not required to effectuate 

the transaction in question cannot form the basis of a private damage 

action.419

3. Culpability Required

Another issue in proxy rule litigation is the degree of culpability required 

to establish a defendant’s violation. Two courts of appeals have upheld 

private Rule 14a-9 claims based on negligence.420 Although a few courts 

have indicated that scienter is required in actions under Rule 14a-9,421 the 

Supreme Court’s ruling in Aaron v. SEC,

422 though decided under § 17(a) 

of the 1933 Act, seems to mandate that a showing of negligent conduct 

would suffice.

4. Remedies

Material misstatements and omissions in connection with a proxy solicitation can result in civil liability to shareholders who can show injury. In 

an appropriate case, a court may enjoin a shareholder meeting or any 

action voted on at that meeting when there have been significant violations of the proxy disclosure and filing requirements.423 Injunctive relief 

418. Mills v. Elec. Auto-Lite Co., 396 U.S. 375 (1970). See also TSC Indus., Inc. v. 

Northway, Inc., 426 U.S. 438 (1976).

419. Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991).

420. Herskowitz v. Nutri/Sys., Inc., 857 F.2d 179 (3d Cir. 1988), cert. denied, 489 U.S. 

1054 (1989); Wilson v. Great Am. Indus., Inc., 855 F.2d 987 (2d Cir. 1988). Accord Gillette Co. v. RB Partners, 693 F. Supp. 1266 (D. Mass. 1988); Fradkin v. Ernst, 571 F. Supp. 

829 (N.D. Ohio 1983).

421. See, e.g., Adams v. Standard Knitting Mills, Inc., 623 F.2d 422 (6th Cir.), cert. 

denied, 449 U.S. 1067 (1980).

422. 446 U.S. 680 (1980).

423. See, e.g., Condec Corp. v. Farley, 573 F. Supp. 1382 (S.D.N.Y. 1983) (no showing of irreparable injury; preliminary injunction denied); Citizens First Bancorp, Inc. v. 

Harreld, 559 F. Supp. 867 (W.D. Ky. 1982) (although plaintiff stated claim, preliminary 

injunction denied because of plaintiff’s failure to show that otherwise there would be 

irreparable injury).
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may also be secured in an SEC enforcement action,424 and in an appropriate case the SEC can refer the matter for criminal prosecution.425 However, it is difficult to unscramble eggs—because of the practical difficulties involved and hardships placed on innocent third parties, only rarely 

will a court set aside a transaction that has already been completed. In 

many cases, the inability of an aggrieved shareholder to secure injunctive 

relief makes the damage action the plaintiff’s only meaningful remedy. 

Calculation of damages in the proxy context is a much more amorphous 

process,426 since proxy rule violations do not always result in a sale of securities or some other readily identifiable reference point for computing 

damages. This, coupled with the paucity of cases on point, means that 

there is little guidance for assessing the prospects of a claim for damages 

in a proxy area not based on a transaction in shares or corporate assets 

(where dollar amounts may be more readily identifiable). The absence of 

much guidance from the courts results from the fact that in most cases 

the plaintiff either has been unsuccessful or has settled prior to a judgment on the merits.

D. Tender Offers and Takeover Bids: Williams Act

Tender offers are publicly announced offers to purchase the shares of a 

target company. During the 1960s the securities markets witnessed a substantial increase in the use of tender offers in lieu of the more conventional statutory merger as a means of effecting corporate combinations. 

The increased use of tender offers resulted in part from the fact that target companies subject to the Exchange Act’s reporting requirements were 

required to hold a shareholder vote and to comply with the Act’s proxy 

rules when participating in a statutory merger. The competitive atmosphere and vociferousness with which such takeover battles were waged 

became extreme in terms of both public and private ramifications. This 

climate led to the 1968 Williams Act, comprising amendments to the 

424. See, e.g., SEC v. May, 134 F. Supp. 247 (S.D.N.Y. 1955), aff’d, 229 F.2d 123 (2d 

Cir. 1956) (preliminary injunction granted in action against shareholders waging proxy 

battle).

425. See, e.g., United States v. Matthews, 787 F.2d 38 (2d Cir. 1986).

426. See, e.g., Mills v. Elec. Auto-Lite Co., 552 F.2d 1239 (7th Cir.), cert. denied, 434 

U.S. 922 (1977).
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1934 Act that were enacted to regulate these tender offers and takeover 

bids. The Williams Act is codified in §§ 13(d), 13(e), 14(d), 14(e), and 

14(f) of the 1934 Act.

Section 13(d) performs an important early warning function by putting investors and the target company’s management on notice of a possible impending takeover attempt. It requires the filing of a disclosure 

statement on Schedule 13D by any person (or group), other than the issuer, who directly or indirectly acquires beneficial ownership of 5% or 

more of a class of equity securities registered pursuant to § 12.427 Once a 

person has reached this 5% threshold, he or she has ten days in which to 

file the Schedule 13D,

428 unless a shorter filing window is provided by 

SEC rule making. As this book went to press, the SEC had not taken action to shorten the ten-day window. After the Schedule 13D filing, there 

is a ten-day moratorium on additional purchases.

As defined by § 13(d)(3), a person includes a “partnership, limited 

partnership, syndicate, or other group.” Accordingly, a Schedule 13D 

must be filed when members of a group aggregately acquire 5% of a class 

of equity securities subject to the 1934 Act’s reporting requirements. According to the Second Circuit, the determinative factor is whether a 

group holding securities has been established pursuant to an express or 

implied agreement, thus presenting the potential for a shift in control; no 

427. That disclosure must include (1) the background and identity of the person(s); 

(2) the source and amount of funds used to make the purchases; (3) the purpose of the 

purchases; (4) the number of shares beneficially owned; and (5) any contracts, arrangements, or understandings involving securities of the issuer. Some institutional investors 

may qualify for the short-form Schedule 13G. An issuer’s purchases of its own shares, 

directly or through an affiliate, are subject to similar disclosure requirements under 

§ 13(e).

428. While initially intended to prevent accidental violations of the securities laws, 

the ten-day window frequently is used for additional undisclosed acquisitions of the target 

company’s stock; there have been attempts to close this window. See, e.g., 15 Sec. Reg. & 

L. Rep. (BNA) 1156 (June 17, 1983) (a panel commissioned by the SEC recommended 

that the Schedule 13D filing be due in advance of the purchases); 16 Sec. Reg. & L. Rep. 

(BNA) 793 (May 11, 1984) (legislative proposals by the SEC to close the ten-day window); 

D’Amato Introduces Comprehensive Proposal for Tender Offer Reform, 19 Sec. Reg. & L. 

Rep. (BNA) 84 (Jan. 24, 1987).
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agreement to purchase further securities is necessary.429 In contrast, the 

Seventh Circuit requires more explicit evidence of a concerted effort to 

form a group. Under the Seventh Circuit’s approach, the group must 

have an agreement not only to exert control but also to acquire additional 

shares for the purpose of exerting control.430

A group may be deemed to exist when individual parties agree to act 

in concert to purchase additional shares, regardless of the absence of a 

common plan with respect to the target corporation beyond the additional share acquisitions.431 Formation of a group via an agreement 

among existing shareholders owning in the aggregate more than 5% of a 

class of equity securities will trigger the § 13(d) filing requirement even 

though no additional shares are to be purchased. Whether a failure in the 

Schedule 13D432 to disclose the existence of a group constitutes a material 

misstatement or omission depends on the facts of the case.433

Rule 13d-3 sets forth the SEC’s standards for determining who is a 

beneficial owner for purposes of § 13(d) and § 13(g)434 filing require429. GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971), cert. denied, 406 U.S. 910 

(1972) (finding that four shareholders constituted group). Accord Global Intellicom, Inc. 

v. Thomson Kernaghan & Co., [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,534, 

1999 WL 544708 (S.D.N.Y. 1999) (sufficient allegations that a number of investors constituted group); Strauss v. Am. Holdings, Inc., 902 F. Supp. 475 (S.D.N.Y. 1995) (allegation 

that one person was president and chief executive officer of one firm that was a shareholder and sole general partner of another was sufficient to allege group).

The Second Circuit held that the member’s agreement to acquire control is established by purchase that reaches the 5% threshold. Corenco Corp. v. Schiavone & Sons, 

Inc., 488 F.2d 207 (2d Cir. 1973). However, discussions by various persons of the possibility of entering into an agreement alone do not establish the formation of a group. Lane 

Bryant, Inc. v. Hatleigh Corp., 517 F. Supp. 1196 (S.D.N.Y. 1981).

430. Bath Indus. v. Blot, 427 F.2d 97 (7th Cir. 1970).

431. Mid-Continent Bancshares, Inc. v. O’Brien, [1982 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 98,734 (E.D. Mo. 1981).

432. 17 C.F.R. § 240.13d-101.

433. Compare SEC v. Savoy Indus., Inc., 587 F.2d 1149 (D.C. Cir. 1978), cert. denied,

440 U.S. 913 (1979), with Treadway Co. v. Care Corp., 638 F.2d 357 (2d Cir. 1980).

434. 15 U.S.C. §§ 78m(d), 78m(g). See, e.g., Stichting Phillips Pensionbonds A and B, 

SEC No-Action Letter, [1987–1988 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,668 

(Jan. 12, 1988) (foreign pension fund investing in regular course of its business and not 

with a view toward affecting control of target company qualified for Schedule 13G).
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ments. Section 13(d)(4) addresses the computation of the 5% threshold.435

Section 13(d)(6) exempts certain acquisitions from the filing requirements of §§ 13(d) and 13(g). The terms of § 13(d)(6) give the SEC 

the power to provide additional exemptions through rule making.436

Section 13(d)’s filing requirements are aimed at creeping acquisitions 

and open-market or privately negotiated large-block purchases. In contrast to § 13(d), § 14(d)’s filing requirements437 and § 14(e)’s general 

antifraud proscriptions438 are triggered by a tender offer.439 The term tender offer is not defined in the Williams Act. Both the courts and the SEC 

have construed the term broadly, providing a flexible definition. The SEC 

has suggested the following eight-factor test to determine whether a tender offer exists:

1. whether there is active and widespread solicitation of public 

shareholders;

2. whether there is solicitation for a substantial percentage of the issuer’s stock;

3. whether the offer to purchase is made at a premium over the 

prevailing market price;

4. whether the terms of the offer are firm rather than negotiable;

5. whether the offer is contingent on the tender of a fixed minimum 

number of shares;

6. whether the offer is open only for a limited period of time;

435. 15 U.S.C. § 78m(d)(4). 

436. Rule 13d-6 exempts a purchase whereby the purchaser becomes more than a 5% 

beneficial owner if the acquisition is made pursuant to preemptive subscription rights, 

provided that (1) an offering is made to all holders of securities of the same class; (2) the 

person acquiring securities does not acquire any additional securities other than through 

the pro rata share offering of preemptive rights; and (3) the acquisition is duly reported, if 

required, pursuant to § 16(a). 17 C.F.R. § 240.13d-6.

437. 15 U.S.C. § 78n(d). 

438. Id. § 78n(e). Unlike the other provisions of the Williams Act, § 14(e) is not limited to securities subject to the 1934 Act registration requirements. Thus, as is the case 

with SEC Rule 10b-5, § 14(e) and the SEC rules thereunder apply to transactions utilizing 

an instrumentality of interstate commerce. See 17 C.F.R. §§ 14e-1 through 14e-5.

439. Section 14(f) relating to disclosures about management turnover is not limited 

to tender offers. 15 U.S.C. § 78n(f). 
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7. whether the offerees are subject to pressure to sell their stock; 

and

8. whether public announcements of a purchasing program precede 

or accompany a rapid accumulation of stock.440

These are only broad guidelines. Hence, any predictability must be 

gleaned from the cases and SEC rulings.441 Cases involving both openmarket and privately negotiated stock purchases seem to turn on whether 

or not the “pressure-creating characteristics of a tender offer”442 accompany the transactions.443 Although the cases conflict, a number of decisions have held that most privately negotiated transactions are susceptible 

to categorization as tender offers. However, most privately negotiated 

purchases are not tender offers unless they subject the seller to undue 

pressure.444 When a privately negotiated attempt to take control of a 

440. The eight-factor test, which is not contained in an official SEC release, has 

evolved over a period of time and is discussed in Wellman v. Dickinson, 475 F. Supp. 783 

(S.D.N.Y. 1979), and Hoover Co. v. Fuqua Indus., Inc., [1979–1980 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 97,107 (N.D. Ohio 1979).

441. See, e.g., Holstein v. UAL Corp., 662 F. Supp. 153 (N.D. Ill. 1987) (holding poison-pill plan involving distribution of rights not tender offer); Beaumont v. Am. Can Co., 

621 F. Supp. 484 (S.D.N.Y. 1984), aff’d, 797 F.2d 79 (2d Cir. 1986) (cash option portion 

of merger with cash election feature not tender offer); In re Pain Webber, Jackson & 

Curtis, Inc., 15 Sec. Reg. L. Rep. (BNA) 131 (SEC Dec. 12, 1982) (block trade of 9.9% is 

tender offer); Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir. 1985) (five privately 

negotiated purchases and one open-market purchase not tender offer; transactions in 

question have been referred to as “end run” because they were preceded by tender offer 

that was withdrawn and then followed by second tender offer); SEC v. Carter Hawley 

Hale Stores, Inc., 760 F.2d 945 (9th Cir. 1985) (issuer’s open-market purchase program in 

response to third-party tender offer not tender offer subject to § 13(e)); Dyer v. E. Trust 

Co., 336 F. Supp. 890 (N.D. Me. 1971) (large block purchase of shares made without intent to obtain control not tender offer).

442. Ludlow Corp. v. Tyco Labs., Inc., 529 F. Supp. 62, 68 (D. Mass. 1981).

443. See also Zuckerman v. Franz, 573 F. Supp. 351 (S.D. Fla. 1983) (highly publicized cash merger proposal at premium above market price constituted tender offer); S-G 

Sec., Inc. v. Fuqua Inv. Co., 466 F. Supp. 1114 (D. Mass. 1978) (holding publicly announced intention to acquire substantial block of stock followed by rapid acquisition of 

28% of shares of target company is tender offer).

444. See, e.g., Cattlemen’s Inv. Co. v. Fears, 343 F. Supp. 1248 (W.D. Okla. 1972) 

(any privately negotiated purchase that interferes with shareholder’s “unhurried investment decision” and “fair treatment” of investors defeats protections of Williams Act and 
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company raises problems that the Williams Act is designed to cover, a 

tender offer may exist; but a review of the cases shows that this will rarely 

be the case.

Once an offer is deemed a tender offer, the offer is governed by various procedural provisions of the Williams Act. In general, § 13(e) and the 

rules promulgated thereunder regulate issuer tender offers, or “self tender 

offers,” and §§ 14(d), (e), and (f) and the rules promulgated thereunder 

regulate tender offers by third parties. The rules governing third-party 

tender offers and issuer tender offers are basically the same. There are six 

important requirements placed on tender offers by the Williams Act: 

(1) disclosure requirements; (2) rules regulating shareholder withdrawal 

rights; (3) the “pro rata” rule; (4) the “all holders” rule; (5) the “best 

price” rule; and (6) rules governing the duration of the tender offer. Most 

of these apply only to offers for securities registered under the 1934 Act 

(§§ 13(e) and 14(d) and applicable rules), but some of the federal tender 

offer regulations apply regardless of 1934 Act registration (§ 14(e) and 

applicable rules).

Section 14(d)(1) of the 1934 Act requires that all “tender offer material” for equity securities subject to the registration requirements of § 12 

must be filed with the SEC445 and accompanied by the appropriate disclosures. Section 14(d) requires disclosures of the type specified by Schedule 

13D, in addition to other information the SEC may require. As with 

Schedule 13D, the § 14(d) filings must be updated to reflect material 

changes and developments.446 Section 14(d) does not apply to an issuer’s 

is probably tender offer); In re G.L. Corp., [1979–1980 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 82,494 (Apr. 15, 1980) (offer for “all or none” purchase at premium may be 

tender offer); Wellman, 475 F. Supp. 783 (secret offers to twenty-eight of target company’s largest shareholders, giving each only from half-hour to overnight to decide, constituted tender offer). Cf. Kennecott Copper Corp. v. Curtis-Wright Corp., 584 F.2d 1195 

(2d Cir. 1978) (acquisition of nearly 10% of target company’s shares does not constitute 

tender offer where tender offeror and solicited shareholder agree on secrecy and private 

nature of transaction, and no high-pressure tactics used); Energy Ventures, Inc. v. Appalachian Co., 587 F. Supp. 734 (D. Del. 1984) (series of privately negotiated transactions 

not involving high pressure did not constitute tender offer).

445. Schedule TO is the appropriate form for filing tender offers under § 14(d). 17 

C.F.R. § 240.14d-100.

446. See, e.g., In re Revlon, Inc., [1986–1987 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 584006, Exchange Act Release No. 34-23320 (June 16, 1986) (finding violations 
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acquisition of its own shares—those transactions are covered by § 13(e),

which, by virtue of SEC rule making, imposes regulations for issuer tender offers that are comparable447 to Regulation 14D’s rules for third-party 

offers.

Under the Williams Act, shareholders have the right at certain times 

to withdraw their tendered shares from a tender offer. Section 14(d)(5) 

provides that all securities deposited pursuant to a tender offer may be 

withdrawn during the first seven days of the tender offer and at any time 

after sixty days from the date of the original tender offer. This has been 

extended by the SEC rules to permit tendered securities to be withdrawn 

at any time while the tender offer remains open.448 The rules also set out 

the proper form for notice of withdrawal.

The “pro rata” rule requires pro rata acceptance of shares tendered 

where the tender offer by its terms does not obligate the tender offeror to 

accept all shares tendered. This takes pressure off the target company’s 

shareholders who would otherwise have to make a quick decision should 

acceptance be on a first-come basis.

The “all holders” rule prohibits discriminatory tender offers that exclude one or more shareholders from participating.449 There is an exception to the all holders requirement when the tender offer is in compliance 

with a constitutionally valid state statute.450 Furthermore, in addition to 

reserving general exemptive power under the all holders rule,451 the SEC 

of Rule 14d-4 for failure to amend Schedule 14D-9 to reflect defensive merger negotiations).

447. See, e.g., Rule 13e-1, 17 C.F.R. § 240.13e-1.

448. 1934 Act § 14(d)(6), 15 U.S.C. § 78n(d)(6). The statutory period has been extended for the entire period of the tender offer by Rule 14d-8 for third-party tender offers 

and Rule 13e-4(f)(3) for issuer tender offers, 17 C.F.R. §§ 240.14d-8, 240.13e-4(f)(3).

449. Rule 14d-10(a)(1), 17 C.F.R. § 240.14d-10(a)(1) (third-party tender offers); 

Rule 13e-4(f)(8)(i), 17 C.F.R. § 240-13e-4(f)(8)(i) (issuer tender offers). These rules were 

promulgated after (and perhaps in response to) a Delaware decision that upheld a tender 

offer by an issuer that excluded a hostile tender offeror. Unocal Corp. v. Mesa Petroleum 

Co., 493 A.2d 946 (D. Del. 1985).

450. Rule 14d-10(b)(2), 17 C.F.R. § 240.14d-10(b)(2) (third-party tender offers); 

Rule 13e-4(f)(9)(ii), 17 C.F.R. § 240.13e-4(f)(9)(ii) (issuer tender offers).

451. Rule 14d-10(e), 17 C.F.R. § 240.14d-10(e); Rule 13e-4(g)(7), 17 C.F.R. 

§ 240.13e-4(g)(7).
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promulgated a specific but limited exemption for “odd-lot tender offers” 

by issuers.452

The “best price” rule states that the highest price paid to any tendering security holder must be paid to all tendering security holders.453 This 

requirement applies only to shares purchased during a single tender offer. 

As such, unlike state “fair price” statutes,454 it does not regulate twotiered offers consummated in two distinct steps. However, it can be important if a series of transactions are integrated and held to be parts of a 

single tender offer.455 The SEC best price rule does not prohibit differentiation in types of consideration. The different consideration need not be 

substantially equivalent in value so long as the tender offer permits each 

tendering security holder to select among the types of consideration offered.456 As is the case with the all holders rule, the SEC has the power to 

grant exemptions from the best price requirement.457

The Williams Act also prescribes minimum lengths for the duration 

of tender offers. A tender offer must remain open for at least twenty 

business days. This requirement applies even for tender offers for securi452. Rule 13e-4(g)(5), 17 C.F.R. § 240.13e-4(g)(5). An odd-lot offer is one limited to 

security holders owning less than a specified number of shares under 100. Within that 

group, however, both the “all holders” and “best price” requirements will apply to the 

terms of the odd-lot offer.

453. Rule 14d-10(a)(2), 17 C.F.R. § 240.14d-10(a)(2) (third-party tender offers); 

Rule 13e-4(f)(8)(ii), 17 C.F.R. § 240.13e-4(f)(8)(ii) (issuer tender offers).

454. See, e.g., Md. Code Ann., Corps. & Ass’ns §§ 3-602, 3-603 (1993).

455. See, e.g., Field v. Trump, 850 F.2d 938 (2d Cir. 1988), cert. denied, 489 U.S. 1012 

(1989) (upholding complaint that withdrawal of first tender offer was sham). Cf. Brill v. 

Burlington N., Inc., 590 F. Supp. 893 (D. Del. 1984) (December tender offer that was 

terminated and January tender offer addressed to same class of shareholders were two 

separate tender offers). See also § 14(d)(7) of the 1934 Act, which provides that whenever 

a person varies the terms of a tender offer or a request before the expiration thereof by 

increasing the consideration offered, the person making such an increase must pay to all 

persons tendering that same price whether or not the securities were tendered prior to the 

variation of the tender offer’s terms. 15 U.S.C. § 78n(d)(7).

456. Rule 14d-10(c), 17 C.F.R. § 240.14d-10(c) (third-party tender offers); Rule 13e4(f)(10), 17 C.F.R. § 240.13e-4(f)(10) (issuer tender offers).

457. Rule 14d-10(e), 17 C.F.R. § 240.14d-10(e); Rule 13e-4(g)(7), 17 C.F.R. 

§ 240.13e-4(g)(7).
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ties of target companies not registered under the 1934 Act.458 Any increase or decrease in the consideration offered under the tender offer 

triggers the requirement that the tender offer be open for ten business 

days from the date of change in consideration.459 Furthermore, notice of 

any “material” change in the terms of the offer must be made in a manner reasonably designed to inform shareholders of that change.460

When a tender offer is made for equity securities subject to the 1934 

Act’s reporting requirements, § 14(f) requires full disclosure of any 

agreements concerning the designation of new directors, unless the designation is made through a formal vote at a meeting of the securities 

holders.461 Contemplated management turnover, including any arrangement regarding the makeup of the majority of directors, also must be disclosed.462 The purpose of § 14(f)’s disclosure requirements is to ensure 

that shareholders and other investors are aware of any changes in management control that are to take place without a shareholder vote. The

required disclosures keep security holders apprised of all material information, including new directors’ backgrounds and their relationships 

with the issuer, both in terms of employment contracts and stock holdings.

In Schreiber v. Burlington Northern, Inc.,

463 the Supreme Court limited the thrust of § 14(e). Schreiber involved a claim that the defendant 

target company’s renegotiation of the terms of a tender offer was manipulative and therefore in violation of § 14(e). Rather than directly confront the issue of what constitutes “manipulative conduct,” the Court 

458. Rule 14e-1(a), 17 C.F.R. § 240.14e-1(a) (third-party tender offers); Rule 13e4(f)(1)(i), 17 C.F.R. § 240.13e-4(f)(1)(i) (issuer tender offers).

459. Rule 14e-1(b), 17 C.F.R. § 240.14e-1(b) (third-party tender offers); Rule 13e4(f)(1)(ii), 17 C.F.R. § 240.13e-4(f)(1)(ii) (issuer tender offers).

460. Rule 14d-4(c), 17 C.F.R. § 240.14d-4(c) (third-party tender offers); Rule 13e4(e)(2), 17 C.F.R. § 240.13e-4(e)(2) (issuer tender offers). The SEC has interpreted this to 

mean that a material change would require holding the offer open for at least five days 

from the date of notice, and for ten days where the change is as significant as a change in 

consideration of the percentage of securities sought.

461. 15 U.S.C. § 78n(f).

462. Rule 14d-4(c), 17 C.F.R. § 240.14d-4(c) (third-party tender offers); Rule 13e4(e)(2), 17 C.F.R. § 240.13e-4(e)(2) (issuer tender offers). See also Rule 14f-1, 17 C.F.R 

§ 240.14f-1 (requiring disclosure of change in majority of directors).

463. 472 U.S. 1 (1985).
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held that “without misrepresentation or nondisclosure, section 14(e) has 

not been violated.”464 In a rather unusual review of the section’s legislative history, the Court concluded that disclosure was the sole thrust of the 

section,465 in effect excising “manipulative conduct” from the terms of the 

statute. The ramifications of this decision, if overextended and literally 

applied, not only could eviscerate Regulation 14E as discussed below but 

also could carry over to § 10(b), on which § 14(e) is based. This could 

lead to the invalidation of some of the § 10(b) rules dealing with manipulative conduct. The Third Circuit, however, was reluctant to give Schreiber such an unwarranted broad reading.466

Although it is clear that the SEC may investigate suspected violations 

and bring enforcement actions, it is not entirely clear whether the Williams Act authorizes implied rights of action. In general, the courts seem 

to favor the existence of at least a limited implied remedy (for material 

misstatements or omissions) under § 14(e)’s antifraud provision. The 

availability of an implied remedy under the Williams Act’s filing requirements (§§ 13(d), 13(e), and 14(d)) is also significant. The cases are 

in conflict, but a number of decisions have held that the relevant provisions of §§ 13 and 14 themselves provide a basis for at least limited private relief. Courts seem more likely to grant injunctive relief467 than damages.468 The Supreme Court indicated in dicta that a target company may 

464. Id. at 12.

465. “Nowhere in the legislative history is there the slightest suggestion that Section 

14(e) serves any purpose other than disclosure . . . .” Id. at 11.

466. See, e.g., Polaroid v. Disney, 862 F.2d 987 (3d Cir. 1988) (upholding validity of 

“all holders” rule, which prohibits excluding shareholders from tender offer).

467. See, e.g., Conagra, Inc. v. Tyson Foods, Inc., 708 F. Supp. 257 (D. Neb. 1989); 

Morrison Knudsen Corp. v. Heil, 705 F. Supp. 497 (D. Idaho 1988); Schnell v. Schnall, 

550 F. Supp. 650 (S.D.N.Y. 1982); Berman v. Metzger, [1981 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 97,857 (D.D.C. 1981).

468. For a case holding that § 14(d)(7) can support a damage action, see Field v. 

Trump, 850 F.2d 938 (2d Cir. 1988), cert. denied, 489 U.S. 1012 (1989). See also Sanders v. 

Thrall Car Mfg. Co., 730 F.2d 910 (2d Cir. 1984), aff’g 582 F. Supp. 945 (S.D.N.Y. 1983); 

Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216 (4th Cir. 1980), cert. denied, 449 U.S. 1101 

(1981); Chromalloy Am. Corp. v. Sun Chem. Corp., 611 F.2d 240 (8th Cir. 1979); Liberty 

Nat’l Ins. Holding Co. v. Charter Co., 734 F.2d 545 (11th Cir. 1984). But see Am. Bakeries 

Co. v. Pro-Met Trading Co., [1981 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,925 
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have standing to complain of delays by a purchaser in filing a Schedule 

13D when the target company can show a resultant injury.469

Since these sections all apply to issuers subject to the 1934 Act’s registration and reporting requirements and involve mandatory filings with 

the SEC, other remedies for material misstatements may be available. For 

example, an investor injured by actual reliance on material misstatements 

in the mandatory filings may sue for damages under the express remedy 

provided in § 18(a) of the 1934 Act. Furthermore, any material misstatements or omissions that give rise to an injury in connection with the purchase or sale of a security will form the basis of a cause of action under 

Rule 10b-5. However, no private remedy appears to exist under Rule 10b5 for mere delay in making the required filing. Thus it is important to 

determine if an implied remedy exists under the Williams Act filing requirements.

E. Liabilities Under 1934 Act

The 1934 Act contains a number of sections creating private rights of action. In addition, the majority of federal securities litigation arises out of 

a few remedies that have been implied from criminal provisions of the 

Act. The discussion that follows examines the express and implied liability provisions according to their coverage.

1. Manipulation of Exchange-Traded Securities: Section 9(e)

Section 9 of the 1934 Exchange Act outlaws manipulative practices in 

connection with the trading of exchange-listed securities.470 It also provides a private remedy for investors injured by such prohibited manipulative conduct. Section 9 does not apply to securities traded in the overthe-counter markets.471 Manipulation of nonexchange-traded securities is 

(N.D. Ill. 1981); Gateway Indus., Inc. v. Agency Rent A Car, Inc., 495 F. Supp. 92 (N.D. 

Ill. 1980).

469. Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 60 (1975).

470. 15 U.S.C. § 78i. Section 9 also applies to transactions in security-based swap 

agreements even if not traded on an exchange.

471. Since 2006, the largest companies that were traded in the over-the-counter 

markets are now exchange-listed securities as a result of the recognition of the NASDAQ 

national stock market as a registered national securities exchange.
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prohibited by §§ 10(b) and 15(c), which do not contain an express private right of action.472 Manipulation is interpreted narrowly, not extending to many acts that effectively alter the price of a security. Although 

manipulation has the same meaning under each of the Exchange Act 

provisions, the Supreme Court has repeatedly stated that it is a “term of 

art” limited to certain types of transactions specifically designed to artificially affect the price of a security.473

Section 9(e)474 provides a private remedy in damages to any investor 

injured by conduct violating § 9 (conduct involving securities listed on a 

national exchange). In addition to costs and reasonable attorneys’ fees, 

the successful plaintiff is entitled to damages based on the difference between the actual value and the price as affected by the manipulative conduct. Liability under § 9(e) is expressly limited to persons “willfully” participating in the manipulative conduct. The plaintiff must also prove manipulative intent.475

The § 9(e) remedy has been described as follows:

To show a violation of section 9(a)(2) in a private suit under section 

9(e), a plaintiff must plead and prove that (1) a series of transactions in 

a security creating actual or apparent trading in that security or raising 

or depressing the price of that security, (2) carried out with scienter 

(3) for the purpose of inducing the security’s sale or purchase by others, 

(4) was relied on by the plaintiff, (5) and affected the plaintiff’s purchase or selling price.476

Although the foregoing test indicates that plaintiffs must prove actual 

reliance, and reliance on market price alone will not suffice, this limitation may be questionable in the face of the “fraud on the market” theory 

472. 15 U.S.C. §§ 78j(b), 78o(c). 

473. Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977); Ernst & Ernst v. Hochfelder, 

425 U.S. 185 (1976); Schreiber v. Burlington N., Inc., 472 U.S. 1 (1985).

474. 15 U.S.C. § 78(i)(e).

475. See Annotation, What Constitutes Willfulness or Manipulative Purpose So As To 

Warrant Imposition of Liability in Private Civil Action Based on Price Manipulation Provisions of Securities Exchange Act (15 USCS §§ 78i(a)(2), 78i(e)), 25 A.L.R. Fed. 623 (1975).

476. Ray v. Lehman Bros. Kuhn Loeb, Inc., 624 F. Supp. 16, 19 (N.D. Ga. 1984) 

(quoting Chemetron Corp. v. Bus. Funds, Inc., 682 F.2d 1149, 1164 (5th Cir. 1982), vacated on other grounds, 460 U.S. 1007 (1983)).
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of reliance.477 The fraud-on-the-market doctrine, which applies to actively traded securities, presumes reliance and shifts the burden of nonreliance to the defendant. Nevertheless, it is patently clear that even without 

this element, the § 9(e) remedy is a rather limited one. Market manipulation and deceptive practices are also regulated by §§ 10, 14(e), and 15(c).

2. False Filings and Other Misstatements

a. Section 18

Section 18 of the 1934 Act provides an express right of action for any investor injured by purchasing or selling securities while relying on a materially misleading statement or omission in a document required to be 

filed478 with the SEC. However, the usefulness of § 18 has been largely 

diminished by the courts’ “eyeball” test: The plaintiff must have actual 

knowledge of and must have relied on the materials filed with the SEC 

(or a copy thereof). That the plaintiff saw similar information in other 

documents prepared by the issuer is not sufficient.479 As a practical matter, civil liability for false SEC filings and false statements generally is 

more likely to be based on the implied remedy under SEC Rule 10b-5.

b. Rule 10b-5

The primary private remedy for fraud available under the 1934 Act is implied from SEC Rule 10b-5. No express provision in the securities laws 

prescribes civil liability for a violation of Rule 10b-5. However, as far back 

as 1946, the courts followed the normal tort rule that persons who violate 

a legislative enactment are liable in damages if they invade an interest of 

another person whom the legislation was intended to protect.480

477. See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224 (1988) (upholding fraud-on-themarket presumption of reliance in Rule 10b-5 actions).

478. The concept of a filed document is narrow. It is limited to forms such as the 10-

K, the 10-Q quarterly report, 8-K filings, and Schedule TO for tender offers, and it does 

not include other required disclosure documents, such as the annual report to shareholders sent under the mandate of the proxy rules. See Rule 14a-3(b), 17 C.F.R. § 240.14a3(b).

479. See, e.g., Ross v. A.H. Robins Co., 607 F.2d 545, 552 (2d Cir. 1979); Jacobson v. 

Peat, Marwick, Mitchell & Co., 445 F. Supp. 518, 525 (S.D.N.Y. 1977).

480. Kardon v. Nat’l Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946) (recognizing private remedy under SEC Rule 10b-5). The first decision to recognize an implied remedy 
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Rule 10b-5 was promulgated under § 10(b), which gives the SEC 

power to make rules prohibiting the use of “manipulative or deceptive 

device[s] or contrivance[s] . . . in connection with the purchase or sale of 

any security . . . .”481 Rule 10b-5 states:

It shall be unlawful for any person, directly or indirectly, by the use of 

any means or instrumentality of interstate commerce, or of the mails or 

of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to 

state a material fact necessary in order to make the statements made, in 

the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.

Rule 10b-5 applies to any purchase or sale by any person of any security. The fact that a security is exempt from 1933 or 1934 Act registration 

does not affect the applicability of Rule 10b’s proscriptions. The rule applies regardless of whether the security is registered under the 1934 Act 

and regardless of whether the company is publicly held or closely held. It 

applies even to government and municipal securities and, in fact, to any 

kind of entity that issues something that can be called a security. Because 

of this broad scope, Rule 10b-5 can be invoked in many situations. 

Transactions in foreign or domestic securities will only give rise to a private remedy if the transaction takes place in the United States.482 The 

Dodd-Frank Act attempts to preserve the SEC’s jurisdiction over foreign 

under § 17(a) of the 1933 Act was Osborne v. Mallory, 86 F. Supp. 869 (S.D.N.Y. 1949). 

Cf. Crookham v. Crookham, 914 F.2d 1027 (8th Cir. 1990) (no § 17(a) remedy).

481. Other rules authorized under this section include Rule 10b-3, addressing manipulation; Rules 10b5-1 and 10b5-2, dealing with insider trading; Rule 10b-9, dealing 

with conditional offerings of securities; Rule 10b-10, dealing with broker–dealer confirmations of securities transactions; Rule 10b-16, addressing requisite disclosure in margin 

transactions; Rule 10b-17, dealing with the untimely announcement of record dates; and 

Rule 10b-18, dealing with a company’s purchases of its own shares. 17 C.F.R. §§ 240.10b3, 240.10b5-1, 240.10b5-2, 240.10b-9, 240.10b-10, 240.10b-16, 240.10b-17, & 240.10b-18.

482. See Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869 (2010).
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transactions in which there is substantial conduct or impact in the United 

States.483

Of the three separate clauses in Rule 10b-5 (above), clause (c) is generally assumed to have the broadest scope. There are five principal elements of this type of Rule 10b-5 claim: the plaintiff must show (1) fraud 

or deceit (2) upon any person (3) in connection with (4) the purchase or 

sale (5) of any security.

One of the requirements for proving the element of fraud is scienter.484 The scienter standard applies under Rule 10b-5 regardless of 

whether the action is a private damage action or an enforcement action 

brought by the SEC.485 Reckless conduct is sufficient to satisfy the scienter 

requirement so long as there is a strong inference of recklessness.486

In suits involving money damages predicated on proof that a defendant acted with a certain state of mind, plaintiffs must plead with particularity that the defendant acted with such state of mind with respect to 

each act or omission.487 Plaintiffs also must provide facts that indicate a 

“strong inference” that a defendant acted with a particular state of 

483. As amended, the jurisdictional provisions of the securities laws provide that the 

SEC can pursue securities fraud for “conduct within the United States that constitute[s]

significant steps in furtherance of the violation, even if the securities transaction occurs 

outside the United States and involves only foreign investors” as well as “conduct occurring outside the United States that has a foreseeable substantial effect within the U.S.”

Dodd–Frank Wall Street Reform & Consumer Protection Act § 929P(b), Pub. Law 111–

203, H.R. 4173, 111th Cong. (2d sess. 2010), adding 15 U.S.C.A. §§ 77v(c), 78aa(b), 80b–

14(b).

484. Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).

485. Aaron v. SEC, 446 U.S. 680 (1980).

486. Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 323 (2007) (“in determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the court 

must take into account plausible opposing inferences”). See, e.g., Glazer Capital Mgmt. LP 

v. Magistri, 549 F.3d 736 (9th Cir. 2008). See also, e.g., S. Ferry LP, No. 2 v. Killinger, 542 

F.3d 776 (9th Cir. 2008); Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 

(9th Cir. 2008).

487. 1934 Act § 21D(b), 15 U.S.C. § 78u-4(b). See, e.g., Griffin v. GK Intelligent Sys., 

Inc., 87 F. Supp. 2d 684 (S.D. Tex. 1999); Note, A Case-by-Case Approach to Pleading 

Scienter Under the Private Securities Litigation Reform Act of 1995, 97 Mich. L. Rev. 2265 

(1999). There is no parallel provision in the 1933 Act’s version of the PSLRA.
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mind.488 A “reasonable inference” of scienter is not sufficient.489 Although 

the inference must be strong and not merely a reasonable one, scienter 

may be inferred from circumstantial evidence.490

To withstand the scrutiny imposed by the Private Securities Litigation Reform Act of 1995, the inference of scienter must be both reasonable and strong.491 The circuits are split on the severity of the scienter 

pleading requirements imposed by the PSLRA: Some courts have held 

that allegations of motive and opportunity can satisfy the specificity requirement when pleading scienter.492 Other courts have held that motive 

and opportunity alone are not sufficient to establish scienter.493

Any statement reasonably calculated to affect the investment decision 

of a reasonable investor will satisfy the rule’s “in connection with” requirement.

494 The Supreme Court has taken a broad view of what types of 

488. See, e.g., Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (PSLRA did not heighten 

Second Circuit requirement; it merely added particularity requirement).

489. Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999). See also, e.g., In re

Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997).

490. Tellabs, 551 U.S. at 323.

491. See, e.g., Novak, 216 F.3d at 316; Coates v. Heartland Wireless Commc’ns, Inc., 

100 F. Supp. 2d 417 (N.D. Tex. 2000). For full discussion of the PSLRA, see supra text 

accompanying notes 317–50.

492. See, e.g., EP Medsystems, Inc. v. EchoCath, Inc., 255 F.3d 865 (3d Cir. 2000); 

Novak, 216 F.3d 300. See also In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999) 

(upholding complaint alleging motive and opportunity); Press v. Chem. Inv. Servs. Corp., 

166 F.3d 529 (2d Cir. 1999) (same).

493. Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th Cir. 1999) (particularity requirement means that plaintiff must allege severe recklessness; alleging motive and opportunity alone will not suffice); In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 988 (9th 

Cir. 1999), aff’g 970 F. Supp. 746 (N.D. Cal. 1997) (PSLRA requires deliberate recklessness; motive, opportunity, and nondeliberate recklessness may provide some evidence of 

intentional misconduct, but standing alone, not sufficient). See also Weber v. Contempo 

Colours, Inc., 105 F. Supp. 2d 769 (W.D. Mich. 2000) (scienter not established by allegations of motive and opportunity); Dalarne Partners, Ltd. v. Sync Res., Inc., 103 F. Supp. 

2d 1209 (C.D. Cal. 2000) (scienter not adequately pleaded under Silicon Graphics); In re

Paracelsus Corp. Sec. Litig., 61 F. Supp. 2d 591 (S.D. Tex. 1998) (showing motive and 

opportunity alone not sufficient).

494. See, e.g., Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000) ( “in connection with” requirement could be satisfied by proving materiality and dissemination to 

public in manner upon which reasonable investor would rely); In re Carter–Wallace, Inc. 

Sec. Litig., 150 F.3d 153 (2d Cir. 1998) (technical detailed advertisements in sophisticated 
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conduct can be characterized as “in connection with” the purchase or sale 

of a security. In SEC v. Zandford,

495 a stockbroker embezzled the proceeds 

of a securities transaction. The Fourth Circuit held that this embezzlement was not in connection with the purchase or sale of securities simply 

because the cash that was taken represented the proceeds of a securities 

transaction. The Supreme Court reversed, finding a sufficient connection. This decision supports a continued expansive approach to the “in 

connection with” requirement.496

To have standing to sue, a Rule 10b-5 plaintiff in a private damages 

action must have been either a purchaser or seller of the securities that 

form the basis of the material omission, misstatement, or deceptive conduct.497 In Blue Chip Stamps v. Manor Drug Stores,

498 the plaintiff had a 

right to purchase the securities in issue under an antitrust consent decree, 

but refrained on the basis of allegedly misleading statements made by the 

defendants. The Supreme Court held that this would-be purchaser could 

medical journals could be found to be made “in connection with” securities transaction); 

Pelletier v. Stuart-James Co., 863 F.2d 1550 (11th Cir. 1989) (fraudulent scheme need not 

relate to “investment value” of security); Ellis v. Merrill Lynch & Co., 664 F. Supp. 979 

(E.D. Pa. 1987) (upholding Rule 10b-5 claim challenging broker’s system for disbursing 

proceeds from sale); Foltz v. U.S. News & World Report, Inc., 627 F. Supp. 1143 (D.D.C. 

1986) (sufficient causal connection based on alleged misstatements dissuading employees 

from delaying retirement, which triggered sale of stock under stock bonus plan); SEC v. 

Tex. Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969) 

(misstatements in corporate press release were made “in connection with” purchases and 

sales made by shareholders in open market, and violated Rule 10b-5, even though corporation itself was not buying or selling shares).

495. 535 U.S. 813 (2002).

496. See also United States v. O’Hagan, 521 U.S. 642 (1997) (finding lawyer guilty of 

insider trading); Carpenter v. United States, 484 U.S. 19 (1987) (taking broad view of 

Mail Fraud Act).

497. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). See also Wharf 

(Holdings) Ltd. v. United Int’l Holdings, 532 U.S. 588 (2001) (plaintiff could challenge 

oral option to purchase securities under Rule 10b-5).

Although the law of some states may allow someone who refrained from selling a 

security to make a fraud claim (see, e.g., Small v. Fritz Cos., 65 P.3d 1255 (Cal. 2003)), if 

brought as a class action with more than fifty class members, the claim will be preempted 

by federal law, which does not allow such a suit. Dabit v. Merrill Lynch, Pierce, Fenner & 

Smith, Inc., 547 U.S. 71 (2006).

498. 421 U.S. 723 (1975).
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not state a Rule 10b-5 cause of action. It seems apparent that, likewise, 

mere “would-be” sellers cannot raise Rule 10b-5 claims.499 The courts 

have generally assumed that it is not necessary for the defendant to have 

been a purchaser or seller of securities in order to have violated Rule 10b5.500

Courts have broadly construed “purchase or sale.” Share exchanges 

or cash-out transactions pursuant to a corporate merger or other business combination will ordinarily constitute purchases and sales under 

Rule 10b-5.501 Most courts also allow a remedy for a corporation for certain transactions, including corporate repurchases of its own shares at an 

inflated price or an additional issuance of corporate shares on an unfavorable basis502 (although a share exchange or merger with a shell company undertaken merely for “corporate restructuring” has been held not 

to constitute a purchase or sale under Rule 10b-5503). A corporation’s 

repurchase of its own shares or an additional issuance of its shares may 

also give rise to a shareholder derivative claim.504

A purchase or sale pursuant to a tender offer can form the basis of a 

Rule 10b-5 claim. A pledge of securities is generally held to be a sale sub499. In fact, this was the prevailing view even before Blue Chip Stamps. See, e.g., Sargent v. Genesco, Inc., 492 F.2d 750 (5th Cir. 1974); Greenstein v. Paul, 400 F.2d 580 (2d 

Cir. 1968); Jensen v. Voyles, 393 F.2d 131 (10th Cir. 1968).

500. See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224 (1988) (upholding liability for 

misleading statement but not directly addressing whether defendant’s not being purchaser or seller precluded liability); Blue Chip Stamps, 421 U.S. 723 (imposing purchaser/seller standing requirement on plaintiff).

501. Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977), cert. denied, 434 U.S. 1069 

(1978); Mader v. Armel, 402 F.2d 158 (6th Cir. 1968), cert. denied, 394 U.S. 930 (1969); 

Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir.), cert. denied, 389 U.S. 977 (1967).

502. See, e.g., Ala. Farm Bureau Mut. Cas. Co. v. Am. Fid. Life Ins. Co., 606 F.2d 602 

(5th Cir. 1979), cert. denied, 449 U.S. 820 (1980) (repurchase of shares); Bailes v. Colonial 

Press, Inc., 444 F.2d 1241 (5th Cir. 1971) (issuance of shares); Ruckle v. Roto Am. Corp., 

339 F.2d 24 (2d Cir. 1964) (issuance of shares); Hooper v. Mountain States Sec. Corp., 

282 F.2d 195 (5th Cir. 1960), cert. denied, 365 U.S. 814 (1961) (issuance of shares). Cf.

Smith v. Ayers, 845 F.2d 1360 (5th Cir. 1988) (shareholder suing in individual capacity

and complaining of corporation’s issuance of shares lacked Rule 10b-5 standing).

503. In re Penn Cent. Sec. Litig., 494 F.2d 528 (3d Cir. 1974).

504. See Basic, 485 U.S. 224; Blue Chip Stamps, 421 U.S. 723.
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ject to a Rule 10b-5 claim,505 although there is some disagreement on this 

point.506 A secured creditor who is injured because of a foreclosure sale of 

securities has been held to have standing to sue under Rule 10b-5.507

Notwithstanding the requirement that, in a private right of action, 

the plaintiff has been a purchaser or seller, there is no comparable requirement for the defendant. Accordingly, a defendant who disseminates 

a materially misleading statement can be held liable even though the defendant did not purchase or sell securities.508 In a sharply divided five-tofour decision, the Supreme Court held that primary liability under Rule 

10b-5 requires that the defendant made the statement in question, and it 

is not sufficient that the defendant played a role in creating the misstatement.509 As discussed more fully below, aiders and abettors can be held 

accountable in government actions but not in private damage actions.510

As noted earlier, for a misstatement or omission to be actionable under Rule 10b-5, it must be material. The Supreme Court has defined materiality in terms of the type of information that a reasonable investor 

would consider significant in making an investment decision.511 The materiality of a particular item is determined within the total mix of information that is publicly available. Because materiality questions are highly 

fact-specific, judgment on the pleadings or summary judgment will rarely 

be appropriate.512 The Supreme Court recently reaffirmed its long-held 

505. E.g., Madison Consultants v. FDIC, 710 F.2d 57 (2d Cir. 1983); Mansbach v. 

Prescott, Ball & Turben, 598 F.2d 1017 (6th Cir. 1979). See also Rubin v. United States, 

449 U.S. 424 (1981) (decided under § 17(a) of 1933 Act).

506. See, e.g., Lincoln Nat’l Bank v. Herber, 604 F.2d 1038 (7th Cir. 1979); Nat’l Bank 

v. All Am. Assurance Co., 583 F.2d 1295 (5th Cir. 1978).

507. See, e.g., Falls v. Fickling, 621 F.2d 1362 (5th Cir. 1980); Bosse v. Crowell Collier 

& MacMillan, 565 F.2d 602 (9th Cir. 1977).

508. See Basic, 485 U.S. 224 (upholding claim against corporation for materially 

misleading statement).

509. Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, 2011 WL 

2297762 (U.S. June 13, 2011).

510. Cent. Bank of Denver v. First Interstate Bank of Denver, 508 U.S. 959 (1993). 

Accord Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).

511. See, e.g., Basic, 485 U.S. 224 (decided under Rule 10b-5); TSC Indus., Inc. v. 

Northway, Inc., 426 U.S. 438 (1976) (decided under proxy rules).

512. For examples of materiality in various contexts, see 4 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 12.9 (6th ed. 2009).
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view that materiality determinations are not subject to formulas or 

bright-line tests.513 Instead, whether a fact is material depends on the totality of surrounding circumstances and publicly available information. 

In other words, a fact is material if there is “‘a substantial likelihood that 

the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information 

made available.’”514

Following the common law of fraud, reliance is an element of any 

Rule 10b-5 claim.515 In a divided decision with only five justices in 

agreement, the Supreme Court recognized the fraud-on-the-market presumption of reliance516 under which a showing that a material misstatement or omission that adversely affects the market price creates a presumption of reliance. However, the availability of the presumption is 

premised on the existence of a relatively liquid and, hence, efficient market for the securities in question.517 The defendant may rebut the presumption of reliance or show that reliance was unreasonable.

513. Matrixx Initiatives, Inc. v. Siracusana, 131 S. Ct. 1309 (2011). See also, e.g., 

United States v. Sayre, [2011 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,280 (9th Cir. 

2011) (upholding jury instruction on definition of materiality).

514. Matrixx, 131 S. Ct. at 1318 (quoting Basic, 485 U.S. at 231–32 and TSC Indus.,

426 U.S. at 449).

515. See, e.g., Stoneridge, 552 U.S. 148 (plaintiff must establish basis for reliance on 

defendant’s participation in allegedly misleading statement); Basic, 485 U.S. 224 (reliance 

is an element of Rule 10b-5 claim for damages).

516. Basic, 485 U.S. 224. See, e.g., Malack v. BDO Seidman LLP, 617 F.3d 743 (3d 

Cir. 2010) (rejecting “fraud-created-the-market” theory recognized by some courts to 

allow presumption of reliance in connection with first-time offering); Finkel v. 

Docutel/Olivetti Corp., 817 F.2d 356 (5th Cir. 1987), cert. denied, 485 U.S. 959 (1988) 

(discussing necessity of efficient market at time of disclosure). See also Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) (applying presumption of reliance in 

face-to-face transaction). Distinct from the fraud-on-the-market presumption, Affiliated 

Ute presumed reliance from a finding of materiality in a case based on material omissions. 

The circuits are divided as to whether Affiliated Ute’s presumption is limited to pure 

omissions (Fourth, Fifth, Ninth, Eleventh), or also applies to half-truths (D.C., Second, 

Third, Tenth). See, e.g., In re InterBank Funding Corp. Sec. Litig., 629 F.3d 213 (D.C. Cir. 

2010).

517. See, e.g., Freeman v. Laventhol & Horwath, 915 F.2d 193 (6th Cir. 1990); 

Greenberg v. Boettcher & Co., 755 F. Supp. 776 (N.D. Ill. 1991); Sanders v. Robinson 

Humphrey/Am. Express, Inc., 634 F. Supp. 1048 (N.D. Ga. 1986), modified on other 
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Causation is a key element of a Rule 10b-5 action. Many courts have 

divided causation into two subparts: transaction causation and loss causation. Transaction causation requires a showing that but for the violations in question, the transaction would not have occurred (at least in the 

form that it took). Loss causation requires a showing of a causal nexus 

between the transaction and the plaintiff’s loss.518 This means that there 

must be a price movement in the shares that corresponds to the timing of 

the misstatement. As the Supreme Court explained in Dura Pharmaceuticals, Inc. v. Broudo,

519

the logical link between the inflated share purchase price and any later 

economic loss is not invariably strong. Shares are normally purchased 

with an eye toward a later sale. But if, say, the purchaser sells the shares 

quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. If the purchaser sells later after the 

truth makes its way into the marketplace, an initially inflated purchase 

price might mean a later loss. But that is far from inevitably so. When 

the purchaser subsequently resells such shares, even at a lower price, 

that lower price may reflect, not the earlier misrepresentation, but 

changed economic circumstances, changed investor expectations, new 

industry-specific or firm-specific facts, conditions, or other events, 

which taken separately or together account for some or all of that lower 

price. (The same is true in respect to a claim that a share’s higher price 

is lower than it would otherwise have been—a claim we do not consider 

here.) Other things being equal, the longer the time between purchase 

and sale, the more likely that this is so, i.e., the more likely that other 

factors caused the loss.

Given the tangle of factors affecting price, the most logic alone permits us to say is that the higher purchase price will sometimes play a role 

in bringing about a future loss. It may prove to be a necessary condition 

of any such loss, and in that sense one might say that the inflated purchase price suggests that the misrepresentation (using language the 

Ninth Circuit used) “touches upon” a later economic loss. But, even if 

grounds sub nom. Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir. 1987), cert. 

denied, 485 U.S. 959 (1988); Reingold v. Deloitte Haskins & Sells, 599 F. Supp. 1241 

(S.D.N.Y. 1984).

518. See 4 Hazen, supra note 512, § 12.11.

519. 544 U.S. 336 (2005).
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that is so, it is insufficient. To “touch upon” a loss is not to cause a loss, 

and it is the latter that the law requires.520

The Circuits were split on whether loss causation must be established at 

the time of class certification.521 Requiring a showing of loss causation at 

the time of class certification would significantly reduce the number of 

securities class actions. The Supreme Court unanimously held that loss 

causation need not be shown at the time of class certification but will be 

resolved later in the litigation.522

Also, as is the case with any fraud claim, the plaintiff must be able to 

establish damages. For most Rule 10b-5 litigation, the appropriate measure of damages is the out-of-pocket loss caused by the material misstatement or omission.523 On occasion, disgorgement of ill-gotten profits or 

the benefits of the bargain might be a more appropriate measure of damages.524

Section 10(b) and Rule 10b-5 do not contain a statute of limitations 

for the implied remedy. In the decisions prior to 1991, the applicable 

statute of limitations for antifraud claims was generally the most analogous state statute of limitations.525 Many courts held this to be the blue 

520. Id. at 342–43 (internal citations omitted). Three circuits apply Dura’s “loss causation” analysis, but the Ninth Circuit uses a “modified market capitalization theory.” See, 

e.g., United States v. Rutkoske, 506 F.3d 170 (2d Cir. 2007); United States v. Olis, 429 F.3d 

540 (5th Cir. 2005); United States v. Nacchio, 573 F.3d 1062 (10th Cir. 2009). But see

United States v. Berger, 587 F.3d 1038 (9th Cir. 2009).

521. Schleicher v. Wendt, 618 F.3d 679, 686 (7th Cir. 2010) (loss causation need not 

be established at time of class certification); In re Salomon Analyst Metromedia Litig., 544 

F.3d 444 (2d Cir. 2011) (defendant should be given opportunity at class certification stage 

to rebut plaintiff’s allegations of loss causation); In re DVI, Inc. Sec. Litig., Nos. 08-8033 & 

08-8045, 2011 WL 1125926 (3d Cir. Mar. 29, 2011) (class certification stage too early to 

determine loss causation); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 

261 (5th Cir. 2007) (loss causation must be established when class is certified).

522. See Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403, 2011 WL 2175208 

(S. Ct. June 6, 2011).

523. E.g., Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1436–37 (9th Cir. 1987); 

Harris v. Union Elec. Co., 787 F.2d 355, 367 (8th Cir.), cert. denied, 479 U.S. 823 (1986).

524. See Green v. Occidental Petroleum Corp., 541 F.2d 1335 (9th Cir. 1976). See 

also 4 Hazen, supra note 512, § 12.12.

525. See 5 Hazen, supra note 512, § 13.8.
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sky limitations period.526 Regardless of the applicable statute of limitations, the earlier decisions held that federal equitable tolling principles 

were applicable, so that the statute of limitations did not begin to run 

until the time the violation was discovered or reasonably should have 

been discovered. In contrast, § 13 of the 1933 Act provides the statute of 

limitations applicable to private actions under the Act: one year from the 

date of discovery, with a three-year repose period. In other words, no 

claim can be brought more than three years after the sale or violation.527

A similar one-year/three-year limitations period applies to express remedies under §§ 9(e) and 18(a) of the 1934 Act.528 In 1991, the Supreme 

Court, in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,

529 held 

that the applicable limitations period was to be found in the most analogous federal (rather than state) statute.530 Accordingly, the Court applied 

the one-year-from-discovery/three-year repose period. In 2002, Congress 

added a new statute of limitations for actions based on fraud and deceptive conduct.531 The limitations period for private fraud actions is two 

years from discovery of the facts constituting the violation, but in no 

event more than five years after the violation. The two-year limitations 

period begins to run once the plaintiff’s reasonable diligence would have 

526. Id. Especially in earlier decisions, some courts applied the longer common-law 

fraud limitations period. A blue sky law is a state securities act.

527. In an action under § 12(a)(2) of the 1933 Act, the three-year repose period runs 

from the sale; in an action under § 11 or § 12(a)(1), the three-year period begins from the 

time the securities were first bona fide offered to the public.

528. In contrast, an action for disgorgement of profits from insider short-swing 

transactions has a two-year limitations period. 1934 Act § 16(b).

529. 501 U.S. 350 (1991).

530. In so ruling, the Supreme Court followed its earlier decision in Agency Holding

Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143 (1987), holding that in a private RICO 

action, the statute of limitations was to be taken from the federal antitrust laws rather 

than the most analogous state limitations period. The Court applied the new rule retroactively, but Congress legislatively overruled the Court by denying retroactive application of 

Lampf. 1934 Act § 27A. In In re Data Access Systems, 843 F.2d 1537 (3d Cir. 1988), the 

Third Circuit held that the Agency Holding rationale is equally applicable to the federal 

securities laws. As such, the court applied § 18(a)’s one-year/three-year limitations period. In contrast to the one-year/three-year statute, the new remedy for illegal insider 

trading contains a five-year limitations period that runs from the date of the transaction. 

1934 Act § 20A(b)(4).

531. 28 U.S.C. § 1658.
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put him on inquiry notice of the violation.532 The 2002 statute clearly applies to actions under Rule 10b-5, but not to actions under provisions of 

the securities laws that are not based on fraud or deceit, in which cases 

the one-year/three-year periods referred to in Lampf remain applicable.

Whether the three-year repose period starts with the sale or the violation differs depending on whether the 1933 Act or 1934 Act applies533—

this in turn would determine whether a continuing fraud could toll the 

statute beyond the three-year repose period.

In Herman & MacLean v. Huddleston,

534 the Supreme Court held that 

the remedies under § 11 of the 1933 Act for misstatements in registration 

materials and Rule 10b-5 are cumulative. Presumably, Rule 10b-5 remedies are cumulative with other express remedies, such as those under § 12 

of the 1933 Act (e.g., those under §§ 12(a)(1) and 12(a)(2)).535

c. Additional Implied Rights of Action

With the exception of Rules 10b-5 and 14a-9536 and §§ 14(e)537 and 

29(b),538 recognition of additional implied private remedies under the 

federal securities laws seems unlikely. While the Supreme Court in the 

early 1970s repeatedly recognized an implied private right of action un532. Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010) (also holding scienter is “fact 

constituting the violation” for purposes of statute of limitations). See also, e.g., City of 

Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011) (discussing 

knowledge required to start statute of limitations running).

533. The three-year period in a § 9(e) action begins to run from the date of the violation; in an action under § 18(a), the three-year repose period runs from the time the 

cause of action “accrues.”

534. 459 U.S. 375 (1983).

535. The measure of damages under § 12 of the 1933 Act is based on rescission. See 

also the remedy under § 18(a) of the 1934 Act (misstatements in false filings). The remedies under the Insider Trading and Securities Fraud Enforcement Act of 1988, codified in 

§ 21A of the 1934 Act (disgorgement of profits in an action by contemporaneous traders), 

are expressly in addition to any other express or implied remedies. See also infra notes 

632–33 and accompanying text.

536. Discussed supra text accompanying notes 403–06, 418–22.

537. Discussed infra text accompanying notes 572–78.

538. Section 29(b) of the 1934 Act provides that any contract in violation of the Act 

or any rule promulgated thereunder is void.
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der Rule 10b-5,539 starting in the mid-1970s the Court showed less willingness to recognize implied rights of action. In 1975, it set forth a restrictive test for determining when implied remedies should be recognized.540 Subsequent decisions have made it clear that additional implied 

remedies are at best doubtful.541 In addition, at least one court has 

awarded Rule 11 sanctions against claims based on other provisions 

where the implied remedy has been denied.542

Secondary liability under the 1934 Act. In addition to primary liability 

of persons who violate the securities laws, there can be secondary liability 

of collateral participants. There are three types of secondary liability: 

(1) controlling-person liability; (2) vicarious liability based on respondeat 

superior; and (3) liability for aiding and abetting a primary violator. To 

539. Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6 (1971) (first Supreme Court case recognizing Rule 10b-5 private remedy). See also, e.g., Musick, Peeler & 

Garrett v. Emp’rs Ins. of Wausau, 508 U.S. 286 (1993) (implied right of contribution for 

liability in Rule 10b-5 action); Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) 

(discussing implied remedy under proxy rules); Blue Chip Stamps v. Manor Drug Stores, 

421 U.S. 723 (1975) (discussing standing in private action under Rule 10b-5); J.I. Case 

Co. v. Borak, 377 U.S. 426 (1964) (recognizing private right of action under proxy rules 

using tort theory of liability).

540. In Cort v. Ash, 422 U.S. 66 (1975), the Supreme Court set forth a four-factor test 

for determining when to recognize an implied remedy: (1) Is the plaintiff one of the class 

for whose special benefit the statute is enacted? (2) Is there any evidence of legislative 

intent to create such a remedy or to deny one? (3) Is the recognition of an implied remedy 

consistent with the underlying purposes of the legislative scheme? (4) Is the area of law 

one that is traditionally relegated to the states? Relying more heavily on legislative intent 

(factor 2) than on the other three factors, the Supreme Court recognized an implied right 

of action under the Commodity Exchange Act in Curran v. Merrill Lynch Pierce Fenner & 

Smith, 456 U.S. 353 (1982). The Court reasoned, inter alia, that the lower federal courts 

had recognized such an action for years while Congress sat by in silence.

541. See Northstar Fin. Advisors Inc. v. Schwab Invs., 615 F.3d 1106 (9th Cir. 2010) 

(investors have no implied private right of action under § 13(a) of 1940 Investment 

Company Act governing charges to mutual funds’ stated investment policies); Crookham 

v. Crookham, 914 F.2d 1027 (8th Cir. 1990) (no remedy under 1933 Act § 17(a)); Landry 

v. All Am. Assurance Co., 688 F.2d 381 (5th Cir. 1982) (same). See also 4 Hazen, supra

note 512, § 12.22.

542. Crookham, 914 F.2d 1027 ($10,000 sanction for bringing suit under § 17(a) of 

1933 Act). Other provisions that are unlikely to support an implied remedy include § 7 of 

the 1934 Act (margin violations), as well as violation of rules of self-regulatory organizations. See 5 Hazen, supra note 512, §§ 14.7, 14.26.
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impose secondary liability on a collateral participant there must be a 

primary violation of the securities laws.

Controlling-person liability is found both in the 1934 Act (§ 20(a)) 

and the 1933 Act (§ 15). Although worded differently, the provisions are 

interpreted as similar.543 The SEC has defined control as “the possession, 

direct or indirect, of the power to direct or cause the direction of the 

management and policies of a person, whether through the ownership of 

voting securities, by contract, or otherwise.”544 This liability requires that 

the defendant not only be a controlling person of the primary violator 

but also a culpable participant in the illegal activity. In an employment 

context, failure to supervise an employee may be deemed indirect participation by the controlling person, and thus the controlling person may 

be liable for any fraudulent schemes arising during the unsupervised period. Controlling-person liability is not limited to an employer–employee 

relationship.

Controlling-person liability is more restrictive than common-law 

agency theories in that it holds a controlling person liable only if that person (1) did not act in good faith or (2) induced or knowingly participated 

in the violation. Controlling-person liability is broader than respondeat 

superior: it is not limited to employers. The question has arisen whether 

controlling-person liability is exclusive. Most courts of appeals have held 

that § 20(a) of the 1934 Act is not an exclusive remedy and thus can be 

supplemented by common-law principles of respondeat superior.

545 In 

contrast to the prevailing rule as to controlling-person liability generally, 

543. Maher v. Durango Metals, 144 F.3d 1302 (10th Cir. 1998). For the 1933 Act, see 

supra text accompanying notes 303–06.

544. Rule 405, 17 C.F.R. § 230.405. Courts have defined control as influence short of 

actual direction. Gould v. Am.-Hawaiian S.S. Co., 535 F.2d 761 (3d Cir. 1976).

545. Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990), cert. denied, 111 

S. Ct. 1621 (1991); In re Atl. Fin. Mgmt., Inc., 784 F.2d 29 (1st Cir. 1986), cert. denied, 481 

U.S. 1072 (1987); Henricksen v. Henricksen, 640 F.2d 880 (7th Cir.), cert. denied, 454 U.S. 

1097 (1981); Paul F. Newton & Co. v. Tex. Commerce Bank, 630 F.2d 1111 (5th Cir. 

1980); Marbury Mgmt., Inc. v. Kohn, 629 F.2d 705 (2d Cir.), cert. denied, 449 U.S. 1011 

(1980). But see Carpenter v. Harris, Upham & Co., 594 F.2d 388 (4th Cir.), cert. denied, 

444 U.S. 868 (1979).
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§ 21A(b)(2) denies respondeat superior liability in actions dealing with 

insider trading.546

Aiding and abetting liability547 for violations of the antifraud provisions of the 1934 Act is available in SEC enforcement actions548 and in 

criminal prosecutions but not in private actions.549 Liability for aiding 

and abetting requires a showing of the following: the existence of a securities law violation by the primary party; “knowledge” of the violation on 

the part of the aider and abettor; and “substantial assistance” by the aider 

and abettor in the achievement of the primary violation.550 The Supreme 

Court has recognized an implied right of contribution for damages based 

on 1934 Act Rule 10b-5.551

Most courts hold that, as a general proposition, the aider and abettor 

must have acted with at least the same degree of scienter as the primary 

violator.552 However, when the aider and abettor stands in a fiduciary relationship to the plaintiff, recklessness will satisfy the scienter require546. The Insider Trading and Securities Fraud Enforcement Act of 1988 provides 

that there is no controlling-person liability under the Insider Trading Sanctions Act of 

1984 unless it is shown that the controlling person knew or recklessly disregarded the 

likelihood of illegal trading on inside information and failed to take precautions against 

the illegal conduct. 1934 Act § 21A(b). See supra text accompanying note 535.

547. See 4 Hazen, supra note 512, § 12.25.

548. Section 20(f) of the 1934 Act gave the SEC the authority to pursue persons who 

knowingly provide substantial assistance to primary violators of the securities laws. 15 

U.S.C. § 78t.

549. Cent. Bank of Denver v. First Interstate Bank of Denver, 508 U.S. 959 (1993).

Accord Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148 (2008) 

(knowing participation in fraudulent scheme not sufficient to make defendant primary 

violator so as to expose him to liability in private suit). See also, e.g., Affco Invs. 2001 LLC 

v. Proskauer Rose LLP, 625 F.3d 185 (5th Cir. 2010) (law firm not liable since false statements not attributable to firm).

550. See, e.g., Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), cert. denied, 474 U.S. 

1057 (1986).

551. Musick, Peeler & Garrett v. Emp’rs Ins. of Wausau, 508 U.S. 286 (1993).

552. See Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 495 (7th Cir. 

1986) (“We take Ernst & Ernst, together with Herman & Maclean, as establishing that 

aiders, abettors, conspirators, and the like may be liable only if they have the same mental 

state required for primary liability.”).
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ment for imposing liability on the defendant for aiding and abetting.553 In 

2010, Congress clarified that reckless conduct is sufficient for aider and 

abettor liability.554

RICO in securities cases. The Racketeer Influenced and Corrupt 

Organizations Act (RICO), enacted in 1973,555 is drafted in general terms 

and thus has a broad reach. Among other things, it provides a treble 

damage remedy to anyone injured by a person associating with an “enterprise” and engaging in “a pattern of racketeering.” In response to the 

fear of abusive RICO litigation, Congress amended the statute to require 

that in order to be sued in a civil RICO action for securities fraud, the 

defendant must have already been criminally convicted of the underlying 

violation.556

553. See Frank v. Dana Corp., No. 09-4233, 2011 U.S. App. LEXIS 10437 at * 14 (6th 

Cir. May 25, 2011) (adopting “holistic” approach to scienter; declining to follow previous 

method of scienter review based on each allegation by itself, rather, courts should “review 

scienter pleadings based on the collective view of the facts, not the facts individually”). See 

also Herm v. Stafford, 663 F.2d 669, 684 (6th Cir. 1981) (holding recklessness will satisfy 

scienter requirement even absent fiduciary relationship). But see, e.g., In re Union Carbide 

Corp. Consumer Prods. Bus. Sec. Litig., 676 F. Supp. 458 (S.D.N.Y. 1987) (actual knowledge required where alleged aider and abettor does not stand in fiduciary or confidential 

relationship to injured party). Brokers are frequently held to stand in a special fiduciary 

relationship to their customers. The existence of this fiduciary duty does not eliminate the 

scienter requirement; it merely affects the degree of scienter necessary to find one guilty of 

aiding and abetting. If no fiduciary duty exists, then the scienter standard will be stricter. 

See Harmsen v. Smith, 693 F.2d 932, 944 n.10 (9th Cir. 1982), cert. denied, 464 U.S. 822 

(1983).

554. 15 U.S.C. § 77o(b), as added by Dodd-Frank Wall Street Reform & Consumer 

Protection Act § 929M, Pub. L. No. 111-203, H.R. 4173, 111th Cong. (2d sess. 2010).

555. 18 U.S.C. §§ 1961–1968. Many states have enacted “little RICO” statutes.

556. Id. § 1964(c) (Supp. 2001). The conviction requirement applies to securities 

fraud actions but not expressly to other actions based on fraud. It would be a subversion 

of the congressional intent to permit a plaintiff to couch a RICO claim involving securities in common law or wire fraud in order to circumvent the conviction requirement. It 

has properly been held that if the conduct could be classified as securities fraud, then the 

conviction requirement applies even if the plaintiff tries to formulate the predicate act on 

alternative grounds. Aries Aluminum Corp. v. King, 1999 U.S. App. LEXIS 24827 (6th 

Cir. Sept. 30, 1999) (unpublished op.) (RICO action predicated on sale of nonexistent 

securities could not be maintained); Bald Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 

F.3d 321 (3d Cir. 1999) (couching complaint in mail or wire fraud will not support RICO 

claim without underlying criminal conviction for action that could be classified as securi-
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An “enterprise” consists of any association, formal or informal557—it 

need not be a permanent association.558 The concept of enterprise connotes a group with a common purpose, a continuity of personnel, and an 

ongoing formal or informal organization.559 The Supreme Court has indicated that the enterprise requirement is a separate element from the 

“pattern of racketeering activity” even though the facts pertaining to each 

may coalesce.560

In addition to the enterprise requirement, a violation of RICO § 1962 

requires a “pattern of racketeering activity.”561 A pattern of racketeering 

requires two or more underlying predicate acts, as defined by § 1961(1), 

occurring within ten years of each other.562 Securities fraud is expressly 

included as one of the underlying predicate acts. As part of the PSLRA, 

RICO was amended to provide that civil liability under RICO for securities fraud requires the defendant to have been convicted of the underlying securities law violation. Fraud and mail fraud are also included as 

predicate acts.563 Thus, it is not necessary that a security be involved; 

fraud relating to other types of investments may be covered by RICO. 

The Supreme Court has held that RICO does not require multiple 

schemes to find a pattern of racketeering. Furthermore, in order to satisfy 

the pattern-of-racketeering requirement, the multiple predicate acts must 

ties fraud). Cf. Mezzonen, S.A. v. Wright, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 90,704, 1999 WL 1037866 (S.D.N.Y. Nov. 16, 1999) (alleged misappropriation 

of assets occurred after securities transaction; thus, misappropriation not in connection 

with purchase or sale of security; RICO claim could proceed despite PSLRA).

557. 18 U.S.C. § 1961(4).

558. See, e.g., United States v. Turkette, 452 U.S. 576 (1981) (applying term to band 

of hooligans who had one-night rampage of murder and other acts covered by RICO).

559. Id.

560. Id. See also Police Ret. Sys. v. Midwest Inv. Advisory Servs., Inc., 706 F. Supp. 

708 (E.D. Mo. 1989) (enterprise requirement was satisfied but no pattern of racketeering 

activity shown).

561. 18 U.S.C. § 1962.

562. See id. § 1961(5).

563. Congress did not explicitly extend the criminal conviction requirement to mail 

and wire fraud (or to fraud generally). However, if that conduct involves securities, it 

would seem that the criminal conviction requirement should apply. See Cyber Media 

Group v. Island Mortg. Network, 183 F. Supp. 2d 559, 578–80 (E.D.N.Y. 2002); Mezzonen, S.A. v. Wright, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,704, 

1999 WL 1037866 *3 (S.D.N.Y. Nov. 16, 1999).
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be arranged or ordered either by the relationship they bear to one another or by the relationship they bear to some external organizing principle.564

The treble damage provision and availability of attorneys’ fees make 

RICO counts attractive in appropriate securities cases.565 A RICO action 

can be brought in either federal or state court.566 RICO has been applied 

in securities cases, for example, where a broker–dealer (i.e., enterprise) 

engages in more than one fraudulent act.

Mail and wire fraud. Two federal acts—the Mail Fraud Act567 and the 

Wire Fraud Act568—can be potent weapons in the enforcement of securities law. The Supreme Court, in a unanimous opinion, held that trading 

securities on nonpublic information could support a mail fraud conviction.569 The Court’s opinion is striking, since, in the same case, the Court 

was equally divided as to whether the conviction on the securities fraud 

count should be sustained. A violation of the Mail or Wire Fraud Act requires only the use of the mails or wires to execute a scheme to defraud 

someone of his property rights, tangible or intangible.570 As long as the 

mails or wires are used, the Mail and Wire Fraud Acts “reach any scheme 

to deprive another of money or property by means of false or fraudulent 

pretenses, representations, or promises.”571 This may be relevant in both 

criminal and civil actions. Although there is no specific civil liability for 

violation of mail fraud and wire fraud statutes, such violations are predicate acts under RICO, which can lead to treble damages.

564. H.J., Inc. v. Nw. Bell Tel. Co., 492 U.S. 229 (1989).

565. RICO also permits forfeiture of attorneys’ fees that were paid with money made 

by the client from racketeering activities. This provision has been used for drug dealers, 

but presumably could also be used with securities laws violations in appropriate cases.

566. Yellow Freight Sys., Inc. v. Donnelly, 494 U.S. 820 (1990).

567. 18 U.S.C. § 1341.

568. Id. § 1343.

569. Carpenter v. United States, 484 U.S. 19 (1987).

570. Id. at 25–28. The Court specifically declared that “[c]onfidential business information has long been recognized as property.” Id. at 26.

571. Id. at 27.
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3. Wrongdoing Related to Tender Offers: Section 14(e)

Section 14(e) of the Exchange Act of 1934 prohibits material misstatements, omissions, and fraudulent practices in connection with tender 

offers regardless of whether the target company is subject to the Exchange 

Act’s reporting requirements.572 It is not always necessary to disclose preliminary merger discussions; however, the Supreme Court has held that 

whether preliminary merger negotiations have crossed the materiality 

threshold is a question of fact573 depending on whether a reasonable investor would consider them significant in making an investment decision.574

In Piper v. Chris-Craft Industries, Inc.,

575 the Supreme Court determined that there is no private remedy for a competing tender offeror. In 

so holding, the Court did not rule out any private remedy; in fact, the 

opinion held out much hope for the recognition of a § 14(e) private right 

of action in the hands of the target company or its shareholders. The 

Court in Piper reasoned that the purpose of the Williams Act was to further investor protection by serving the shareholders of the target company, not serving competing tender offerors, who, at best, were collateral 

beneficiaries of the tender offer provisions. Most lower courts have recognized a remedy in the hands of the target company or one of its shareholders,576 as well as the right of a competing tender offeror to seek injunctive relief.577 Target company shareholders, but not the target company management, may be able to assert claims under Regulation 14D.578

572. In contrast, the other provisions of the Williams Act are limited to securities of 

issuers subject to § 12’s registration requirements.

573. Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

574. Id. See also TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976).

575. 430 U.S. 1 (1977).

576. See, e.g., Seaboard World Airlines, Inc. v. Tiger Int’l, Inc., 600 F.2d 355 (2d Cir. 

1979) (recognizing § 14(e) remedy but finding no substantive violation); Smallwood v. 

Pearl Brewing Co., 489 F.2d 579 (5th Cir.), cert. denied, 419 U.S. 873 (1974) (same); H.K. 

Porter Co. v. Nicholson File Co., 482 F.2d 421 (1st Cir. 1973) (same).

577. See, e.g., Humana, Inc. v. Am. Medicorp, Inc., 445 F. Supp. 613 (S.D.N.Y. 1977).

578. Polaroid v. Disney, 862 F.2d 987 (3d Cir. 1988).
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4. Insider Reporting and Short-Swing Profits: Section 16 Overview

Section 16579 of the 1934 Act is intended to prevent corporate insiders 

from using access to nonpublic information about important, impending 

corporate actions to trade short-term in the securities of a company for 

profit—a practice known as “short-swing” trading. Short-swing trading is 

short-term trading in the corporation’s stock; as defined in the statute, it 

is a purchase then sale, or sale then purchase, occurring within six 

months. Section 16(a) requires every officer, director, and beneficial 

owner of more than 10% of any class of equity security registered under 

§ 12 of the Act to file disclosure notices with the SEC. These notices must 

disclose all ownership interest in any of the issuer’s equity securities. The 

notice must be filed within ten days of a person’s becoming an officer, 

director, or beneficial owner of more than 10% of a class of securities, as 

well as on the second business day following any transaction resulting in 

a change in that person’s holdings. These reports are then made available 

to the public at the SEC’s office in Washington, D.C. The SEC also publishes monthly summaries of the reports.

F. Insider Trading

1. Insider Trading and Rule 10b-5 

Perhaps the most common and widely known use of Rule 10b-5 of the 

1934 Act is in the context of “insider trading,” or trading on the basis of 

nonpublic confidential or proprietary information. Trading on inside 

information destroys the integrity of the marketplace by giving an informational advantage to a select group of corporate insiders. Rule 10b-5 is 

the primary source of liability for improper trading on inside information.580 There are essentially two varieties of improper trading on the ba579. See infra text accompanying notes 635–67.

580. Promulgated by the SEC in 1942, Rule 10b-5 is patterned directly on § 17(a) of 

the 1933 Act. The primary difference is that Rule 10b-5 extends to misstatements or omissions occurring in connection with either a purchase or sale of securities, whereas § 17(a) 

is limited to fraudulent sales. The former assistant solicitor of the SEC, Milton Freeman, 

who formulated Rule 10b-5 in response to a fraudulent purchase of corporate securities 

by the company’s president, describes the drafting and adoption of the rule in Conference 

on Codification of the Federal Securities Laws, 22 Bus. Law. 793, 922 (1967).
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sis of nonpublic information. One is a face-to-face transaction in which 

an insider fails to disclose material information to the buyer or seller. 

This not only involves a clear violation of Rule 10b-5581 but also violates 

principles of common-law fraud.582 The second variety, which forms the 

basis of the overwhelming majority of litigation under the securities laws, 

involves open-market transactions by corporate insiders and others in 

possession of material nonpublic information.

As there is no statutory definition of what constitutes improper trading on nonpublic information, the 1934 Act’s catchall provision in Rule 

10b-5 is the primary source of the violation. Over time, there has been a 

change in the premise of insider trading liability under Rule 10b-5 from 

one of unfairness to investors583 to one of fiduciary duty and misappropriation.584 Rule 10b-5(c) makes it unlawful for “any person, directly or 

indirectly, by the use of any instrumentality of interstate commerce . . . to 

engage in any act, practice, or course of business which operates or would 

operate as a fraud or deceit upon any person, in connection with the sale 

or purchase of any security.” The violation is thus premised on fraud and 

the existence of some duty to speak honestly. Silence alone is not actionable; there must be a duty to speak. Possession of inside information 

without more does not create the duty to speak or abstain from trading 

under Rule 10b-5.585 Subsequent judicial treatment of this requirement 

has led to the misappropriation theory, and the concept of the “constructive” or “temporary” insider who, though not strictly speaking an insider, 

nevertheless owes some fiduciary duty to the person who discloses to him 

the material nonpublic information he “misappropriates.”

Beginning in 1961, the SEC broadened the application of Rule 10b-5 

into a general prohibition on corporate officials trading on the basis of 

581. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972).

582. See, e.g., Strong v. Repide, 213 U.S. 419 (1909).

583. In re Cady, Roberts & Co., 40 S.E.C. 907 (1961). See 4 Hazen, supra note 512, 

§ 12.17.

584. See, e.g., United States v. O’Hagan, 521 U.S. 642 (1997); Chiarella v. United 

States, 445 U.S. 222 (1980). For an explanation of the development of Rule 10b-5, see 

Chiarella, 445 U.S. at 226–29 (Powell, J.).

585. Chiarella, 445 U.S. 222.
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material nonpublic information, even on the open market.586 This expansion stemmed from the view that the harm the rule sought to protect 

against was unfairness to investors not privy to the inside information, so 

the potential trader possessing material nonpublic information had an 

alternative duty to disclose the information or to abstain from trading.587

In the first Supreme Court case on point, the Court held that in a face-toface transaction, a purchaser possessing inside information about a company has a duty to disclose such information to the seller before consummating the transaction.588 The Court has since held, however, that to 

find a violation of Rule 10b-5, the plaintiff must show that the defendant 

had material nonpublic information and a legal duty, based on a wrongful conversion or misappropriation of the information, to disclose it.589

In Chiarella v. United States,

590 the Supreme Court held that a Rule 

10b-5 claim cannot be based solely on the defendant’s knowingly trading 

to his advantage while in possession of material nonpublic information. 

The defendant was the employee of a printing company involved in the 

production of various tender offer documents. The target company’s 

name was concealed in the galleys sent to the printer in an effort to maintain confidentiality. However, Chiarella was able to identify the company 

based on other information in the tender offer material, and with this 

knowledge, he traded in securities of the target company for profit. The 

Court reversed his conviction on the ground that he had no legal duty to 

speak. However, five of the justices apparently would have upheld a conviction based on a theory that the defendant was given information in a 

586. Cady, 40 S.E.C. 907. See also, e.g., In re Smith Barney, Harris, Upham & Co., 

Exchange Act Release No. 34-21242, [1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 83,656 (Aug. 15, 1984) (brokerage firm should give its customers time to digest research 

recommendations reflecting material change in firm’s position before firm trades in securities for its own account). But see Moss v. Morgan Stanley, Inc., 719 F.2d 5 (2d Cir. 

1983), cert. denied, 465 U.S. 1025 (1984) (brokerage firm not held liable to open-market 

seller). SEC Rule 14e-3 is another source of insider trading prohibitions, but its application is limited to tender offers.

587. SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 

976 (1969).

588. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972).

589. O’Hagan, 521 U.S. 642; Chiarella, 445 U.S. 222.

590. 445 U.S. 222 (1980).
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position of trust and then wrongfully misappropriated the information to 

his advantage.

The Supreme Court had an opportunity to address the misappropriation theory in Carpenter v. United States.

591 There the defendant was a 

financial columnist (writing the influential Wall Street Journal’s “Heard 

on the Street” column) who had tipped his friends in advance as to the 

contents of upcoming columns that would affect the price of certain 

stocks. The Second Circuit ruled that the information had been misappropriated from the defendant’s employer (Dow Jones), and thus, under 

the “disclose or abstain” rule, the columnist and his friends had violated 

Rule 10b-5.592 An equally divided Supreme Court affirmed the Second

Circuit’s decision without opinion. Whether the Court was divided over 

the validity of the misappropriation theory in general or on some other 

issues raised by the case was not clear.593

The Court subsequently adopted the misappropriation theory of liability in United States v. O’Hagan.

594 In O’Hagan, a partner in a law firm 

knew that a client was about to launch a takeover of another company, 

and purchased stock in the shares of the target company. It remains difficult to define situations in which there is a sufficient duty that gives rise 

to Rule 10b-5’s “disclose or abstain from trading” obligation with regard 

to material nonpublic information.595

591. 484 U.S. 19 (1987).

592. United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986). The misappropriation 

theory also finds support in the legislative history of the 1988 Insider Trading and Securities Fraud Enforcement Act (ITSFEA), H.R. Rep. No. 100-910, at 10–11 (1988).

593. For example, the Supreme Court may have been divided over whether Rule 

10b-5’s “in connection with” requirement had been satisfied. In Carpenter, the reporter’s 

employer—from whom the information was allegedly misappropriated—was neither a 

purchaser nor a seller of securities. The SEC had argued that if the conviction were to be 

overturned, it should be overturned on these grounds rather than on a wholesale rejection 

of the misappropriation theory.

594. 521 U.S. 642 (1997).

595. The SEC adopted Rule 10b5-2 to provide a degree of certainty in identifying the 

types of relationships in which such a duty arises. 17 C.F.R. § 240.10b5-2. Under Rule 

10b5-2 there are three nonexclusive bases for determining that a duty of trust or confidence was owed by a person receiving information: (1) when the person agreed to keep 

information confidential; (2) when the persons involved in the communication had a 

history, pattern, or practice of sharing confidences that resulted in a reasonable expecta-
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A Second Circuit decision is illustrative of the problem of defining 

insider trading. In United States v. Chestman,

596 a stockbroker’s customer 

relayed to the broker information about an impending takeover.597 The 

broker, armed with that knowledge, purchased shares in the target company and subsequently was indicted for violating Rules 14e-3598 and 10b5 and for mail fraud. The jury found the broker guilty on all counts. The 

broker appealed, and in three separate opinions a panel of the Second 

Circuit reversed the broker’s convictions on all counts.599 The Second 

Circuit then agreed to rehear the case en banc,600 and the Rule 14e-3 convictions were affirmed while the Rule 10b-5 and mail fraud convictions 

were reversed. However, these decisions were reached as a result of many 

tion of confidentiality; and (3) when the person who provided the information was a 

spouse, parent, child, or sibling of the person who received the information, unless it were 

shown affirmatively, based on the facts and circumstances of that family relationship, that 

there was no reasonable expectation of confidentiality. Selective Disclosure and Insider 

Trading, Exchange Act Release No. 34-42259 (Dec. 20, 1999).

Thus, for example, family relationships can provide the basis for Rule 10b-5’s “disclose or abstain” rule. See, e.g., SEC v. Yun, 148 F. Supp. 2d 1287 (M.D. Fla. 2001) (postnuptial negotiations created confidential relationship so as to support insider trading 

liability based on tip of information between husband and wife). The breadth of Rule 

10b5-2 has been brought into question by a few decisions. See United States v. Kim, 173 F. 

Supp. 2d 1035 (N.D. Cal. 2001), amended by, 184 F. Supp. 2d 1006 (N.D. Cal. 2002) (expectation or understanding of confidentiality not sufficient). Until definitively decided to 

the contrary, Rule 10b5-2 should be considered to be a valid exercise of the SEC’s rulemaking authority.

596. 704 F. Supp. 451 (S.D.N.Y. 1989), rev’d, 903 F.2d 75 (2d Cir. 1990), reh’g en 

banc, 947 F.2d 551 (2d Cir. 1991), cert. denied, 112 S. Ct. 1759 (1992).

597. The customer, Mr. Loeb, was married to the granddaughter of Julia Waldbaum, 

a member of the board of directors of Waldbaum, Inc., a publicly traded company that 

owned a large supermarket chain. Furthermore, Mrs. Loeb’s uncle, Ira Waldbaum, was 

president and controlling shareholder of Waldbaum, Inc. As a member of the Waldbaum 

family, Mr. Loeb learned nonpublic information concerning the impending sale of Waldbaum, Inc., to the Great Atlantic & Pacific Tea Company, and relayed the information to 

a broker.

598. Adopted by the SEC immediately after Chiarella, Rule 14e-3 prohibits trading in 

advance of tender offers. 17 C.F.R. § 240.14e-3. It was promulgated under § 14(e), which 

arguably, unlike Rule 10b-5, is not subject to a duty requirement.

599. 903 F.2d 75 (2d Cir. 1990).

600. 947 F.2d 551 (2d Cir. 1991).
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separate opinions.601 In affirming the broker’s Rule 14e-3 convictions, ten 

of the eleven judges rejected the broker’s arguments that (1) Rule 14e-3 

was invalid, or that, if not, there was insufficient evidence to sustain the 

convictions; and that (2) his convictions violated the “fair notice” requirement of due process. However, the Rule 10b-5 convictions (as well 

as the mail fraud convictions) were reversed because six of the judges 

found that no fiduciary duty had been breached.602 As a result, it appears 

in the Second Circuit that, at least in the context of public tender offers, 

the SEC has filled the gap left by the decision in Chiarella, as no fiduciary 

duty is required for a conviction under Rule 14e-3.603 Although there is 

sparse authority on point, a fiduciary duty is not necessary under Rule 

10b-5 if the defendant has agreed to keep the information confidential 

and not trade upon it.604 If someone has obtained the information by 

trickery and deception, the “disclose or abstain” obligation will apply 

even in the absence of a fiduciary relationship.605

601. Five judges voted to affirm the Rule 14e-3 convictions and reverse the Rule 10b5 and mail fraud convictions (with one judge writing a special concurrence); five judges 

voted to affirm all convictions; and one judge voted to reverse all convictions.

602. One case that shows the potential for liability under this view is United States v. 

Willis, 737 F. Supp. 269 (S.D.N.Y. 1990). A former CEO of Shearson and former president 

of American Express was considering becoming CEO of BankAmerica. He discussed these 

plans with his wife, who in turn discussed them with her psychiatrist in the course of her 

treatment. The psychiatrist traded in the marketplace on the basis of this material nonpublic information and profited as a result. On the basis of the breach of the fiduciary 

relationship between the psychiatrist and his patient, the court held that the psychiatrist 

had violated Rule 10b-5.

603. Rule 14e-3 was upheld by the Supreme Court in United States v. O’Hagan, 521 

U.S. 642 (1997).

604. See SEC v. Cuban, 620 F.3d 551, 558 (5th Cir. 2010):

 Given the paucity of jurisprudence on the question of what constitutes a relationship of “trust and confidence” and the inherently fact-bound nature of 

determining whether such a duty exists, we decline to first determine or place 

our thumb on the scale in the district court’s determination of its presence or 

to now draw the contours of any liability that it might bring, including the 

force of Rule 10b5-2(b)(1).

For further discussion, see Thomas Lee Hazen, Identifying the Duty Prohibiting Outsider Trading on Material Non-Public Information, 61 Hastings L.J. 881 (2010).

605. SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009) (computer hacker would be subject to “disclose or abstain” rule if he obtained information through deceit).
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In Dirks v. SEC,

606 the Supreme Court indicated that someone who 

receives information from an insider (or anyone else holding that information in trust) is not liable under Rule 10b-5 for trading on the information unless the insider passed on that information with a wrongful 

motive. In Dirks, the insiders were former employees of the company at 

issue. Their motivation in disclosing the information to Dirks, a security 

analyst, was a desire to expose the company’s fraud. While attempting to 

verify that a fraud had in fact occurred, Dirks disclosed the information 

to some of his institutional customers, who thereupon sold large quantities of stock in the company. The Court found that Dirks was not an insider and that he did not owe a duty to the insiders not to disclose the 

information (in fact, they wanted him to). Since the insiders who passed 

the information on to him did not have a wrongful motive, Dirks was not 

obligated to abstain from passing on the inside information disclosed to 

him.

Thus in the absence of some breach of fiduciary duty, or “misappropriation,” there is no violation of Rule 10b-5. The Court in Dirks also 

suggested that for liability to attach, there must be “personal gain” by the 

wrongdoer. However, subsequent case law suggests that this may no 

longer be true.607

Another issue in insider trading is whether it must be shown that the 

trader in fact used the information in question; namely, that she would 

not have traded but for the confidential information. Courts have favored 

this view, although use could be inferred from trades made while in possession of the information.608 The SEC adopted a rule requiring the defendant to have used the information in making the challenged securities 

transactions.609 Rule 10b5-1 also contains a presumption that someone 

who trades while in possession of information has used that information 

606. 463 U.S. 646 (1983).

607. See supra notes 591–93 and accompanying text.

608. SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998); United States v. Smith, 155 F.3d 

1051 (9th Cir. 1998). Cf. United States v. Teicher, 987 F.2d 112 (2d Cir.), cert. denied,

Teicher v. United States, 510 U.S. 976 (1993).

609. 17 C.F.R. § 240.10b5-1. The SEC originally adopted the possession test, but after 

reviewing the public comments, it reproposed the rule to adopt the use requirement plus 

a presumption of use. See Exchange Act Release No. 34–24259 (Dec. 20, 1999).
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in making the trade.610 The presumption of use that follows from trading 

while in possession may be rebutted by a showing that the defendant 

(1) had a preexisting binding contract to enter into the transaction in 

question, (2) executed a prior instruction to a third party to execute the 

transaction in question, or (3) previously adopted a written plan specifying the transactions in question.611

2. Insider Trading Sanctions: SEC Actions

Willful violations of the federal securities laws may give rise to a criminal 

prosecution resulting in fines and imprisonment. Furthermore, violations 

may result in sanctions from the SEC. The SEC may impose administrative sanctions. For example, a violator who is a broker–dealer or other 

market professional may have her license suspended or revoked. By virtue of § 21(d)(1) of the 1934 Act, the SEC is authorized to seek either 

temporary or permanent injunctive relief in the courts “whenever it shall 

appear to the Commission that any person is engaged or is about to engage in any acts or practices which constitute or will constitute a violation.”

Although the statutory enabling provisions are written solely in terms 

of the SEC’s power to enjoin, the SEC and the courts have fashioned 

remedies ancillary to the traditional injunctive decree relying on “the 

general equitable powers of the federal courts.”612 Ancillary relief has 

taken many forms, ranging from disgorgement of ill-gotten profits to 

more imaginative corrective action. Among the latter remedies are the 

appointment of an independent majority on the board of directors,613 the 

appointment of a receiver,614 prohibitions against exercising voting con610. 17 C.F.R. § 240.10b5-1.

611. Id.

612. See, e.g., James Farrand, Ancillary Remedies in SEC Civil Enforcement Suits, 89 

Harv. L. Rev. 1779, 1781 (1976).

613. See, e.g., SEC v. Vesco, 571 F.2d 129 (2d Cir. 1978); SEC v. Mattel, Inc., [1974–

1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,807 (D.D.C. 1974) (consent to sanctions).

614. See, e.g., SEC v. United States Fin. Group, Inc., 474 F.2d 354 (9th Cir. 1973); 

SEC v. Fla. Bank Fund, [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,707 (M.D. 

Fla. 1978). This power is expressly given to the SEC by § 42(e) of the Investment Company Act for violators of the Act’s registration requirements. 15 U.S.C. § 80a-42(e).
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trol in a proxy battle,615 the appointment of “special professionals” to ensure compliance with securities laws,616 orders designed to protect remaining assets,617 and prohibitions on continued participation as an officer or director of any public company.618

In the wake of the Supreme Court’s decisions in Chiarella v. United 

States619 and Dirks v. SEC,

620 Congress enacted even stronger insider trading penalties available for use by the SEC. The Insider Trading Sanctions 

Act of 1984 (ITSA) increased civil and criminal penalties for trading 

while in possession of material nonpublic information. The SEC is 

authorized to seek disgorgement of profits and a civil penalty of up to 

three times the profits gained or the loss avoided by the defendant; and 

the criminal penalty was increased from $10,000 to $100,000. However, 

while facially applicable to transactions involving misuse of nonpublic 

material information, ITSA does not define the scope of permissible conduct. Thus it does not alter the availability of a cause of action, merely the 

penalties that may be imposed. Nevertheless, ITSA has proven to be an 

effective enforcement weapon. Following its enactment, the SEC has been 

increasingly vigorous in enforcing insider trading prohibitions and has 

reached some lucrative settlements.621

615. Cf. Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir.), cert. 

denied, 414 U.S. 910 (1973) (defendant barred from voting for five years on shares obtained illegally).

616. See, e.g., SEC v. Beisinger Indus. Corp., 552 F.2d 15 (1st Cir. 1977) (appointment of receiver); SEC v. First Jersey Sec., Inc., [1984–1985 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 91,923 (S.D.N.Y. 1985) (appointment of consultant to review broker–

dealer’s practices, pursuant to permanent injunction entered by parties’ consent).

617. See, e.g., SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1105–06 (2d Cir. 

1972) (appointment of trustees to protect assets); SEC v. R.J. Allen & Assocs., Inc., 386 F. 

Supp. 866, 881 (S.D. Fla. 1974) (creation of temporary trust and ordering an accounting). 

See also SEC v. Vaskevitch, 657 F. Supp. 312 (S.D.N.Y. 1987) (freeze order in insider trading case); SEC v. Am. Bd. of Trade, Inc., 830 F.2d 431 (2d Cir. 1987), cert. denied, 485 U.S. 

938 (1988) (freeze order in illegal unregistered commercial paper investment program).

618. See, e.g., SEC v. Cosmopolitan Investors Funding Co., Litig. Release No. 7366 

(SEC Apr. 23, 1976); 42 SEC Ann. Rep. 119 (1976).

619. 445 U.S. 222 (1980).

620. 463 U.S. 646 (1983).

621. See, e.g., SEC v. Galleon Mgmt. LP, SEC Litig. Release No. 21732, 2010 WL 

4467012 (SEC Nov. 8, 2010) (settlement by multiple defendants in massive insider trading 

case); SEC v. Certain Unknown Purchasers of Common Stock & Call Options of Santa Fe 
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However, the SEC’s general enforcement authority under § 21(d) is 

displaced by the § 21A remedy. The Second Circuit held that a civil penalty in an SEC action under 1934 Act § 21(d)(3) cannot be imposed for 

insider trading where the violations are subject to specific penalty provisions of 1934 Act § 21A.622 The court noted, “history suggests that Congress, cognizant of the reach of section 21A, intended the amendment 

that became section 21(d)(3) to fill a gap in the SEC’s enforcement powers by addressing violations other than those ‘described in’ section 

21A.”623

The question arises whether SEC actions under ITSA and criminal 

prosecutions based on the same transactions violate the constitutional 

prohibition against double jeopardy. In United States v. Halper,

624 the Supreme Court held that double jeopardy issues can arise when a criminal 

prosecution is followed by a government suit seeking to impose civil penalties. The Court eased double jeopardy concerns with its decision in 

Hudson v. United States.

625 The defendants had been sued by the Office of 

the Comptroller of the Currency and agreed to pay monetary assessments

resulting from violating federal law. A subsequent criminal prosecution 

was challenged on the grounds of double jeopardy. The Court ruled that 

since the assessments in the first action were not punitive, there was no 

double jeopardy bar to the criminal prosecution. The Court ruled that 

the Halper test of whether a civil sanction is punitive proved “unworkable.” Instead, the Court referred to the test it had enunciated previously 

in United States v. Ward,

626 to the effect that there is a strong presumption 

that Congress’s designation of a sanction as “civil” means that it is not 

Int’l Corp., [1985–1986 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,484 (S.D.N.Y. 

1986) (consent order to disgorge $7.8 million in alleged insider trading profits); SEC v. 

Boesky, [1986–1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,991 (S.D.N.Y. 1986) 

(settlement of $50 million disgorgement and $50 million penalty); SEC v. Kidder Peabody 

& Co., 19 Sec. Reg. & L. Rep. (BNA) 811 (S.D.N.Y. 1987) (settlement of more than $25 

million).

622. SEC v. Rosenthal, No. 10-1204-cv (L), 2011 U.S. App. LEXIS 11684 (2d Cir. 

June 9, 2011).

623. Id. at * 15.

624. 490 U.S. 435 (1989).

625. 522 U.S. 93 (1997).

626. 448 U.S. 242 (1980).
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punitive, and that a court must find the “clearest proof” before the legislative label of a civil sanction is disregarded. It thus became increasingly 

unlikely that a civil penalty, such as the one imposed by the ITSA, will be 

viewed as criminal in nature. Accordingly, double jeopardy should not be 

an issue with regard to successive SEC and criminal actions against insider trading.627

3. Private Rights of Action for Insider Trading

In a face-to-face transaction, an action will lie against someone who sells 

or purchases while in possession of material nonpublic information.628

However, in an open-market context, standing to sue could be more 

problematic. In a Ninth Circuit case,629 a financial columnist purchased 

stock prior to publishing his “buy” recommendation, which was based on 

an overly optimistic view of the company. The plaintiffs acquired the 

stock pursuant to a merger that was agreed to prior to the conduct in 

question. Despite the fact that the plaintiffs were “forced purchasers” 

who made no investment decision and thus did not rely on the column, 

the defendant was held liable. The court reasoned that the columnist’s 

failure to disclose his stock purchase defrauded the market by causing an 

artificially high price that the plaintiffs were forced to pay. This is the 

fraud-on-the-market theory.

The fraud-on-the-market theory, however, is far from unanimously 

accepted in the insider trading context. The Sixth Circuit has held that 

any duty that was breached was owed to the person from whom the information was appropriated, not to someone in a faceless market.630 Similarly, the Second Circuit held that a tippee of inside information who was 

627. But see United States v. Andrews, 146 F.3d 933 (D.C. Cir. 1998). The D.C. Circuit indicated that a civil penalty could form the basis of double jeopardy; however, the 

claim could not be raised in a criminal prosecution of a corporation’s CEO based on a 

civil penalty assessed against the corporation rather than the CEO himself. Id. at 941–42.

628. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). Causation 

was not a problem because the purchaser dealt directly with the seller. Further, the Supreme Court held that reliance on the nondisclosure could be presumed from the materiality of the information.

629. Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979).

630. Friedrich v. Bradford, 542 F.2d 307 (6th Cir. 1976), cert. denied, 429 U.S. 1053 

(1977).
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convicted of having violated Rule 10b-5 was not liable in damages to 

people who were selling their stock at the same time that the defendant 

was buying on inside information. To be held liable for damages, the 

court said, the “inside trader” must be a corporate official who owes an 

independent duty to the shareholders who trade on opposite sides of the 

insider’s transactions.631

The Insider Trading and Securities Fraud Enforcement Act (ITSFEA) 

of 1988 was designed by Congress to supplement any remedy that may 

exist under Rule 10b-5. The Act provides an express private right of action by contemporaneous traders against persons making improper use 

of material nonpublic information.632 Damages in such an action are limited to the profit (or loss avoided) that is attributable to the defendant’s 

illegal conduct, reduced to the extent that the SEC has secured disgorgement (as opposed to a penalty) under the 1984 Insider Trading Sanctions 

Act (ITSA).

ITSFEA also specifically addresses controlling-person liability.633 Such 

liability in a private suit is still governed by § 20(a) of the 1934 Act. However, ITSFEA imposes a more specific provision for controlling-person 

liability in SEC actions under ITSA. Under ITSFEA, a court can impose 

ITSA’s treble damage penalties on a controlling person of a primary violator only if (1) the controlling person knew or acted in reckless disregard 

of the fact that the controlled person was likely to engage in illegal insider 

trading, and (2) the controlling person failed to take adequate precautions to prevent the prohibited conduct from taking place. The establishment of a “Chinese Wall” or “fire wall” to keep confidential information confined to the proper sectors of a multiservice firm may help protect against controlling-person liability.

In a further attempt to provide incentive for private persons to expose illegal insider trading, ITSFEA also added a “bounty” provision. Section 21A(e) states that up to 10% of any civil penalty recovered by the 

SEC may, at the SEC’s discretion, be paid to the private individuals who 

631. Moss v. Morgan Stanley, Inc., 719 F.2d 5 (2d Cir. 1983), cert. denied, 465 U.S. 

1025 (1984).

632. 1934 Act § 20A.

633. The 1988 legislation was amended to make it clear that tippers and tippees are 

both primary violators, so plaintiffs need not rely on aiding and abetting principles. 1934 

Act § 20A(c).
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provided information leading to the imposition of the penalty. Persons 

associated with the SEC, the Department of Justice, or the self-regulatory 

organizations are not eligible to receive a bounty reward.

With the Securities Enforcement Remedies and Penny Stock Reform 

Act of 1990, amendments to the 1934 Act gave the SEC the power in an 

administrative proceeding to require disgorgement of illegal profits.634

4. Insider Transactions and Section 16

Section 16 of the Exchange Act regulates directors, officers, and 10% (or 

greater) beneficial owners635 of any class of equity securities636 subject to 

§ 12 registration requirements. Section 16(a) contains reporting requirements; § 16(b) imposes liability for short-swing profits; and § 16(c) 

prohibits insider short sales.

Persons falling within the scope of § 16 are required to file appropriate notice with the SEC, including disclosure of all ownership interest in 

any of the issuer’s equity securities, within ten days of acquiring that 

status, or such shorter period as the SEC may prescribe.

637 Thereafter, 

whenever they acquire or dispose of any equity securities of the company, 

they must file notice thereof with the SEC by the second business day following the acquisition or disposition of shares.638

634. These amendments also require additional disclosures about penny stocks. See

supra note 73 and accompanying text.

635. Beneficial ownership hinges on the direct or indirect pecuniary interest in the 

shares, and that interest may be the result of “any contract, arrangement, understanding, 

relationship, or otherwise.” Rule 16a-1(a)(2), 17 C.F.R. § 240.16a-1(a)(2). Thus when 

several persons get together for the purpose of exercising control, this group will be considered a single person for the purpose of computing the 10% beneficial ownership 

threshold. See Morales v. Freund, 163 F.3d 763 (2d Cir. 1999); Strauss v. Kapp Inv. Advisors, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,666 (S.D.N.Y. 1999). 

See also Rosenberg v. XM Ventures, 129 F. Supp. 2d 681 (D. Del. 2001).

636. The owner of convertible securities becomes a 10% beneficial owner with regard 

to the underlying securities once his conversion rights would permit 10% ownership of 

the underlying securities. Medtox Scientific, Inc. v. Morgan Capital L.L.C., 50 F. Supp. 2d 

896 (D. Minn. 1999). See also Chem. Fund, Inc. v. Xerox Corp., 377 F.2d 107 (2d Cir. 

1967).

637. 1934 Act § 16(a).

638. Id. Violations of the filing requirements do not give rise to a private remedy. 

Scientex Corp. v. Kay, 689 F.2d 879 (9th Cir. 1982); C.R.A. Realty Corp. v. Goodyear Tire 
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In addition to its reporting requirements, § 16(a) determines who is 

subject to § 16(b)’s provisions for disgorgement of insider short-swing 

profits. However, the Act does not precisely define officer, director, or 

10% beneficial owner. As a result, many questions have been raised as to 

the scope of § 16’s coverage.

a. Officer

The courts and the SEC have both considered the scope of officer. SEC 

Rule 3b-2 provides that under the Act, generally “‘officer’ means a president, vice president, treasurer, secretary, comptroller, and any other person who performs for an issuer, whether incorporated or unincorporated, functions corresponding to those performed by the foregoing officers.” Although expressly refusing to pass on the validity of Rule 3b-2, the 

Second Circuit adopted a similar functional equivalency test under the 

terms of the statute.639 In 1991, the SEC completely revamped its interpretive rules under § 16. As part of this reform, for the purposes of § 16, officer is limited to high-ranking company officials in policy-making positions.640 Since Rule 16a-1 specifically addresses § 16 of the Act, in this respect its definition prevails over the more general definition in Rule 3b-2.

b. Director

Another problem in determining who is subject to § 16(b) arises in the 

context of deputization. The Supreme Court has held that where a partnership profited from short-swing transactions in the corporation’s 

stock, and the partnership designated or deputized one of its partners to 

sit on that corporation’s board of directors, the partnership would be 

& Rubber Co., 705 F. Supp. 972 (S.D.N.Y.), aff’d, 888 F.2d 125 (2d Cir. 1989). However, 

they can result in criminal sanctions. See, e.g., United States v. Guterma, 281 F.2d 742 (2d 

Cir.), cert. denied, 364 U.S. 871 (1960).

639. Colby v. Klune, 178 F.2d 872, 875 (2d Cir. 1949):

 [“Officer”] includes, inter alia, a corporate employee performing important 

executive duties of such character that he would be likely, in discharging these 

duties, to obtain confidential information about the company’s affairs that 

would aid him if he engaged in personal market transactions. It is immaterial 

how his functions are labeled or how defined in the by-laws, or that he does or 

does not act under the supervision of some other corporate representative.

Id. at 873.

640. Rule 16a-1(f), 17 C.F.R. § 240.16a-1(f).
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deemed a “director” under the doctrine of deputization.641 The Court 

appeared to require the plaintiff to prove an actual deputizing or agency 

relationship,642 but subsequent lower court decisions suggest that it may 

be enough to show that the potential for abuse was more than a mere 

possibility.643 The mere presence of an interlocking directorate will not be 

sufficient to create a § 16 deputization644—each situation must be examined on its own facts.

Another issue to be considered under § 16 is the effect the timing of 

the transactions has regarding an officer’s or director’s assumption of 

office or resignation. In general, courts tend to find liability if either the 

purchase or sale occurred while the defendant was an officer or director;645 if both the purchase and sale were before or after the defendant 

held the position, courts tend not to find liability.646

c. 10% Beneficial Owner

In contrast to cases dealing with officers and directors, § 16 provides that 

where insider status attaches by virtue of 10% beneficial equity ownership, the section applies only where beneficial ownership existed “both at 

the time of purchase and sale, or the sale and purchase.” The Supreme 

Court has held that the purchase that pushes the defendant over the 10% 

threshold does not qualify as a purchase subject to § 16, and that only 

purchases made after the threshold purchase will give rise to liability.647

641. Blau v. Lehman, 368 U.S. 403 (1962).

642. Id. at 411.

643. See, e.g., Feder v. Martin Marietta Corp., 406 F.2d 260 (2d Cir. 1969), cert. denied, 396 U.S. 1036 (1970).

644. See, e.g., Popkin v. Dingman, 366 F. Supp. 534 (S.D.N.Y. 1973).

645. See, e.g., Feder, 406 F.2d 260 (defendant purchased shares while a director, then 

sold them at a profit after resigning); Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959) (defendant purchased shares before becoming an officer, then sold them after assuming his 

position).

646. See Lewis v. Mellon Bank, 513 F.2d 921 (3d Cir. 1975) (officer who exercised 

stock option immediately after resigning, then sold at profit, not liable under § 16, since 

he was not insider at time of purchase or sale); Lewis v. Varnes, 505 F.2d 785 (2d Cir. 

1974) (defendant not officer or director at time of short-swing transaction and thus not 

liable under § 16(b)). Since this result appears justified by the language of § 16, such conduct could be used to raise a presumption of reliance on inside information to find a possible violation of Rule 10b-5. See 4 Hazen, supra note 512, § 12.10.

647. Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232 (1976).
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Similarly, when a holder of more than 10% first sells enough to bring her

holdings down to 9.9%, and on the next day liquidates the remaining 

holdings, the second sale cannot be subject to § 16, even if the two sales 

were parts of a single, prearranged scheme.648

Section 16(b) requires statutory insiders under § 16(a) to disgorge to 

the issuer any profit wrongfully realized as a result of a purchase and sale,

or sale and purchase, of covered equity securities occurring within a sixmonth period. Congress saw § 16(b) as a “crude rule of thumb” or objective method of preventing “the unscrupulous employment of (corporate) 

inside information.”649 Accordingly, in light of its broad remedial purpose, § 16(b) requires disgorgement of insider short-swing profits even in 

the absence of any wrongdoing.

Section 16 does not prohibit officers, directors, and 10% equity 

shareholders from short-term trading in the stock of their companies; it 

simply authorizes the company (or a shareholder suing on its behalf) to 

recover the profits realized from such trading. The SEC, therefore, has no 

enforcement responsibilities under § 16. It has, however, adopted rules 

and regulations exempting transactions from the liability provisions if it 

finds them to be “not comprehended within the purpose of” § 16(b).650

A § 16(b) action is not based on any injury to the plaintiff, but rather 

is a remedial provision designed to prevent certain types of insider trading abuses. Success in an action under § 16(b) is not dependent on the 

possession or use of inside information.651

An action may be brought under § 16(b) by a shareholder after a 

demand has been made to and refused by the directors.652 Section 16(b) 

648. Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418 (1972).

649. Hearings on S. Res. 84, S. Res. 97 Before the Senate Comm. on Banking and Currency, 73d Cong., 1st Sess. pt. 15 at 6,557 (1934).

650. 1934 Act § 16(b). The SEC has in fact adopted a number of rules exempting 

transactions. For example, it has exempted certain transactions by registered investment 

companies; certain large block transactions in connection with a distribution of securities; 

qualifying employee benefit plans; certain securities acquired in connection with a redemption of another security; certain option exercises and most conversions of convertible securities; and certain transactions involving share subscriptions. For details and a 

more complete list of exemptions, see SEC Rules 16b-1 through 16b-11.

651. Hearings on S. Res. 84, supra note 649.

652. Dottenheim v. Murchison, 227 F.2d 737 (5th Cir. 1955), cert. denied, 351 U.S. 

919 (1956); Benisch v. Cameron, 81 F. Supp. 882 (S.D.N.Y. 1948).
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actions arise even though the SEC has no enforcement powers under 

§ 16; corporate management is seldom interested in suing itself; and the 

financial stake for an individual shareholder is generally very small. The 

greatest incentive for bringing a § 16(b) action is that attorneys’ fees will 

be awarded to the successful plaintiff’s attorneys out of the fund created 

by the recovery.653 Suit may be filed by a person who is, at the time of the 

suit, a shareholder of record, as long as that person continues to be a 

shareholder throughout the trial. The commonplace contemporaneous 

ownership rule, requiring a shareholder who brings suit to have been a 

shareholder at the time of the act complained of, does not apply in an 

action under § 16(b).654 Thus people who purchase their shares after the 

transactions in question may bring suit. Notwithstanding the possible 

champerty implications,655 the courts have held that it is no defense to an 

action under § 16(b) that the suit was motivated primarily by an attorney’s desire to obtain attorneys’ fees. Courts generally reason that Congress must have accepted this price in order to achieve effective enforcement of the provision.656 An action under § 16(b) for disgorgement of 

profits may be brought in law or in equity.

If a person is found to fall within one of the categories covered by 

§ 16, the next question is whether there has been a “purchase” and “sale.” 

Where there is a “garden variety” cash-for-stock transaction, § 16(b)’s 

application will be determined by an objective test.657 However, the courts 

653. See, e.g., Super Stores, Inc. v. Reiner, 737 F.2d 962 (11th Cir. 1984).

654. Portnoy v. Kawecki Berylco Indus., Inc., 607 F.2d 765 (7th Cir. 1979); Dottenheim, 227 F.2d 737; Blau v. Mission Corp., 212 F.2d 77 (2d Cir.), cert. denied, 347 U.S. 

1016 (1954).

655. Champerty is the impermissible practice of a lawyer purchasing the right to 

bring a lawsuit or encouraging a client to bring suit so that the lawyer can recover attorneys’ fees. Since § 16(b) does not have a contemporaneous ownership rule, it is possible 

to purchase the right to bring suit by purchasing or having a nominee purchase a share of 

the company’s stock after the impermissible act.

656. Magida v. Cont’l Can Co., Inc., 231 F.2d 843 (2d Cir.), cert. denied, 351 U.S. 972 

(1956).

657. See, e.g., Arrow Distrib. Corp. v. Baumgartner, 783 F.2d 1274 (6th Cir. 1986) 

(with respect to cash-for-stock transactions, plaintiff need only show both transactions 

occurred within a period of less than six months). Other transactions have also been 

viewed as “orthodox” transactions, requiring the application of the objective test. See, e.g.,

Gund v. First Fla. Banks, Inc., 726 F.2d 682 (11th Cir. 1984) (sale of convertible deben-
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have also had to decide whether other transactions—so-called “unorthodox” transactions—fall within § 16(b)’s reach. The exercise of an option 

or a conversion privilege or the exchange of one security for another, either in a merger or a voluntary transaction, may or may not fall within 

the statute depending on the circumstances.

In Kern County Land Co. v. Occidental Petroleum Corp.,

658 the Supreme Court addressed the applicability of § 16(b) to sales of the target 

company’s shares by a defeated tender offeror. In finding that a § 16(b) 

“sale” had not occurred, the Court used a pragmatic analysis of the transaction:

In deciding whether borderline [unorthodox] transactions are within 

the reach of the statute, the courts have come to inquire whether the 

transaction may serve as a vehicle for the evil which Congress sought to 

prevent—the realization of short-swing profits based upon access to inside information—thereby endeavoring to implement congressional 

objectives without extending the reach of the statute beyond its intended limits.659

This pragmatic approach was intended to take the place of the objective test for unorthodox transactions, such as “stock conversions, exchanges pursuant to mergers and other corporate reorganizations, stock 

reclassifications, and dealings in options, rights, and warrants.”660 If there 

is no fear of or potential for § 16(b) abuse in the unorthodox transaction 

at issue, the pragmatic analysis should find no purchase or sale.661

There has also been significant debate over the method of computing 

a profit within the meaning of § 16(b). The apparent majority approach, 

when there has been a series of transactions within a six-month period, is 

to match the lowest purchase price against the highest sales price within 

tures followed by purchase of underlying stock; objective test applied); Oliff v. Exch. Int’l 

Corp., 669 F.2d 1162 (7th Cir. 1980), cert. denied, 450 U.S. 915 (1981) (court found “orthodox” transaction even where “purchase” was repurchase under compulsion of paying 

205% penalty to IRS for self-dealing in prior sale, and IRS called repurchase a “rescission” 

of prior sale).

658. 411 U.S. 582 (1973).

659. Id. at 594–95 (footnotes omitted). See also, e.g., Gwozdzinsky v. Zell/Chil-mark 

Fund, L.P., 156 F.3d 396 (2d Cir. 1998), aff’g 979 F. Supp. 263 (S.D.N.Y. 1997).

660. Kern County, 411 U.S. at 594 n.24.

661. See 5 Hazen supra note 512, § 13.4.
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that period.662 This method is the harshest of the alternative interpretations, since it catches a profit even in situations where an out-of-pocket 

loss may exist for all transactions entered into during the six-month period.663 Furthermore, there is authority to the effect that dividends declared on shares sold at a profit will be considered part of the § 16(b) 

profit, provided that insider status applied at the time of declaration of 

the dividend.664

Section 16(c) prohibits certain speculative activities by insiders (10% 

beneficial owners, officers, and directors) who must file reports under 

§ 16(a). Section 16(c) is aimed at two types of speculative transactions: 

(1) short sales,665 or selling the security of the issuer without owning the 

underlying security; and (2) sales “against the box,”666 when the seller 

delays in delivering the securities. In both instances, the investor’s hope is 

that the price will decline from the time of sale, thus enabling the seller to 

cover at a lower price. Although these are legitimate speculating devices 

in certain instances, the practices of selling short and selling against the 

box are high-risk transactions subject to speculative abuse, particularly by 

insiders. Section 16(c) operates to make it unlawful to sell a security if the 

selling insider either (1) does not own the security or (2) owns the secu662. Arrow Distrib. Corp. v. Baumgartner, 783 F.2d 1274 (6th Cir. 1986); Whittaker 

v. Whittaker Corp., 639 F.2d 516, 530–32 (9th Cir.), cert. denied, 454 U.S. 1031 (1981); 

Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir.), cert. denied, 320 U.S. 751 (1943).

663. See Smolowe, 136 F.2d at 239.

664. W. Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d 736 (8th Cir. 1965), cert. 

denied, 382 U.S. 987 (1966). But see, e.g., Morales v. Lukens, Inc., 593 F. Supp. 1209, 

1214–15 (S.D.N.Y. 1984) (relying on Blau v. Lamb, 363 F.2d 507, 528 (2d Cir. 1966), cert. 

denied, 385 U.S. 1002 (1967) (dividends excluded from § 16(b) computation absent evidence defendant manipulated dividend)).

665. A “short sale” takes place when a seller, believing the price of a stock will fall, 

borrows stock from a lender and sells it to a buyer. Later, the seller buys similar stock to 

pay back the lender, ideally at a lower price than he received on the sale to the buyer.

666. A “sale against the box” takes place when the seller, anticipating a decline in the 

price of stock she owns, sells it to a buyer at the present market price, but delivers it later, 

when (she hopes) the market price will have fallen below the sales price, thus creating a 

paper profit for the seller.
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rity but does not deliver it within twenty days or deposit it in the mail in 

five days.667

G. Regulation of Marketplace and Securities Professionals

In addition to imposing disclosure requirements on issuers of publicly 

traded securities, the 1934 Act regulates the marketplace. Although the 

SEC has direct authority, a great deal of market regulation is carried out 

through its oversight of national exchanges and self-regulatory organizations.668 Market regulation includes the establishment of fair market practices and minimum-capital requirements for broker–dealers in order to 

minimize the risk of insolvency. A major goal of market regulation is to 

ensure orderly markets. There are also prohibitions against fraudulent 

and manipulative broker–dealer conduct. The SEC and Federal Reserve 

Board work together in regulating the extension of credit for securities 

transactions.

Section 15(a) of the 1934 Act requires registration with the SEC of all 

broker–dealers669 engaged in interstate business involving securities 

transactions.670 Section 15(b)(4) empowers the SEC to hold hearings and 

impose disciplinary sanctions, ranging from censure to revocation of the 

registration of broker–dealers engaging in certain types of proscribed 

667. There is a good-faith exception provided within the statute. Furthermore, the 

SEC has exempted certain transactions deemed not to violate the policy of the provision.

See Rules 16c-1, 16c-2, and 16c-3.

668. SEC and self-regulatory organization rules can operate as a preemption or implied repeal of the antitrust laws. For example, the SEC regulation of IPO practices serves 

as an implied repeal of the antitrust laws, leading the Second Circuit to hold that purchasers 

in public offerings lacked antitrust standing to challenge price fixing by the underwriters. 

Friedman v. Salomon/Smith Barney, Inc., 313 F.3d 796 (2d Cir. 2002). The Supreme Court, 

in another case, subsequently held that IPO practices, including “laddering,” were immune from antitrust attack because of their regulation under the securities laws. Credit 

Suisse Sec. (USA) LLC v. Billing, 551 U.S. 264 (2007).

669. See generally Jerry W. Markham & Thomas L. Hazen, Broker–Dealer Operations 

Under Securities and Commodities Law: Financial Responsibilities, Credit Regulation, 

and Customer Protection (2001 supp.).

670. The only exemption from the registration requirements is for a broker–dealer 

“whose business is exclusively intrastate and who does not make use of any facility of a 

national exchange.”
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conduct.671 Section 15(b)(6) empowers the SEC to impose similar sanctions for the same types of conduct on persons who, although not themselves broker–dealers, are associated or seek to become associated with 

broker–dealers.

In addition to imposing sanctions arising out of the SEC’s direct broker–dealer regulation, the SEC is charged with supervising a securities 

firm’s structure and taking measures to ensure its solvency. Pursuant to 

§ 15(b)(7), broker–dealers must meet such operational and financial 

competence standards as the SEC may establish. The competence requirements include provisions for maintenance of adequate records and 

standards for supervisory and associated personnel. The SEC also has 

established financial responsibility requirements in its net capital rule, 

which sets out the minimum standards of broker–dealer solvency based 

on the balance sheet.672

Section 15(b)(8) requires that all broker–dealers be members of a 

qualifying self-regulatory organization (either a national exchange or registered securities association).673

Section 15(c) contains a series of antifraud provisions designed to 

prohibit securities broker–dealers from engaging in fraudulent practices 

and conduct. In addition to regulating broker–dealers’ financial responsibilities, this provision and others674 are used most often by the SEC and 

courts to regulate (1) excessive prices for over-the-counter securities;675

671. For example, the SEC may impose sanctions after a hearing (1) when a broker–

dealer makes false filings with the SEC; (2) when the broker–dealer, within the past ten 

years, has been convicted of certain crimes or misdemeanors involving moral turpitude or 

breach of fiduciary duty; (3) when the broker–dealer has willfully violated or aided in 

violating any federal securities law or rule; and (4) when the broker–dealer has been

barred by the SEC or enjoined from being a broker–dealer. 1934 Act § 15(b)(4).

672. Rule 15c3-1, the net capital rule, is based on a complex balance sheet test for 

solvency. See, e.g., SEC Study on the Financing and Regulatory Capital Needs of the Securities Industry (Jan. 23, 1985).

673. There are nine national exchanges registered under § 6 of the Act and one securities association registered under § 15A (the National Association of Securities Dealers).

674. Most notably, other provisions include § 17(a) of the 1933 Act and § 10(b) of 

the 1934 Act and rules promulgated thereunder.

675. See, e.g., Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943) (holding 

violation of securities laws where broker–dealer made high-pressure “cold calls,” convincing purchasers to pay an undisclosed 16%–40% markup over market value of securities).
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(2) activities of market makers who deal directly with individual customers;676 (3) generation of commissions by excessive trading in customers’ 

accounts (“churning”) and other fraudulent trading practices;677 and 

(4) undisclosed interests of investment advisers in the stocks they recommend.678

Beyond the SEC rules and the additional requirements that may be 

imposed by the applicable self-regulatory organizations, broker–dealers 

are, of course, subject to common-law duties and fiduciary obligations. 

For example, a broker–dealer is prohibited from recommending a security unless he has actual knowledge of the characteristics and fundamental facts relevant to the security in question. Also, the recommendation 

must be reasonably supported by the facts.679 This “know your security” 

requirement is an extension of the common-law doctrine of “holding 

out.” The Second Circuit has held that to satisfy this requirement, a challenged broker–dealer must show that there was (1) an adequate and reasonable basis for the recommendation; (2) a reasonable independent investigation (the standards of which vary based on the nature of the security); (3) disclosure of essential information about the company to the 

investor; and (4) disclosure to the investor of any lack of information and 

the risks that may therein arise.

680

676. See, e.g., In re Alstead, Dempsey & Co., Exchange Act Release No. 20,825, 30 

SEC Docket 211 (Apr. 5, 1984) (in OTC market, where market maker’s customers hold 

95.7% of stock of company at issue, and market maker controls market, markups of 

11%–20% over transactions in independent interdealer market are excessive); Chasins v. 

Smith, Barney, 438 F.2d 1167 (2d Cir. 1970) (failure to disclose market-maker status is 

nondisclosure of material fact in violation of securities laws). See also SEC Rule 10b-10.

677. See, e.g., Mihara v. Dean Witter, 619 F.2d 814 (9th Cir. 1980) (where broker–

dealer has control or de facto control of account, high turnover rate—particularly of securities unsuitable to complaining investors—generates excessive commissions in violation 

of securities laws); Nesbit v. McNeil, 896 F.2d 380 (9th Cir. 1990) (in churning case, successful plaintiff entitled to receive as damages—at her option—decline in value of her 

portfolio, amount of excess commissions generated by churning in account, or both).

678. See, e.g., SEC v. Capital Gains Res. Bureau, Inc., 375 U.S. 180 (1963) (failure to 

disclose purchases of securities prior to making recommendation constituted violation of 

Investment Advisers Act § 206).

679. Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969).

680. Id.
IV. Regulating Issuers, Securities Professionals, and Securities Markets—

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Furthermore, there are obligations imposed with regard to the broker–dealer’s duty to “know the customer.” This duty is frequently imposed by rules of self-regulatory organizations but also arises from general fiduciary duties between brokers and their customers. This duty requires that a broker be certain that the customer understands the risks of 

investment (or, in a discretionary account, that the broker understands 

the objectives of the customer, e.g., financial security as opposed to 

speculation). Although the fiduciary obligations are high, disciplinary 

actions have been few, and the overwhelming majority of cases have denied the existence of a private remedy by an injured investor based solely 

on the violation of an applicable rule of a self-regulatory organization.681

On the other hand, if an injured customer can state the equivalent of a 

Rule 10b-5 violation—including showing the requisite scienter, materiality, reliance, causation, damages, and deception—a violation of the 

“know the customer” rule will be actionable.682

Relatively few broker–customer disputes end up in the courts, especially because of the 1987 Supreme Court decision holding that predispute arbitration agreements are enforceable.683 Since that decision, predispute arbitration agreements have been increasingly popular. As is the 

case with arbitration generally, the scope of review is extremely limited, 

and the appropriate standard of review is “manifest disregard of the 

law.”684

681. See, e.g., Carrott v. Shearson Hayden Stone, Inc., 724 F.2d 821 (9th Cir. 1984); 

Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert. denied, 385 U.S. 817 

(1966); Klock v. Lehman Bros. Kuhn Loeb, Inc., 584 F. Supp. 210 (S.D.N.Y. 1984). Contra

Buttry v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir.), cert. denied, 

396 U.S. 838 (1969).

682. See, e.g., Pelletier v. Stuart-James Co., 863 F.2d 1550 (11th Cir. 1989); Lopez v. 

Dean Witter Reynolds, Inc., 591 F. Supp. 581 (N.D. Cal. 1984).

683. Shearson Am. Express, Inc. v. McMahon, 482 U.S. 220 (1987).

684. E.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 

(2d Cir. 1986).
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H. Regulation of Exchanges and Securities Markets685

Market regulation extends beyond the broker–dealer industry. For example, the SEC and the self-regulatory organizations oversee the markets 

themselves. At one time the exchanges and the over-the-counter markets 

were self-regulatory organizations. However, the largest markets—the 

New York Stock Exchange (NYSE) and the NASDAQ market—

demutualized and became for-profit enterprises. Eventually both the 

NASDAQ markets and the NYSE became publicly held companies, once 

it became necessary to spin off the regulatory function into a separate 

independent entity.686 Thus, two new independent organizations—NASD 

Regulation (NASDR) and New York Stock Exchange Regulation 

(NYSER)—took over the regulatory functions. The SEC approved the 

merger of the NASDR and NYSER in 2007, creating a more efficient, single self-regulator and avoiding duplication.687 As a consequence, the Financial Industry Regulatory Authority (FINRA) carries out the selfregulatory functions previously handled by the NYSE and the National 

Association of Securities Dealers (NASD).

When Congress created the SEC in 1934, stock exchanges, as private 

associations, had been regulating their members for up to 140 years. 

Rather than displace this system of “self regulation,” Congress superimposed the SEC on it as an additional level of regulation. The effect of 

§ 5688 of the 1934 Act is to require every “national securities exchange” to 

685. This discussion was adapted from 5 Thomas Lee Hazen, Treatise on the Law of 

Securities Regulation § 14.1[3][C] (6th ed. 2009).

686. The NASDAQ national market became a registered national securities exchange 

in 2006. See In the Matter of the Application of the NASDAQ Stock Market LLC for Registration as a National Securities Exchange Findings, Opinion, and Order of the Commission, Exchange Act Release No. 34–53128, 2006 WL 92913 (SEC Jan. 13, 2006); SEC Approves NASDAQ Stock Market Bid To Become Registered National Exchange, 38 Sec. Reg. & 

L. Rep. (BNA) 117 (Jan. 17, 2006).

687. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; 

Order Approving Proposed Rule Change to Amend the By-Laws of NASD to Implement 

Governance and Related Changes to Accommodate the Consolidation of the Member 

Firm Regulatory Functions of NASD and NYSE Regulation, Inc., Exchange Act Release 

No. 34–56145 (File No. SR–NASD–2007–023) (SEC July 26, 2007).

688. 15 U.S.C. § 78e.
IV. Regulating Issuers, Securities Professionals, and Securities Markets—

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register with the SEC. Under § 6(b) of the Act,689 an exchange cannot be 

registered unless the SEC determines that its rules are designed, among 

other things, to “prevent fraudulent and manipulative acts and practices, 

to promote just and equitable principles of trade,”690 and to provide for 

appropriate discipline of its members for any violations of its own rules 

or the securities laws.

Under the authority of § 6 of the Act, the various exchanges, of which 

the NYSE is by far the largest and most important, have maintained and 

enforced a large body of rules for the conduct of their members. These 

rules fall into two categories: rules relating to transactions on the particular exchange, and rules relating to the internal operations of the member 

firms and their dealings with their customers.

In the first group are rules governing the following: criteria for listing 

securities on the exchange and provisions for delisting or suspension of 

trading in particular securities; obligations of issuers of listed securities; 

bids and offers on the exchange floor; activities of “specialists” (now referred to as designated market-makers in listed securities); transactions 

by members in listed securities for their own account; when transactions 

in listed securities may take place off the exchange; clearing and settlement of exchange transactions; and rules for the governance and operation of the exchange itself.

Section 19 of the Exchange Act, as originally enacted, gave the SEC 

power to suspend or withdraw the registration of an exchange, to suspend or expel any member of an exchange, to suspend trading in listed 

securities, and to require changes in exchange rules with respect to a wide 

range of matters. However, it did not require SEC approval for changes in 

stock exchange rules, nor did it provide for SEC review of disciplinary 

actions by exchanges against their members. Section 19, as amended in 

1975, expanded and consolidated the SEC’s authority over all selfregulatory organizations. The SEC’s increased authority over exchanges 

689. Id. § 78f(b).

690. For examples of cases in which exchanges received censure and bar for violating 

“just and equitable principles of trade,” see, e.g., In re Hazelgrove–Mulkerrins, Exchange 

Hearing Panel Decision 00–211, 2000 WL 33158159 (N.Y.S.E. Nov. 28, 2000); In re Hudson, Exchange Hearing Panel Decision 00–76, 2000 WL 897699 (N.Y.S.E. May 11, 2000); 

In re Falbo, Exchange Hearing Panel Decision 93–189, 1993 WL 594332 (N.Y.S.E. Dec. 21, 

1993).
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and the NASD (now part of FINRA) with respect to the over-the-counter 

(OTC) markets is roughly comparable to, but even broader than, its previous authority over the NASD.691 In particular, since 1975, the SEC must 

give advance approval for any exchange rule changes, and it has review 

power over exchange disciplinary actions.692

When Congress decided to extend federal regulation over the nonexchange (or OTC) market, it followed the pattern already established with 

respect to exchanges. Section 15A693 authorized the establishment of “national securities associations” to be registered with the SEC. Like an exchange, any such association must have rules designed “to prevent 

fraudulent and manipulative acts and practices [and] to promote just and 

equitable principles of trade” in transactions in the OTC market.694 Only 

one such association has been established, the NASD, which has since 

become a part of FINRA. The NASD adopted a substantial body of 

“Rules of Fair Practice”—these rules are now embodied in FINRA’s Code 

of Conduct, dealing with various problems in the OTC markets. Among 

the most important are its rule that a dealer may not recommend a security unless the dealer has reason to believe the security is “suitable” to the 

customer’s financial situation and needs; its interpretation of its “fair 

spread or profit” rule to bar markups in excess of 5% on principal trans691. See Marianne K. Smythe, Self-Regulation and the Antitrust Laws: Suggestions for 

An Accommodation, 62 N.C. L. Rev. 475, 505–06 (1984).

692. See, e.g., Ho v. SEC, No. 06-3788, 2007 WL 1224027 (7th Cir. Apr. 25, 2007) 

(affirming SEC’s affirmance of Chicago Board Option Exchange’s three-year suspension 

of already suspended exchange member and market-maker who continued to trade on 

exchange in violation of his earlier suspension). Cf. PAZ Sec., Inc. v. SEC, 494 F.3d 1059 

(D.C. Cir. 2007) (SEC can review de novo disciplinary decisions of self-regulatory organizations; finding SEC abused its discretion in failing to consider mitigating factors in imposing sanctions) (applying 15 U.S.C. § 78s(e) and relying on Otto v. SEC, 253 F.3d 960, 

964, 966–67 (7th Cir. 2001) (“the SEC conducts de novo review of the NASD’s sanctions”)); McCarthy v. SEC, 406 F.3d 179, 189–90 (2d Cir. 2005) (holding SEC’s affirmation of sanction deficient because it failed to provide reasoned basis to show it was not 

arbitrary).

693. 15 U.S.C. § 78o, added by the “Maloney Act” of 1938, Pub. L. No. 75–719, 52 

Stat. 1070 (1938).

694. See, e.g., FINRA Conduct Rule 2010, http://finra.complinet.com/en/display/

display_main.html?rbid=2403&element_id=5504 (“[a] member, in the conduct of its 

business, shall observe high standards of commercial honor and just and equitable principles of trade”).
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actions; its procedures for reviewing underwriting compensation and 

provisions for ensuring that members make a bona fide public offering of 

underwritten securities; and its rules with respect to execution of orders 

in the OTC market and disclosure in confirmations to customers.

From time to time, FINRA (and formerly the NASD) promulgates 

rules and issues interpretations directed to specially enumerated prohibited practices.695 Although FINRA and NASD rules and interpretations 

identify a number of impermissible practices, those specifically identified 

practices do not constitute an exclusive list of prohibited practices.

696 In 

other words, FINRA can invoke general antifraud principles as well as the 

general concept of just and equitable principles of trade to invalidate improper conduct that is not specifically defined in FINRA or SEC rule

making.697

That an industry practice has been followed for a long period of time 

does not mean it is compliant with FINRA and SEC standards of fair and 

equitable conduct.698 Similarly, the fact that a certain type of conduct has 

695. For example, in 2002, the NASD issued a notice to members pointing out the 

impropriety of interfering with a customer's attempt to transfer to another broker–

dealer. Rule Change by the National Association of Securities Dealers, Inc. Relating to the 

Adoption of Interpretive Material Regarding Interfering With the Transfer of Customer 

Accounts, 67 FR 1790–01, 2002 WL 29460 (SEC Jan. 14, 2002); NASD Notice to Members 

02–07 (Jan. 2002).

696. Initial public offering (IPO) abuses implicate numerous anti-manipulation 

rules. For example, the SEC has imposed severe penalties against firms charged with improper IPO practices. See, e.g., SEC v. Morgan Stanley & Co. Inc., No. 

1:05CV00166(HHK) (D.D.C. 2005), Litigation Release No. 19050, 2005 WL 156766 (SEC 

Jan. 25, 2005); SEC v. Goldman Sachs & Co., 05 CV 853 (SAS) (S.D.N.Y 2005), Litigation 

Release No. 19051, 2005 WL 156767 (SEC Jan. 25, 2005).

697. See In re Kunz, Admin. Proc. File No. 3–9960, Exchange Act Release No. 34-

45290 n. 2, 2002 WL 54819 at *9 n. 2 (SEC Jan. 16, 2002) (paying compensation to unregistered representative violated NASD (now FINRA) Conduct Rule 2110).

698. Newton v. Merrill, Lynch, Pierce, Fenner & Smith, 135 F.3d 266, 274 (3d Cir. 

1998):

Even a universal industry practice may still be fraudulent. See Chasins v. Smith, 

Barney & Co., 438 F.2d 1167, 1171–72 (2d Cir. 1971) (non-disclosure of widespread industry practice may still be non-disclosure of material fact); Opper v. 

Hancock Securities Corp., 250 F. Supp. 668, 676 (S.D.N.Y.) (industry custom 

may be found fraudulent, especially on first occasion it is litigated) aff'd, 367 

F.2d 157 (2d Cir. 1966); see also Vermilye & Co. v. Adams Express Co., 88 U.S. 

(21 Wall.) 138, 146, 22 L. Ed. 609 (1874). Indeed, the SEC recently completed 
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158

been long-standing industry practice does not prevent it from being 

fraudulent.699 The NASD has cease and desist powers with respect to certain securities law violations.700

In addition to regulating broker–dealers and exchanges, the SEC 

regulates firms that are engaged in the clearing of securities transactions. 

Congress decided to implement a more unified national market to replace the more fragmented set of markets that existed previously. This 

included use of a national system for clearing and settlement of securities 

transactions established pursuant to § 17A of the 1934 Act.701 The Act 

regulates clearing agencies and the activities of securities brokers engaging in clearing activities. The pervasive federal regulation of clearing of 

securities transactions results in federal preemption of state law that 

would provide contrary rules.702

an investigation in which it found that certain practices by Nasdaq market 

makers, not at issue here, were fraudulent even though they were widely followed within the industry. See Report of Investigation Pursuant to Section 

21(a) of the Securities Exchange Act of 1934 Regarding the NASD and the 

Nasdaq Market, 1996 SEC LEXIS 2146 (Aug. 8, 1996).

699. SEC v. Johnson, No. 03 Civ. 177, Fed. Sec. L. Rep. (CCH) ¶ 93,205, 2005 WL 

696891 * at 5 (S.D.N.Y. Mar. 24, 2005) (“even where a defendant is successful in showing 

that it has followed a customary course in the industry, the first litigation of such a practice is a proper occasion for its outlawry if it is in fact in violation”) (quoting Chasins v. 

Smith, Barney & Co., 438 F.2d 1167, 1171 (2d Cir. 1971)); SEC v. Dain Rauscher, Inc., 

254 F.3d 852, 857 (9th Cir. 2001) (“the standard of care by which [defendant’s] conduct 

must be measured is not defined solely by industry practice, but must be judged by a 

more expansive standard of reasonable prudence, for which the industry standard is but 

one factor to consider”).

700.This increased enforcement authority was given in 2003. See NASD Special Notice to Members 03–35, available at http://www.finra.org/Industry/Regulation/Notices/

2003/p003242 (NASDR June 23, 2003).

701.15 U.S.C. § 78q–1. As part of the national market system implementation, the 

SEC requires registration of securities information processors that are used to facilitate 

quotations for securities. 17 C.F.R. § 240.11Aa3–2. Section 17A does not support an implied private right of action. Baltia Air Lines, Inc. v. CIBC Oppenheimer Corp., 2001 WL 

431528, [2001–2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,421 (2d Cir. 2001) 

(unpublished).

702. See Whistler Invs., Inc. v. Depository Trust & Clearing Corp., 539 F.3d 1159 

(9th Cir. 2008) (challenge to naked short-selling precluded by conflict-preemption regulation under § 17A; court found filed preemption not applicable); Pet Quarters, Inc. v. 

Depository Trust & Clearing Corp., 545 F. Supp. 2d 845 (E.D. Ark. 2008) (since federal 
IV. Regulating Issuers, Securities Professionals, and Securities Markets—

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I. Regulation of Credit Rating Agencies

Over the past thirty years, the markets in general and also many regulators, including the SEC, relied on credit ratings to help monitor the risk 

of debt securities and, in turn, the risks related to investment banking, 

commercial banking, insurance companies, and other regulated entities, 

not to mention the risks of unregulated entities such as hedge funds. 

Over that time, the SEC has come to recognize several credit rating agencies as nationally recognized statistical rating organizations (NRSROs), 

through the issuance of no-action letters, for regulatory and legislative 

purposes. For many years prior to the credit crisis and market collapse in 

2008–2009, there was concern about the efficacy of these highly relied on 

credit rating agencies. For example, many of the companies that failed 

during the turn of the twenty-first century had good credit ratings, so the 

market was surprised when these highly rated companies experienced 

severe problems.

In 2006, Congress enacted the Credit Rating Agency Reform Act as 

an amendment to the Securities Exchange Act of 1934, granting the SEC 

the regulatory authority to register and oversee nationally recognized statistical rating organizations.703 The SEC implemented regulation of rating 

agencies704 and has introduced proposals to refine and expand their regulation. In the aftermath of the 2008 credit crisis, there continue to be calls 

for increased regulation of credit rating agencies.

and state law conflicted, conflict-preemption preempted state law); Nanopierce Techs., 

Inc. v. Depository Trust & Clearing Corp., 168 P.3d 73, 76 (Nev. 2007) (compliance with 

1934 Act § 17A and state law not possible; conflict-preemption preempted state law).

703. Credit Rating Agency Reform Act of 2006, Pub. L. No. 109-291, 120 Stat. 1327 

(2006). See 1934 Act § 15E, 15 U.S.C. § 78o-7 (Registration of Nationally Recognized 

Statistical Rating Organizations).

704. See 1934 Act Rules 17g-1 through 17g-6; 17 C.F.R. §§ 240.17g-1 through 

240.17g-6.

161

Appendix: Statutory Conversion 

Securities Act of 1933 (key provisions)

Act § 15 U.S.C. §

1 77a Short Title

2 77b Definitions

2A 77b-1 Swap Agreements

3 77c Exempted Securities

4 77d Exempted Transactions

5 77e Prohibitions Relating to Interstate Commerce and the 

Mails

6 77f Registration of Securities and Signing of Registration 

Statement

7 77g Information Required in Registration Statement

8 77h Taking Effect of Registration Statements and 

Amendments Thereto

8A 77h-1 Cease and Desist Proceedings

9 77i Court Review of Orders

10 77j Information Required in Prospectus

11 77k Civil Liabilities on Account of False Registration 

Statement

12 77l Civil Liabilities Arising in Connection with Prospectuses 

and Communications

13 77m Limitation of Actions

14 77n Contrary Stipulations Void

15 77o Liability of Controlling Persons

16 77p Additional Remedies

17 77q Fraudulent Interstate Transactions

18 77r State Control of Securities

18A 77r-1 Preemption of State Law

19 77s Special Powers of Commission

20 77t Injunctions and Prosecution of Offenses

21 77u Hearings by Commission

22 77v Jurisdiction of Offenses and Suits

23 77w Unlawful Representations

24 77x Penalties

25 77y Jurisdiction of Other Government Agencies over 

Securities
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162

26 77z Separability of Provisions

27 77z-1 Private Securities Litigation

27A 77z-2 Application of Safe Harbor for Forward-Looking 

Statements

28 77z-3 General Exemptive Authority
Appendix: Statutory Conversion

163

Securities Exchange Act of 1934 (key provisions)

Act § 15 U.S.C. §

1 78a Short Title

2 78b Necessity for Regulation

3 78c Definitions and Applications

3A 78c-1 Swap Agreements

4 78d Securities and Exchange Commission

4A 78d-1 Delegation of Functions by Commission

4B 78d-2 Transfer of Functions with Respect to Assignment of 

Personnel to Chairman

4C 78d-3 Appearance and Practice Before the Commission

5 78e Transactions on Unregistered Exchanges

6 78f National Securities Exchanges

7 78g Margin Requirements

8 78h Restrictions on Borrowing and Lending by Members, 

Brokers, and Dealers

9 78i Prohibition Against Manipulation of Security Prices

10 78j Manipulative and Deceptive Devices

10A 78j-1 Audit Requirements

11 78k Trading by Members of Exchanges, Brokers, and Dealers

11A 78k-1 National Market System for Securities; Securities 

Information Processors

12 78l Registration Requirements for Securities

13 78m Periodical and Other Reports

14 78n Proxies

15 78o Registration and Regulation of Brokers and Dealers

15A 78o-3 Registered Securities Associations

15B 78o-4 Municipal Securities

15C 78o-5 Government Securities Brokers and Dealers

15D 78o-6 Securities Analysts and Research Reports

15E 78o-7 Registration of Nationally Recognized Statistical Rating 

Organizations

16 78p Directors, Officers, and Principal Stockholders

17 78q Records and Reports

17A 78q-1 National System for Clearance and Settlement of 

Securities Transactions

17B 78q-2 Automated Quotation Systems for Penny Stocks

18 78r Liability for Misleading Statements
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164

19 78s Registration, Responsibilities, and Oversight of SelfRegulatory Organizations

20 78t Liability of Controlling Persons

20A 78t-1 Liability to Contemporaneous Traders for Insider 

Trading

21 78u Investigations and Actions

21A 78u-1 Civil Penalties for Insider Trading

21B 78u-2 Civil Remedies in Administrative Proceedings

21C 78u-3 Cease and Desist Proceedings

21D 78u-4 Private Securities Litigation

21E 78u-5 Application of Safe Harbor for Forward-Looking 

Statements

22 78v Hearings by Commission

23 78w Rules, Regulations, and Orders; Annual Reports

24 78x Public Availability of Information

25 78y Court Review of Orders and Rules

26 78z Unlawful Representations

27 78aa Jurisdiction of Offenses and Suits

27A 78aa-1 Special Provision Relating to Statute of Limitations on 

Private Cause of Action

28 78bb Effect on Existing Law

29 78cc Validity of Contracts

30 78dd Foreign Securities Exchanges

30A 78dd-1 Prohibited Foreign Trade Practices by Issuers

30B 78dd-2 Prohibited Foreign Trade Practices by Domestic Concerns

30C 78dd-3 Prohibited Foreign Trade Practices by Persons Other 

than Issuers or Domestic Concerns

31 78ee Transaction Fees

32 78ff Penalties

33 78gg Separability of Provision

34 78hh Effective Date

35 78kk Authorization of Appropriations

35A 78ll Requirements for the EDGAR System

36 78mm General Exemptive Authority

37 78nn Tennessee Valley Authority

38 78oo Federal National Mortgage Association, Federal Home 

Loan Mortgage Corporation, Federal Home Loan Banks
165

For Further Reference

Securities Regulation

Thomas Lee Hazen, Treatise on the Law of Securities Regulation (Westgroup 6th ed. 2009)

Louis Loss & Joel Seligman, Securities Regulation (Aspen Law & Business 3d ed. 1989)

Jerry W. Markham & Thomas Lee Hazen, Broker Dealer Operations 

Under Securities and Commodities Law (Westgroup 1995; 2d ed. 

2003)

Commodities Regulation

Phillip McBride Johnson & Thomas Lee Hazen, Derivatives (2004)

Jerry W. Markham, Commodities Regulation: Fraud, Manipulation, and 

Other Claims (Westgroup 2001)

167

Glossary

blue sky law – Blue sky law is a term used to refer to state securities laws.

boiler room – Boiler room refers to a brokerage firm that focuses on 

high-pressure sales practices and various fraudulent activities.

bucket shop – A variety of boiler room where the customer orders are 

not actually placed. The orders are bucketed rather than entered in the 

markets.

call option – A call option is a contract between a seller (the option writer) 

and a buyer under which the option buyer has the right to exercise the option and thereby purchase the underlying security at an agreed-on price 

(the “strike” or “exercise” price). The option will expire unexercised (and 

hence valueless) unless it is exercised within a specified time period, the last 

day of which is the expiration date. See also put option.

churning – Churning is an illegal practice when brokers with discretionary authority or control over an account enter into trades to generate 

commissions.

cross trade – See matched order.

flipping – Flipping occurs when someone purchases securities as part of a 

public offering with an intent to sell immediately into a rising aftermarket.

free writing – Free writing refers to information not contained in a prospectus relating to a company that may be disseminated by that company 

while engaged in a public offering.

gun-jumping – Gun-jumping results from premature publicity about an 

upcoming public offering. Gun-jumping is prohibited by 1933 Act § 5(c).

haircut – A haircut is a discount deducted from the value of securities 

when computing value for purposes of the net capital requirements for 

securities broker–dealers (SEC Rule 15c3-1).

margin – A margin transaction involves buying securities with funds borrowed from the broker. The Federal Reserve Board and the exchanges set 

the minimum margin requirements.
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168

market maker – A market maker is a securities dealer that provides firm 

bid and asked (ask) prices for securities. Market makers are regulated by 

FINRA and originally functioned primarily in the over-the-counter markets, but now they also make a market for exchange-traded securities.

marking the close – Marking the close is a manipulative practice whereby 

a portfolio manager artificially inflates the price of stocks held in the 

portfolio just before the close of trading for the purpose of increasing the 

portfolio’s value.

mark up (and mark down) – A mark up or mark down refers to the 

commission received by a broker–dealer for a retail transaction in the 

NASDAQ market. A mark up represents the amount that the customer is 

charged above the actual purchase price. A mark down is the amount 

deducted from the proceeds of the sales price.

matched order – A matched order occurs when orders are entered simultaneously to buy and sell the same security. The mere fact that a broker crosses trades or enters into matched orders does not violate the 1934 

Act. Cross-trades can actually benefit the firm’s customers if the savings 

on commissions are passed on to the customers. Cross-trades become 

problematic when the cost savings are not passed on to the customer.

odd-lot – An odd-lot refers to a block of shares containing fewer than 100

shares. Traditionally shares in publicly held companies have been traded 

in 100-share lots. Transactions in 100-share lots are referred to as round 

lots.

over-the-counter – An over-the-counter transaction is one that takes 

place through something other than the facilities of an organized securities exchange.

painting the tape – Painting the tape is a manipulative practice of reporting fictitious orders to make it appear that real transactions are taking 

place.

parking – Parking is a fraudulent practice of placing shares in someone 

else’s name in order to hide the identity of the true owner.

post-effective period – The post-effective period is the time after a 1933 

Act registration has become effective. Sales of the securities covered by 
Glossary

169

the registration statement are not permitted until the beginning of the 

post-effective period. During the post-effective period, the prospectus 

delivery requirements of 1933 Act §§ 5(b) and 10 continue to apply.

prefiling period – The prefiling period is that time shortly before the filing of a registration when all offers to buy and all offers to sell are prohibited by the terms of 1933 Act § 5(a).

prospectus – As defined in 1933 Act § 2(a)(10), a prospectus is an offer to 

sell in writing or through other permanent means such as online. During 

a public offering, a prospectus is subject to the disclosure requirements 

spelled out in § 10. Also § 5(b) sets forth the circumstances under which 

a prospectus must be provided to investors.

proxy – Proxy is a power of attorney, granted by a shareholder, authorizing 

the proxy holder to vote the shares owned by the shareholder. Proxy is defined in SEC Rule 14a-1(f) to include any shareholder’s consent or authorization regarding the casting of that shareholder’s vote. Requirements for 

the appropriate form of the proxy itself are found in Rule 14a-4.

proxy solicitation – Solicitation, as defined in SEC Rule 14a-1(l), includes the following: any request for a proxy; any request to execute or 

not to execute, or to revoke, a proxy; or any communication to shareholders reasonably calculated to result in the procurement, withholding, 

or revocation of a proxy. Rule 14a-2 lists the types of solicitations exempt 

from the proxy rules. Rule 14a-3 sets forth the types of information that 

must be included in proxy solicitations.

pump and dump – A pump-and-dump scheme is the fraudulent and 

manipulative practice of hyping particular stocks to bring them to artificially high levels and then dumping the stock into the market.

put option – A put option gives the option’s buyer the right to exercise 

the option by selling the underlying security. The put-option seller must 

purchase the underlying security at the agreed-on price (the strike price) 

if the option is exercised on or before the expiration date. If the strike 

price is “out of the money” in comparison with the price of the underlying security, so that it would not make economic sense to exercise the 

option, the option will simply expire unexercised. See also call option.
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170

quiet period – The quiet period is the time shortly before a 1933 Act registration statement is filed in connection with a public offering (also 

known as the prefiling period). During the quiet period, participants in 

the offering must be careful not to disseminate information that could be 

construed as an illegal offer to sell the securities to be covered by the registration statement.

red herring prospectus – A red herring prospectus is a preliminary prospectus that may be used after the filing of a 1933 Act registration during 

the waiting period (see SEC Rule 430).

reporting company – A reporting company is a publicly held company 

that is subject to the 1934 Act’s periodic (annual, quarterly, and interim) 

reporting requirements. Reporting companies include those having to 

register under 1934 Act § 12 because their shares are listed on a national 

exchange (including the NYSE, AMEX, and NASDAQ stock market), as 

well as over-the-counter companies having more than $10 million in assets and 500 shareholders of record.

restricted securities – A restricted security is one that is subject to transfer restrictions. Restricted securities often result from securities that are 

sold in a private placement as opposed to a public offering.

safe harbor rule – A safe harbor rule is a rule under which the SEC provides guidance as to how to comply with specific provisions of the securities laws. It is a safe harbor, but it is not the exclusive way of complying 

with the applicable law.

sale against the box – A sale against the box takes place when the seller, 

anticipating a decline in the price of stock she owns, sells it to a buyer at 

the present market price, but delivers it later, when (she hopes) the market price will have fallen below the sales price, thus creating a paper profit 

for the seller.

scalping – Scalping is the illegal practice that occurs when someone touts 

securities that he owns with the goal of raising the price to increase the 

value of his holdings.

secondary offering – A secondary offering occurs when securities are offered as part of a distribution by existing securities holders. In a secondary offering, the proceeds of the sale go to the selling shareholders. In 
Glossary

171

contrast, with a primary offering the shares are sold by the issuer and the 

proceeds go to the company.

shelf registration – A shelf registration is a 1933 Act registration statement for securities that are going to be offered on a delayed or continuous basis (see SEC Rule 415).

short sale – A short sale takes place when a seller, believing the price of a 

stock will fall, borrows stock from a lender and sells it to a buyer. Later, 

the seller buys similar stock to pay back the lender, ideally at a lower price 

than he received on the sale to the buyer.

solicitation – See proxy solicitation.

specialist – For most of its existence, New York Stock Exchange trading 

took place through specialist firms who had no retail securities business. 

Over time, the specialist system has given way to a system based on designated market makers who function much like market makers in the 

over-the-counter markets.

spread – The spread is the difference between the bid and the asked price 

of a security. A market maker earns its commission through the spread—

by buying at the bid price and then selling the securities at the asked 

price. See also mark up and mark down.

street name – Securities are held in street name when the brokerage firm 

holds the securities in their own name for the benefit of the customer as 

beneficial owner.

tombstone advertisement – A tombstone ad is the industry term for an 

identifying statement that simply announces the offering and lists the 

underwriter.

underwriter – An underwriter is a broker–dealer or investment banking 

firm that acts as a wholesaler for a securities distribution. Underwriter 

status can also result from substantial participation in a securities distribution (see 1933 Act § 2(a)(11)).

waiting period – The waiting period is the time between the filing of a 

1933 Act registration statement and the time that it becomes effective. Sales 

of the securities covered by the registration statement are not permitted 

during the waiting period (1933 Act § 5(a)). During the waiting period, 
Federal Securities Law

172

written, online, radio, and television communications must satisfy or be 

exempt from the prospectus requirements of 1933 Act §§ 5(b) and 10.

warrant – A warrant is a stock option issued by the company itself, often 

as compensation to promoters or as a separate security to be publicly 

traded. Stock options may also be issued by the company to employees or 

consultants; generally these are simply referred to as stock options and 

not as warrants.

wash sale – A wash sale is a fictitious sale in which there is no change in 

beneficial ownership: It is a transaction without the usual profit motive,

and is designed to give the false impression of market activity when in 

fact there is none.
173

Table of Cases

By Case Name

Aaron v. SEC, 446 U.S. 680 (1980), nn.297, 422, 485

Abell v. Potomac Insurance Co., 858 F.2d 1104 (5th Cir. 1988), n.273

Ackerberg v. Johnson, 892 F.2d 132 (8th Cir. 1989), n.213

Adams v. Standard Knitting Mills, Inc., 623 F.2d 422 (6th Cir. 1980), n.421

Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959), n.645

Advanta Corp. Securities Litigation, In re, 180 F.3d 525 (3d Cir. 1999), n.492

Affco Investments 2001 LLC v. Proskauer Rose LLP, 625 F.3d 185 (5th Cir. 2010), nn.307, 

549

Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), nn.416, 516, 581, 

588, 628

Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143 (1987), n.530

Alabama Farm Bureau Mutual Casualty Co. v. American Fidelity Life Insurance Co., 606 

F.2d 602 (5th Cir. 1979), n.502

Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496 (7th Cir. 1989), n.101

Ameribanc Investors Group v. Zwart, 706 F. Supp. 1248 (E.D. Va. 1989), n.405

American Bakeries Co. v. Pro-Met Trading Co., [1981 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 97,925 (N.D. Ill. 1981), n.468

Amino Acid Lysine Antitrust Litigation, In re, 918 F. Supp. 1190 (N.D. Ill. 1996), n.338

Antinore v. Alexander & Alexander Service, Inc., 597 F. Supp. 1353 (D. Minn. 1984), 

n.311

Aries Aluminum Corp. v. King, 1999 U.S. App. LEXIS 24827 (6th Cir. Sept. 30, 1999), 

n.556

Armstrong v. McAlpin, 699 F.2d 79 (2d Cir. 1983), n.308

Arrow Distributing Corp. v. Baumgartner, 783 F.2d 1274 (6th Cir. 1986), nn.657, 662

Atkins v. Tony Lama Co., 624 F. Supp. 250 (S.D. Ind. 1985), n.406

Atlantic Financial Management, Inc., In re, 784 F.2d 29 (1st Cir. 1986), nn.306, 545

Austin v. Loftsgaarden, 675 F.2d 168 (8th Cir. 1982), n.288

Baan Co. Securities Litigation, In re, 186 F.R.D. 214 (D.D.C. 1999), n.329

Baffa v. Donaldson, Lufkin & Jenrette Securities Corp., 222 F.3d 52 (2d Cir. 2000), n.324

Bailes v. Colonial Press, Inc., 444 F.2d 1241 (5th Cir. 1971), n.502

Bald Eagle Area School District v. Keystone Financial, Inc., 189 F.3d 321 (3d Cir. 1999), 

n.556

Baltia Air Lines, Inc. v. CIBC Oppenheimer Corp., 2001 WL 431528, [2001–2002 Transfer 

Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,421 (2d Cir. 2001), n.701

Bankamerica Corp. Securities Litigation, In re, 95 F. Supp. 2d 1044 (D. Mo. 2000), n.368

Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490 (7th Cir. 1986), n.552

Basic, Inc. v. Levinson, 485 U.S. 224 (1988), nn.408, 477, 500, 504, 508, 511, 514–16, 573–

74

Bateman, Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985), n.279
Federal Securities Law

174

Bath Industries v. Blot, 427 F.2d 97 (7th Cir. 1970), n.430

Beaumont v. American Can Co., 621 F. Supp. 484 (S.D.N.Y. 1984), n.441

Benisch v. Cameron, 81 F. Supp. 882 (S.D.N.Y. 1948), n.652

Berman v. Metzger, [1981 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,857 (D.D.C. 

1981), n.467

Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966), n.664

Blau v. Lehman, 368 U.S. 403 (1962), nn.641–42

Blau v. Mission Corp., 212 F.2d 77 (2d Cir. 1954), n.654

Blech Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,978, 2000 WL 661680 (S.D.N.Y. 2000), n.348

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), nn.497–500, 504, 539

Board of Trade v. SEC, 187 F.3d 713 (7th Cir. 1999), n.86

Bosse v. Crowell Collier & MacMillan, 565 F.2d 602 (9th Cir. 1977), n.507

Bowman v. Legato Systems, Inc., 195 F.R.D. 655 (N.D. Cal. 2000), n.329

Bradshaw v. Jenkins, [1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,645 (W.D. 

Wash. 1984), n.406

Brill v. Burlington Northern, Inc., 590 F. Supp. 893 (D. Del. 1984), n.455

Brockton Savings Bank v. Peat, Marwick, Mitchell & Co., 577 F. Supp. 1281 (D. Mass. 

1983), n.50

Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th Cir. 1999), n.493

Buchholtz v. Renard, 188 F. Supp. 888 (S.D.N.Y. 1960), n.276

Buffo v. Graddick, 742 F.2d 592 (11th Cir. 1984), n.311

Buhler v. Audio Leasing Corp., 807 F.2d 833 (9th Cir. 1987), n.305

Burke v. Ruttenberg, 102 F. Supp. 2d 1280 (N.D. Ala. 2000), nn.323, 330

Burlington Coat Factory Securities Litigation, In re, 114 F.3d 1410 (3d Cir. 1997), n.489

Burns v. Prudential Securities, 116 F. Supp. 2d 917 (N.D. Ohio 2000), n.363

Busch v. Carpenter, 827 F.2d 653 (10th Cir. 1987), nn.175, 178

Business Roundtable v. SEC, 2011 WL 2936808 (D.C. Cir. 2011), n.402

Buttry v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir. 1969), n.681

Cady, Roberts & Co., In re, 40 S.E.C. 907 (1961), nn.583, 586

Carl M. Loeb, Rhoades & Co., In re, 38 S.E.C. 843 (1959), nn.110, 116

Carpenter v. Harris, Upham & Co., 594 F.2d 388 (4th Cir. 1979), n.545

Carpenter v. United States, 484 U.S. 19 (1987), nn.65, 496, 569–71, 591, 593

Carrott v. Shearson Hayden Stone, Inc., 724 F.2d 821 (9th Cir. 1984), n.681

Carter–Wallace, Inc. Securities Litigation, In re, 150 F.3d 153 (2d Cir. 1998), n.494

Cattlemen’s Investment Co. v. Fears, 343 F. Supp. 1248 (W.D. Okla. 1972), n.444

Cendant Corp. Litigation, In re, 182 F.R.D. 144 (D.N.J. 1998), nn.335, 337–38

Cendant Corp. Prides Litigation, In re, 98 F. Supp. 2d 602 (D.N.J. 2000), n.338

Cendant Corp. Prides Litigation, In re, 51 F. Supp. 2d 537 (D.N.J. 1999), n.341

Central Bank of Denver v. First Interstate Bank of Denver, 508 U.S. 959 (1993), nn.307, 

510, 549

Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), n.675

Chasins v. Smith, Barney, 438 F.2d 1167 (2d Cir. 1970), nn.676, 699

Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir. 1984), n.47
Table of Cases

175

Chemical Fund, Inc. v. Xerox Corp., 377 F.2d 107 (2d Cir. 1967), n.636

Cherednichenko v. Quarterdeck Corp., [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,108 (C.D. Cal. 1997), n.153

Chiarella v. United States, 445 U.S. 222 (1980), nn.584–85, 589–90, 598, 619

Chicago Mercantile Exchange v. SEC, 883 F.2d 537 (7th Cir. 1989), n.86

Chris-Craft Industries, Inc. v. Bangor Punta Corp., 426 F.2d 569 (2d Cir. 1970), n.116

Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir. 1973), n.615

Christy v. Cambron, 710 F.2d 669 (10th Cir. 1983), n.42

Chromalloy American Corp. v. Sun Chemical Corp., 611 F.2d 240 (8th Cir. 1979), n.468

Citizens First Bancorp, Inc. v. Harreld, 559 F. Supp. 867 (W.D. Ky. 1982), n.423

Cleary v. Perfectune, 700 F.2d 774 (1st Cir. 1983), n.308

Coates v. Heartland Wireless Communications, Inc., 100 F. Supp. 2d 417 (N.D. Tex. 

2000), n.491

Colby v. Klune, 178 F.2d 872 (2d Cir. 1949), n.639

Collins v. Signetics Corp., 443 F. Supp. 552 (E.D. Pa. 1977), n.275

Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir. 1966), n.681

Commerford v. Olson, 794 F.2d 1319 (8th Cir. 1986), n.306

Conagra, Inc. v. Tyson Foods, Inc., 708 F. Supp. 257 (D. Neb. 1989), n.467

Condec Corp. v. Farley, 573 F. Supp. 1382 (S.D.N.Y. 1983), n.423

Conner Bonds Litigation, In re, [1988–1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 93,969 (E.D.N.C. 1988), n.288

Conseco, Inc. Securities Litigation, In re, [2000–2001 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 91,234 (S.D. Ind. 2000), n.324

Corenco Corp. v. Schiavone & Sons, Inc., 488 F.2d 207 (2d Cir. 1973), n.429

Cort v. Ash, 422 U.S. 66 (1975), n.540

C.R.A. Realty Corp. v. Goodyear Tire & Rubber Co., 705 F. Supp. 972 (S.D.N.Y.), aff’d, 

888 F.2d 125 (2d Cir. 1989), n.638

Craftmatic Securities Litigation, In re, 703 F. Supp. 1175 (E.D. Pa. 1989), n.275

Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007), n.668

Crookham v. Crookham, 914 F.2d 1027 (8th Cir. 1990), nn.302, 480, 541, 542

CTS v. Dynamics, 481 U.S. 69 (1987), n.101

Curran v. Merrill Lynch Pierce Fenner & Smith, 456 U.S. 353 (1982), n.540

Currie v. Cayman Research Corp., 835 F.2d 780 (11th Cir. 1988), n.288

Cyber Media Group v. Island Mortgage Network, 183 F. Supp. 2d 559 (E.D.N.Y. 2002), 

n.563

Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 547 U.S. 71 (2006), n.497

Dahl v. Gardner, 583 F. Supp. 1262 (D. Utah 1984), n.314

Dalarne Partners, Ltd. v. Sync Research, Inc., 103 F. Supp. 2d 1209 (C.D. Cal. 2000), 

n.493

Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216 (4th Cir. 1980), n.468

Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir. 1967), n.501

Data Access Systems, In re, 843 F.2d 1537 (3d Cir. 1988), n.530

Davis v. Avco Financial Services, Inc., 739 F.2d 1057 (6th Cir. 1984), n.294
Federal Securities Law

176

Diamond Multimedia Sys., Inc. Securities Litigation, In re, [1997 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 99,561, 1997 WL 773733 (N.D. Cal. 1997), n.345

Dietrich v. Bauer, 192 F.R.D. 119 (S.D.N.Y. 2000), n.332

Dirks v. SEC, 463 U.S. 646 (1983), nn.606, 620

Diskin v. Lomasney & Co., 452 F.2d 871 (2d Cir. 1971), n.283

District 65, UAW v. Harper & Row Publishers, 576 F. Supp. 1468 (S.D.N.Y. 1983), n.405

Donald J. Trump Casino, In re, 7 F.3d 357 (3d Cir. 1993), n.154

Doran v. Petroleum Management Corp., 545 F.2d 893 (5th Cir. 1977), nn.209, 239

Dottenheim v. Murchison, 227 F.2d 737 (5th Cir. 1955), nn.652, 654

Draney v. Wilson, Morton, Assaf & McElligott, 592 F. Supp. 9 (D. Ariz. 1984), n.265

Drexel Burnham Lambert Group, Inc., In re, 960 F.2d 285 (2d Cir. 1992), n.324

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), nn.519–20

Durham v. Kelly, 810 F.2d 1500 (9th Cir. 1987), n.305

DVI, Inc. Securities Litigation, In re, Nos. 08-8033 & 08-8045, 2011 WL 1125926 (3d Cir. 

Mar. 29, 2011), n.521

Dyer v. Eastern Trust Co., 336 F. Supp. 890 (N.D. Me. 1971), n.441

Edgar v. MITE, 457 U.S. 624 (1982), n.101

Ellis v. Merrill Lynch & Co., 664 F. Supp. 979 (E.D. Pa. 1987), n.494

Energy Ventures, Inc. v. Appalachian Co., 587 F. Supp. 734 (D. Del. 1984), n.444

EP Medsystems, Inc. v. EchoCath, Inc., 255 F.3d 865 (3d Cir. 2000), n.492

Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403, 2011 WL 2175208 (S. Ct. June 

6, 2011), n.522

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), nn.473, 484

Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968), n.265

Exchange National Bank v. Touche Ross & Co., 544 F.2d 1126 (2d Cir. 1976), n.47

F & M Distribs., Inc. Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,621 (E.D. Mich. 1999), n.341

Falls v. Fickling, 621 F.2d 1362 (5th Cir. 1980), n.507

Feder v. Martin Marietta Corp., 406 F.2d 260 (2d Cir. 1969), nn.643, 645

Feit v. Leaseco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971), 

n.265

Field v. Trump, 850 F.2d 938 (2d Cir. 1988), nn.455, 468

Finkel v. Docutel/Olivetti Corp., 817 F.2d 356 (5th Cir. 1987), n.516

First Jersey Securities, Inc. v. SEC, 476 A.2d 861 (N.J. Super. 1984), n.59

Flight Transportation Corp. Securities Litigation, In re, 593 F. Supp. 612 (D. Minn. 1984), 

n.265

Florida State Board of Administration v. Brick, [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,758, 2000 WL 178416 (6th Cir. 2000), n.322

Foltz v. U.S. News & World Report, Inc., 627 F. Supp. 1143 (D.D.C. 1986), n.494

Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232 (1976), n.647

Fortune Systems Securities Litigation, In re, [1987 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 93,390 (N.D. Cal. 1987), n.265

Foster v. Jesup & Lamont Securities Co., Inc., 759 F.2d 838 (11th Cir. 1985), n.272

Fradkin v. Ernst, 571 F. Supp. 829 (N.D. Ohio 1983), n.420
Table of Cases

177

Franchard Corp., 42 S.E.C. 163 (1964), n.147

Frank v. Dana Corp., No. 09-4233, 2011 U.S. App. LEXIS 10437 (6th Cir. May 25, 2011), 

n.553

Franklin Savings Bank of New York v. Levy, 551 F.2d 521 (2d Cir. 1977), n.63

Frederiksen v. Poloway, 637 F.2d 1147 (7th Cir. 1981), n.42

Freeman v. Laventhol & Horwath, 915 F.2d 193 (6th Cir. 1990), n.517

Friedman v. Salomon/Smith Barney, Inc., 313 F.3d 796 (2d Cir. 2002), n.668

Friedrich v. Bradford, 542 F.2d 307 (6th Cir. 1976), n.630

GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971), n.429

Gaines v. Haughton, 645 F.2d 761 (9th Cir. 1981), n.147

Gas Reclamation, Inc. Securities Litigation, In re, 659 F. Supp. 493 (S.D.N.Y. 1987), n.311

Gateway Industries, Inc. v. Agency Rent A Car, Inc., 495 F. Supp. 92 (N.D. Ill. 1980), 

n.468

G.A. Thompson & Co. v. Partridge, 636 F.2d 945 (5th Cir. 1981), n.305

Gillette Co. v. RB Partners, 693 F. Supp. 1266 (D. Mass. 1988), n.420

Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir. 1959), nn.190, 200

Glazer Capital Management LP v. Magistri, 549 F.3d 736 (9th Cir. 2008), n.486

Global Intellicom, Inc. v. Thomson Kernaghan & Co., [1999 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,534, 1999 WL 544708 (S.D.N.Y. 1999), n.429

Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977), n.501

Gould v. American-Hawaiian Steamship Co., 535 F.2d 761 (3d Cir. 1976), n.544

Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999), n.489

Green v. Ameritrade, Inc., 120 F. Supp. 795 (D. Neb. 2000), n.362

Green v. Occidental Petroleum Corp., 541 F.2d 1335 (9th Cir. 1976), n.524

Greenberg v. Boettcher & Co., 755 F. Supp. 776 (N.D. Ill. 1991), n.517

Greenstein v. Paul, 400 F.2d 580 (2d Cir. 1968), n.499

Griffin v. GK Intelligent Systems, Inc., 196 F.R.D. 298 (S.D. Tex. 2000), n.335

Griffin v. GK Intelligent Systems, Inc., 87 F. Supp. 2d 684 (S.D. Tex. 1999), n.487

Gund v. First Florida Banks, Inc., 726 F.2d 682 (11th Cir. 1984), n.657

Gustafson v. Alloyd Co., 513 U.S. 561 (1995), nn.262, 271

Gwozdzinsky v. Zell/Chil-mark Fund, L.P., 156 F.3d 396 (2d Cir. 1998), n.659

Haas v. Wieboldt Stores, Inc., 725 F.2d 71 (7th Cir. 1984), n.395

Hahn v. Breed, 587 F. Supp. 1369 (S.D.N.Y. 1984), n.410

Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969), nn.679–80

Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir. 1985), n.441

Harmsen v. Smith, 693 F.2d 932 (9th Cir. 1982), n.553

Harris v. Union Electric Co., 787 F.2d 355 (8th Cir. 1986), n.523

Harrison v. Equitable Life Assurance Society, 435 F. Supp. 281 (W.D. Mich. 1977), n.64

Henricksen v. Henricksen, 640 F.2d 880 (7th Cir. 1981), nn.306, 545

Herm v. Stafford, 663 F.2d 669 (6th Cir. 1981), n.553

Herman & MacLean v. Huddleston, 459 U.S. 375 (1983), nn.257, 534

Herskowitz v. Nutri/System, Inc., 857 F.2d 179 (3d Cir. 1988), n.420

Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680 (5th Cir. 1971), 

n.210
Federal Securities Law

178

Hillsborough Investment Corp. v. SEC, 276 F.2d 665 (1st Cir. 1960), n.176

H.J., Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (1989), n.564

H.K. Porter Co. v. Nicholson File Co., 482 F.2d 421 (1st Cir. 1973), n.576

Ho v. SEC, No. 06-3788, 2007 WL 1224027 (7th Cir. Apr. 25, 2007), n.692

Hochfelder v. Midwest Stock Exchange, 503 F.2d 364 (7th Cir. 1974), n.308

Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990), nn.306, 545

Holstein v. UAL Corp., 662 F. Supp. 153 (N.D. Ill. 1987), n.441

Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir. 1960), n.502

Hoover Co. v. Fuqua Industries, Inc., [1979–1980 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 97,107 (N.D. Ohio 1979), n.440

Hudson v. United States, 522 U.S. 93 (1997), n.625

Humana, Inc. v. American Medicorp, Inc., 445 F. Supp. 613 (S.D.N.Y. 1977), n.577

I. Meyer Pincus & Associates v. Oppenheimer & Co., 936 F.2d 759 (2d Cir. 1991), n.154

Ikon Office Solutions, Inc. Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 90,972 (E.D. Pa. 2000), n.348

InterBank Funding Corp. Securities Litigation, In re, 629 F.3d 213 (D.C. Cir. 2010), n.516

Inter-County Resources, Inc. v. Medical Resources, Inc., 49 F. Supp. 2d 682 (S.D.N.Y. 

1999), n.350

IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980), n.313

Iowa Public Employees’ Retirement System v. MF Global, Ltd., 620 F.3d 137 (2d Cir. 

2010), n.155

Ira Haupt & Co., In re, 23 S.E.C. 589 (1946), nn.10, 185, 224

Jabend, Inc. v. Four-Phase Systems, Inc., 631 F. Supp. 1339 (W.D. Wash. 1986), n.43

Jacobson v. Peat, Marwick, Mitchell & Co., 445 F. Supp. 518 (S.D.N.Y. 1977), n.479

Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, 2011 WL 2297762 (U.S. 

June 13, 2011), n.509

Jensen v. Voyles, 393 F.2d 131 (10th Cir. 1968), n.499

J.I. Case Co. v. Borak, 377 U.S. 426 (1964), nn.386, 403, 539

Kademian v. Ladish Co., 792 F.2d 614 (7th Cir. 1986), n.415

Kaliski v. Hunt International Resources Corp., 609 F. Supp. 649 (N.D. Ill. 1985), n.310

Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946), n.480

Kennecott Copper Corp. v. Curtis-Wright Corp., 584 F.2d 1195 (2d Cir. 1978), n.444

Kerbs v. Fall River Industries, Inc., 502 F.2d 731 (10th Cir. 1974), n.314

Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973), nn.658–60

Ketchum v. Green, 557 F.2d 1022 (3d Cir. 1977), n.417

Kilmartin v. H.C. Wainwright & Co., 580 F. Supp. 604 (D. Mass. 1984), n.312

King v. Livent, 36 F. Supp. 2d 187 (S.D.N.Y. 1999), n.323

King v. Winkler, 673 F.2d 342 (11th Cir. 1982), n.42

Kircher v. Putnam Funds, 547 U.S. 633 (2006), n.367

Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir. 1987), n.517

Kline v. First Western Government Securities, Inc., 24 F.3d 480 (3d Cir. 1994), n.154

Kline v. Henrie, 679 F. Supp. 464 (M.D. Pa. 1988), n.64

Klock v. Lehman Bros. Kuhn Loeb, Inc., 584 F. Supp. 210 (S.D.N.Y. 1984), n.681

Koppel v. 4987 Corp., 191 F.R.D. 360 (S.D.N.Y. 2000), n.335
Table of Cases

179

Krangel v. Golden Rule Res., Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 91,025 (E.D. Pa. 2000), nn.347–48

Krause v. Perryman, 827 F.2d 346 (8th Cir. 1987), n.301

Krauth v. Executive Telecard, Ltd., 890 F. Supp. 269 (S.D.N.Y. 1995), n.411

Kubik v. Goldfield, 479 F.2d 472 (3d Cir. 1973), n.220

Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), nn.529, 530

Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985), n.43

Landry v. All American Assurance Co., 688 F.2d 381 (5th Cir. 1982), nn.301, 541

Lane Bryant, Inc. v. Hatleigh Corp., 517 F. Supp. 1196 (S.D.N.Y. 1981), n.429

Lehman Bros. Mortgage-Backed Securities Litigation, In re, 2011 WL 1778726 (2d Cir. 

2011), n.188

Leitner v. Kuntz, 655 F. Supp. 725 (D. Utah 1987), n.63

Levin v. Marder, 343 F. Supp. 1050 (W.D. Pa. 1972), n.64

Lewis v. Mellon Bank, 513 F.2d 921 (3d Cir. 1975), n.646

Lewis v. Varnes, 505 F.2d 785 (2d Cir. 1974), n.646

Liberty National Insurance Holding Co. v. Charter Co., 734 F.2d 545 (11th Cir. 1984), 

n.468

Lincoln National Bank v. Herber, 604 F.2d 1038 (7th Cir. 1979), n.506

Local 144 Nursing Home Pension Fund v. Honeywell International, Inc., [2000–2001 

Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,261, 2000 U.S. Dist. LEXIS 16712 

(D.N.J. Nov. 16, 2000), n.325

Lone Star Ladies Investment Club v. Schlotzsky’s Inc., 238 F.3d 363 (5th Cir. 2001), 

nn.263, 285

Lopez v. Dean Witter Reynolds, Inc., 591 F. Supp. 581 (N.D. Cal. 1984), n.682

Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986), n.154

Lucent Technologies, Inc. Securities Litigation, In re, 194 F.R.D. 137 (D.N.J. 2000), n.338

Ludlow Corp. v. Tyco Laboratories, Inc., 529 F. Supp. 62 (D. Mass. 1981), n.442

Lutheran Brotherhood Variable Insurance Products Co., In re, 105 F. Supp. 2d 1037 (D. 

Minn. 2000), n.366

Mader v. Armel, 402 F.2d 158 (6th Cir. 1968), n.501

Madison Consultants v. FDIC, 710 F.2d 57 (2d Cir. 1983), n.505

Magida v. Continental Can Co., Inc., 231 F.2d 843 (2d Cir. 1956), n.656

Maher v. Durango Metals, 144 F.3d 1302 (10th Cir. 1998), n.543

Malack v. BDO Seidman LLP, 617 F.3d 743 (3d Cir. 2010), n.516

Maldonado v. Flynn, 597 F.2d 789 (2d Cir. 1979), n.393

Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017 (6th Cir. 1979), n.505

Marbury Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir. 1980), nn.306, 545

Marine Bank v. Weaver, 455 U.S. 551 (1982), nn.36, 50

Martin v. Pepsi-Cola Bottling Co., 639 F. Supp. 931 (D. Md. 1986), n.313

Matrixx Initiatives, Inc. v. Siracusana, 131 S. Ct. 1309 (2011), nn.513, 514

Mayer v. Oil Field Systems Corp., 803 F.2d 749 (2d Cir. 1986), nn.290–91

McCarthy v. SEC, 406 F.3d 179 (2d Cir. 2005), n.692

McKesson HBOC, Inc. Securities Litigation, In re, 97 F. Supp. 2d 993 (N.D. Cal. 1999), 

n.321
Federal Securities Law

180

Medtox Scientific, Inc. v. Morgan Capital L.L.C., 50 F. Supp. 2d 896 (D. Minn. 1999), 

n.636

Mego Financial Corp. Securities Litigation, In re, 213 F.3d 454 (9th Cir. 2000), n.348

Mendell v. Greenberg, 612 F. Supp. 1543 (S.D.N.Y. 1985), n.410

Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010), n.532

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930 (2d Cir. 1986), n.684

Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), n.550

Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049 (9th Cir. 2008), n.486

Meyers v. C & M Petroleum Producers, Inc., 476 F.2d 427 (5th Cir. 1973), n.260

Mezzonen, S.A. v. Wright, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,704, 1999 WL 1037866 (S.D.N.Y. Nov. 16, 1999), nn.556, 563

Mid-Continent Bancshares, Inc. v. O’Brien, [1982 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 98,734 (E.D. Mo. 1981), n.431

Mihara v. Dean Witter, 619 F.2d 814 (9th Cir. 1980), n.677

Miller v. Material Sciences Corp., 31 Sec. Reg. & L. Rep. (BNA) 1007 (N.D. Ill. 1999), 

n.335

Mills v. Electric Auto-Lite Co., 552 F.2d 1239 (7th Cir. 1977), nn.403, 426

Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970), n.418

Mishkin v. Peat, Marwick, Mitchell & Co., 658 F. Supp. 271 (S.D.N.Y. 1987), n.312

Morales v. Freund, 163 F.3d 763 (2d Cir. 1999), n.635

Morales v. Lukens, Inc., 593 F. Supp. 1209 (S.D.N.Y. 1984), n.664

Morrison Knudsen Corp. v. Heil, 705 F. Supp. 497 (D. Idaho 1988), n.467

Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), n.482

Morrissey v. County Tower Corp., 717 F.2d 1227 (8th Cir. 1983), n.415

Moss v. Morgan Stanley, Inc., 719 F.2d 5 (2d Cir. 1983), nn.586, 631

Musick, Peeler & Garrett v. Employers Insurance of Wausau, 508 U.S. 286 (1993), nn.270, 

539, 551

Nanophase Technologies Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 90,686, 1999 WL 965468 (N.D. Ill. 1999), n.327

Nanopierce Technologies, Inc. v. Depository Trust & Clearing Corp., 168 P.3d 73 (Nev. 

2007), n.702

National Bank v. All American Assurance Co., 583 F.2d 1295 (5th Cir. 1978), n.506

Nesbit v. McNeil, 896 F.2d 380 (9th Cir. 1990), n.677

Netsky v. Capstead Mortgage Corp., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 91,020 (N.D. Tex. 2000), n.319

Neuberger v. Shapiro, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,061 

(E.D. Pa. 2000), n.348

Neuwirth Inv. Fund, Ltd. v. Swanton, 422 F. Supp. 1187 (S.D.N.Y. 1975), n.213

Newcome v. Esrey, 862 F.2d 1099 (4th Cir. 1988), n.301

Newton v. Merrill, Lynch, Pierce, Fenner & Smith, 135 F.3d 266 (3d Cir. 1998), n.698

Nice Systems, Ltd. Securities Litigation, In re, 188 F.R.D. 206 (D.N.J. 1999), n.329

Northstar Financial Advisors Inc. v. Schwab Investments, 615 F.3d 1106 (9th Cir. 2010), 

n.541

Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000), nn.488, 491, 492
Table of Cases

181

N2K Inc. Securities Litigation, In re, 202 F.3d 81 (2d Cir. 2000), nn.153, 154

Nutis v. Penn Merchandising Corp., 610 F. Supp. 1573 (E.D. Pa. 1985), n.410

Oliff v. Exchange International Corp., 669 F.2d 1162 (7th Cir. 1980), n.657

Osborne v. Mallory, 86 F. Supp. 869 (S.D.N.Y. 1949), n.480

Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 

2007), n.521

Otto v. SEC, 253 F.3d 960 (7th Cir. 2001), n.692

P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F. Supp. 2d 546 (D.N.J. 

1999), n.153

Pacific Investment Management Co. LLC v. Mayer Brown LLP, 603 F.3d 144 (2d Cir. 

2010), n.307

Palumbo v. Deposit Bank, 758 F.2d 113 (3d Cir. 1985), n.405

Paracelsus Corp. Securities Litigation, In re, 61 F. Supp. 2d 591 (S.D. Tex. 1998), n.493

Paul F. Newton & Co. v. Texas Commerce Bank, 630 F.2d 1111 (5th Cir. 1980), nn.306, 

545

PAZ Securities, Inc. v. SEC, 494 F.3d 1059 (D.C. Cir. 2007), n.692

Pelletier v. Stuart-James Co., 863 F.2d 1550 (11th Cir. 1989), nn.494, 682

Penn Central Securities Litigation, In re, 494 F.2d 528 (3d Cir. 1974), n.503

Pet Quarters, Inc. v. Depository Trust & Clearing Corp., 545 F. Supp. 2d 845 (E.D. Ark. 

2008), n.702

Pinter v. Dahl, 486 U.S. 622 (1988), nn.272, 275, 277–78, 280–81

Piper v. Chris-Craft Industries, Inc., 430 U.S. 1 (1977), n.575

Polaroid v. Disney, 862 F.2d 987 (3d Cir. 1988), nn.466, 578

Police Retirement System v. Midwest Investment Advisory Services, Inc., 706 F. Supp. 708 

(E.D. Mo. 1989), n.560

Pontiac, City of, General Employees’ Retirement System v. MBIA, Inc., 637 F.3d 169 (2d 

Cir. 2011), n.532

Popkin v. Dingman, 366 F. Supp. 534 (S.D.N.Y. 1973), n.644

Portnoy v. Kawecki Berylco Industries, Inc., 607 F.2d 765 (7th Cir. 1979), n.654

Powers v. Eichen, 229 F.3d 1249 (9th Cir. 2000), n.340

Press v. Chemical Investment Services Corp., 166 F.3d 529 (2d Cir. 1999), n.492

Quincy Co-Operative Bank v. A.G. Edwards & Sons, Inc., 655 F. Supp. 78 (D. Mass. 

1986), n.274

Quintel Corp., N.V. v. Citibank, N.A., 589 F. Supp. 1235 (S.D.N.Y. 1984), n.314

Raftery v. Mercury Financial Co., No. 97C624, 1997 WL 529553 (N.D. Ill. Aug. 7, 1997), 

n.337

Ray v. Lehman Bros. Kuhn Loeb, Inc., 624 F. Supp. 16 (N.D. Ga. 1984), n.476

Refco, Inc. Securities Litigation, In re, No. 05 Civ. 8626 (GEL), 2008 WL 3843343 at *4 

(S.D.N.Y. Aug. 14, 2008), n.189

Reingold v. Deloitte Haskins & Sells, 599 F. Supp. 1241 (S.D.N.Y. 1984), n.517

Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418 (1972), n.648

Reves v. Ernst & Young, 494 U.S. 56 (1990), nn.46, 48

Ribozyme Pharmaceuticals, Inc. Securities Litigation, In re, 192 F.R.D. 656 (D. Colo. 

2000), n.328
Federal Securities Law

182

Richter v. Achs, 174 F.R.D. 316 (S.D.N.Y. 1997), n.350

Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975), nn.306, 313

Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st Cir. 1991), n.154

Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975), n.469

Roots Partnership v. Land’s End, Inc., 965 F.2d 1411 (7th Cir. 1992), nn.149, 411

Rosenberg v. XM Ventures, 129 F. Supp. 2d 681 (D. Del. 2001), n.635

Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979), n.479

Rubin v. United States, 449 U.S. 424 (1981), n.505

Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994), n.154

Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964), n.502

Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir. 1986), n.312

Saddleback Partners, Ltd. v. Hiatt, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

91,051, 2000 WL 1182793 (S.D.N.Y. 2000), n.324

Sakhrani v. Brightpoint, Inc., 78 F. Supp. 2d 845 (S.D. Ind. 1999), n.330

Salomon Analyst Metromedia Litigation, In re, 544 F.3d 444 (2d Cir. 2011), n.521

Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980), nn.289, 293

Sanders v. Robinson Humphrey/Am. Express, Inc., 634 F. Supp. 1048 (N.D. Ga. 1986), 

n.517

Sanders v. Thrall Car Manufacturing Co., 730 F.2d 910 (2d Cir. 1984), n.468

San Francisco–Oklahoma Petroleum Exploration Corp. v. Carstan Oil Co., Inc., 765 F.2d 

962 (10th Cir. 1985), n.305

Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977), n.473

Sargent v. Genesco, Inc., 492 F.2d 750 (5th Cir. 1974), n.499

Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010), n.521

Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir. 1974), n.417

Schlifke v. Seafirst Corp., 866 F.2d 935 (7th Cir. 1989), n.301

Schnell v. Schnall, 550 F. Supp. 650 (S.D.N.Y. 1982), n.467

Schreiber v. Burlington Northern, Inc., 472 U.S. 1 (1985), nn.463–65, 473

Scientex Corp. v. Kay, 689 F.2d 879 (9th Cir. 1982), n.638

Scotch v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 709 F. Supp. 95 (M.D. Pa. 

1988), n.275

Seaboard World Airlines, Inc. v. Tiger International, Inc., 600 F.2d 355 (2d Cir. 1979), 

n.576

Seamans v. Aid Auto Stores, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,902 (E.D.N.Y. 2000), n.331

Sears v. Likens, 912 F.2d 889 (7th Cir. 1990), n.287

SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), n.608

SEC v. American Board of Trade, Inc., 830 F.2d 431 (2d Cir. 1987), n.617

SEC v. American International Savings & Loan Association, 199 F. Supp. 341 (D. Md. 

1961), n.165

SEC v. Beisinger Industries Corp., 552 F.2d 15 (1st Cir. 1977), n.616

SEC v. Boesky, [1986–1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,991 (S.D.N.Y. 

1986), n.621

SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963), n.678
Table of Cases

183

SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945 (9th Cir. 1985), n.441

SEC v. Certain Unknown Purchasers of Common Stock & Call Options of Santa Fe 

International Corp., [1985–1986 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,484 

(S.D.N.Y. 1986), n.621

SEC v. Chinese Consolidated Benevolent Association, 120 F.2d 738 (2d Cir. 1941), n.184

SEC v. Coffey, 493 F.2d 1304 (6th Cir. 1974), nn.308, 310–13

SEC v. Cuban, 620 F.3d 551 (5th Cir. 2010), n.604

SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir. 2001), n.699

SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009), n.605

SEC v. Edwards, 540 U.S. 389 (2004), n.38

SEC v. Falstaff Brewing Corp., 629 F.2d 62 (D.C. Cir. 1980), n.394

SEC v. First Jersey Securities, Inc., [1984–1985 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 91,923 (S.D.N.Y. 1985), n.616

SEC v. Florida Bank Fund, [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,707 

(M.D. Fla. 1978), n.614

SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), n.40

SEC v. Guild Films Co., 279 F.2d 485 (2d Cir. 1960), n.187

SEC v. Johnson, No. 03 Civ. 177, Fed. Sec. L. Rep. (CCH) ¶ 93,205, 2005 WL 696891 

(S.D.N.Y. Mar. 24, 2005), n.699

SEC v. Joseph Schlitz Brewing Co., 452 F. Supp. 824 (E.D. Wis. 1978), n.147

SEC v. Kidder Peabody & Co., 19 Sec. Reg. & L. Rep. (BNA) 811 (S.D.N.Y. 1987), n.621

SEC v. M & A West, Inc., 538 F.3d 1043 (9th Cir. 2008), n.195

SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972), nn.259, 617

SEC v. Mattel, Inc., [1974–1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,807 

(D.D.C. 1974), n.613

SEC v. May, 134 F. Supp. 247 (S.D.N.Y. 1955), n.424

SEC v. McDonald Investment Co., 343 F. Supp. 343 (D. Minn. 1972), n.174

SEC v. Morgan Stanley & Co. Inc., No. 1:05CV00166(HHK) (D.D.C.), Litigation Release 

No. 19050, 2005 WL 156766 (SEC Jan. 25, 2005), n.696

SEC v. National Student Marketing Corp., 457 F. Supp. 682 (D.D.C. 1978), n.314

SEC v. Platforms Wireless International Corp., 617 F.3d 1072 (9th Cir. 2010), n.189

SEC v. R.J. Allen & Associates, Inc., 386 F. Supp. 866 (S.D. Fla. 1974), n.617

SEC v. Ralston Purina Co., 346 U.S. 119 (1953), nn.207, 208

SEC v. Rogers, 790 F.2d 1450 (9th Cir. 1986), n.312

SEC v. Rosenthal, No. 10-1204-cv (L), 2011 U.S. App. LEXIS 11684 (2d Cir. June 9, 

2011), nn.622–23

SEC v. Savoy Industries, Inc., 587 F.2d 1149 (D.C. Cir. 1978), n.433

SEC v. Tambone, 579 F.3d 436 (1st Cir. 2010), n.307

SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), nn.494, 587

SEC v. United Benefit, 387 U.S. 202 (1967), n.103

SEC v. United States Financial Group, Inc., 474 F.2d 354 (9th Cir. 1973), n.614

SEC v. Variable Annuity Life Insurance Co., 359 U.S. 65 (1959), nn.103, 169

SEC v. Vaskevitch, 657 F. Supp. 312 (S.D.N.Y. 1987), n.617

SEC v. Vesco, 571 F.2d 129 (2d Cir. 1978), n.613
Federal Securities Law

184

SEC v. W.J. Howey Co., 328 U.S. 293 (1946), nn.37, 39

SEC v. Wall Street Publishing Institute, Inc., 851 F.2d 365 (D.C. Cir. 1988), nn.299, 300

SEC v. Yun, 148 F. Supp. 2d 1287 (M.D. Fla. 2001), n.595

SEC v. Zandford, 535 U.S. 813 (2002), n.495

Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000), n.494

SG Cowen Securities Corp. v. U.S. District Court, 31 Sec. Reg. & L. Rep. (BNA) 1199 (9th 

Cir. 1999), n.344

S-G Securities, Inc. v. Fuqua Investment Co., 466 F. Supp. 1114 (D. Mass. 1978), n.443

Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir. 1992), nn.263, 287

Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), n.306

Shearson American Express, Inc. v. McMahon, 482 U.S. 220 (1987), n.683

Sherleigh Associates, LLC v. Windmere–Durable Holdings, Inc., 186 F.R.D. 669 (S.D. Fla. 

1999), nn.335, 338

Sides v. Simmons, No. 07-80347-CIV-Ryskamp/Vitunac, 2007 WL 3344405 (S.D. Fla. 

Nov. 7, 2007), n.54

Silicon Graphics, Inc. Securities Litigation, In re, 183 F.3d 970 (9th Cir. 1999), n.493

Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157 (2d Cir. 

1999), n.350

Sinay v. Lamson & Sessions Co., 948 F.2d 1037 (6th Cir. 1991), n.154

Small v. Fritz Companies, 65 P.3d 1255 (Cal. 2003), n.497

Smallwood v. Pearl Brewing Co., 489 F.2d 579 (5th Cir. 1974), n.576

Smith v. Ayers, 845 F.2d 1360 (5th Cir. 1988), n.502

Smith International, Inc. v. Texas Commerce Bank, 844 F.2d 52 (5th Cir. 1988), n.49

Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943), nn.662, 663

South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008), n.486

Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520 (D. Minn. 1986), n.43

Stearns v. Navigant Consulting Corp., 89 F. Supp. 2d 1014 (N.D. Ill. 2000), n.333

Steinberg v. Illinois Co., 659 F. Supp. 58 (N.D. Ill. 1987), n.305

Stokes v. Lokken, 644 F.2d 779 (8th Cir. 1981), n.273

Stoneridge Investment Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148 (2008), 

nn.307, 510, 515, 549

Stoppelman v. Owens, [1982–1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,208 

(D.D.C. 1984), n.213

Strauss v. American Holdings, Inc., 902 F. Supp. 475 (S.D.N.Y. 1995), n.429

Strauss v. Kapp Inv. Advisors, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,666 (S.D.N.Y. 1999), n.635

Strong v. Repide, 213 U.S. 419 (1909), n.582

Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6 (1971), n.539

Superintendent of Insurance v. Freedman, 443 F. Supp. 628 (S.D.N.Y. 1977), n.417

Switzenbaum v. Orbital Sciences Corp., 187 F.R.D. 246 (E.D. Va. 1999), n.329

Tafflin v. Levitt, 865 F.2d 595 (4th Cir. 1989), n.50

Takeda v. Turbodyne Technologies, Inc., 67 F. Supp. 2d 1129 (C.D. Cal. 1999), n.330

Tarica v. McDermott International, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 90,946, 2000 WL 377817 (E.D. La. 2000), n.336
Table of Cases

185

Teicher v. United States, 510 U.S. 976 (1993), n.608

Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 (2007), nn.486, 490

Telxon Corp. Securities Litigation, In re, 67 F. Supp. 2d 803 (N.D. Ohio 1999), nn.326, 

329

Tenneco Securities Litigation, In re, 449 F. Supp. 528 (S.D. Tex. 1978), n.417

Treadway Co. v. Care Corp., 638 F.2d 357 (2d Cir. 1980), n.433

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), nn.403, 407, 418, 511, 514, 

574

Tumolo v. Cymer, Inc., No. 98-CV-1599TW, 1999 U.S. Dist. LEXIS 22105 (S.D. Cal. Jan. 

22, 1999), n.329

2The Mart.com, Inc. Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 91,037 (C.D. Cal. 2000), n.152

Tyco International Ltd. Securities Litigation, In re, No. 00-MD-1335-B, 2000 WL 1513772 

(D.N.H. Aug. 17, 2000), nn.325, 330

Ultrafem, Inc. Securities Litigation, In re, 91 F. Supp. 2d 678 (S.D.N.Y. 2000), nn.263, 285

Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985), n.305

Unicorn Field, Inc. v. Cannon Group, Inc., 60 F.R.D. 217 (S.D.N.Y. 1973), n.275

Union Carbide Corp. Consumer Products Business Securities Litigation, In re, 676 F. 

Supp. 458 (S.D.N.Y. 1987), n.553

Union National Bank v. Farmers Bank, 786 F.2d 881 (8th Cir. 1986), n.49

United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975), n.41

United States v. Andrews, 146 F.3d 933 (D.C. Cir. 1998), n.627

United States v. Berger, 587 F.3d 1038 (9th Cir. 2009), n.520

United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), n.592

United States v. Chestman, 704 F. Supp. 451 (S.D.N.Y. 1989), nn.596, 599–601

United States v. Guterma, 281 F.2d 742 (2d Cir. 1960), n.638

United States v. Halper, 490 U.S. 435 (1989), n.624

United States v. Kim, 173 F. Supp. 2d 1035 (N.D. Cal. 2001), n.595

United States v. Matthews, 787 F.2d 38 (2d Cir. 1986), n.425

United States v. Nacchio, 573 F.3d 1062 (10th Cir. 2009), n.520

United States v. O’Hagan, 521 U.S. 642 (1997), nn.496, 584, 589, 594, 603

United States v. Olis, 429 F.3d 540 (5th Cir. 2005), n.520

United States v. Pray, 452 F. Supp. 788 (M.D. Pa. 1978), n.64

United States v. Rutkoske, 506 F.3d 170 (2d Cir. 2007), n.520

United States v. Sherwood, 175 F. Supp. 480 (S.D.N.Y. 1959), n.191

United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), n.608

United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), n.608

United States v. Turkette, 452 U.S. 576 (1981), nn.558–60

United States v. Ward, 448 U.S. 242 (1980), n.626

United States v. Willis, 737 F. Supp. 269 (S.D.N.Y. 1990), n.602

United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968), nn.10, 187, 303

Universal Camera Corp., In re, 19 S.E.C. 648 (1945), n.145

Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (D. Del. 1985), n.449
Federal Securities Law

186

Value Line Income Fund, Inc. v. Marcus, Fed. Sec. L. Rep. (CCH) ¶ 91,523 (S.D.N.Y. 

1965), n.213

Vaughn v. Teledyne, Inc., 628 F.2d 1214 (9th Cir. 1980), n.415

Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), nn.412, 419, 539

Warner Communications v. Murdoch, 581 F. Supp. 1482 (D. Del. 1984), n.415

Weber v. Contempo Colours, Inc., 105 F. Supp. 2d 769 (W.D. Mich. 2000), n.493

Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979), nn.440, 444

Wells Fargo Securities Litigation, In re, 156 F.R.D. 223 (N.D. Cal. 1994), n.338

Wenderhold v. Cylink Corp., 191 F.R.D. 600 (N.D. Cal. 2000), n.338

Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999), nn.329, 338

Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d 736 (8th Cir. 1965), n.664

Wharf (Holdings) Ltd. v. United International Holdings, 532 U.S. 588 (2001), n.497

Whistler Investments, Inc. v. Depository Trust & Clearing Corp., 539 F.3d 1159 (9th Cir. 

2008), n.702

Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), n.662

Wielgos v. Commonwealth Edison, 892 F.2d 509 (7th Cir. 1989), nn.149, 411

Wigand v. Flo-Tek, 609 F.2d 1028 (2d Cir. 1979), n.292

Williams v. MGM–Pathe Communications Co., 129 F.3d 1026 (9th Cir. 1997), n.341

Wilson v. Great American Industries, Inc., 855 F.2d 987 (2d Cir. 1988), nn.414, 420

Wininger v. SI Management, L.P., 33 F. Supp. 2d 838 (N.D. Cal. 1998), n.341

Woodward v. Metro Bank of Dallas, 522 F.2d 84 (5th Cir. 1975), nn.308, 315

Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987), n.523

WorldCom Inc. Securities Litigation, In re, No. 02 Civ. 3288 (DLC), 2005 WL 638268 

(S.D.N.Y. Mar. 21, 2005), n.265

Worlds of Wonder Securities Litigation, In re, 35 F.3d 1407 (9th Cir. 1994), n.154

Yellow Freight System, Inc. v. Donnelly, 494 U.S. 820 (1990), n.566

Yuan v. Bayard Drilling Technologies, Inc., 96 F. Supp. 2d 1259 (W.D. Okla. 1999), n.285

Z-Seven Fund, Inc. v. Motocar Parts & Accessories, 231 F.3d 1215 (9th Cir. 2000), n.322

Zuckerman v. Franz, 573 F. Supp. 351 (S.D. Fla. 1983), n.443

Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979), n.629
Table of Cases

187

Cases By Court

U.S. Supreme Court

Aaron v. SEC, 446 U.S. 680 (1980), nn.297, 422, 485

Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), nn.416, 516, 581, 

588, 628

Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143 (1987), n.530

Basic, Inc. v. Levinson, 485 U.S. 224 (1988), nn.408, 477, 500, 504, 508, 511, 514–16, 573–74

Bateman, Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985), n.279

Blau v. Lehman, 368 U.S. 403 (1962), nn.641–42

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), nn.497–500, 504, 539

Carpenter v. United States, 484 U.S. 19 (1987), nn.65, 496, 569–70, 591, 593

Central Bank of Denver v. First Interstate Bank of Denver, 508 U.S. 959 (1993), nn.307, 

510, 549

Chiarella v. United States, 445 U.S. 222 (1980), nn.584–85, 589–90, 598, 619

Cort v. Ash, 422 U.S. 66 (1975), n.540

Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007), n.668

CTS v. Dynamics, 481 U.S. 69 (1987), n.101

Curran v. Merrill Lynch Pierce Fenner & Smith, 456 U.S. 353 (1982), n.540

Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 547 U.S. 71 (2006), n.497

Dirks v. SEC, 463 U.S. 646 (1983), nn.606, 620

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), nn.519–20

Edgar v. MITE, 457 U.S. 624 (1982), n.101

Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403, 2011 WL 2175208 (S. Ct. June 

6, 2011), n.522

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), nn.473, 484

Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232 (1976), n.647

Gustafson v. Alloyd Co., 513 U.S. 561 (1995), nn.262, 271

Herman & MacLean v. Huddleston, 459 U.S. 375 (1983), nn.257, 534

H.J., Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (1989), n.564

Hudson v. United States, 522 U.S. 93 (1997), n.623

Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, 2011 WL 2297762 (U.S. 

June 13, 2011), n.509

J.I. Case Co. v. Borak, 377 U.S. 426 (1964), nn.386, 403, 539

Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973), nn.658–60

Kircher v. Putnam Funds, 547 U.S. 633 (2006), n.367

Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), n.529, 530

Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985), n.43

Marine Bank v. Weaver, 455 U.S. 551 (1982), nn.36, 50

Matrixx Initiatives, Inc. v. Siracusana, 131 S. Ct. 1309 (2011), nn.513, 514

Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010), n.532

Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970), n.418

Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), n.482
Federal Securities Law

188

Musick, Peeler & Garrett v. Employers Insurance of Wausau, 508 U.S. 286 (1993), nn.270, 

539, 551

Pinter v. Dahl, 486 U.S. 622 (1988), nn.272, 275, 277–78, 280–81

Piper v. Chris-Craft Industries, Inc., 430 U.S. 1 (1977), n.575

Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418 (1972), n.648

Reves v. Ernst & Young, 494 U.S. 56 (1990), nn.46, 48

Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975), n.469

Rubin v. United States, 449 U.S. 424 (1981), n.505

Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977), n.473

Schreiber v. Burlington Northern, Inc., 472 U.S. 1 (1985), nn.463–65, 473

SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963), n.678

SEC v. Edwards, 540 U.S. 389 (2004), n.38

SEC v. Ralston Purina Co., 346 U.S. 119 (1953), nn.207, 208

SEC v. United Benefit, 387 U.S. 202 (1967), n.103

SEC v. Variable Annuity Life Insurance Co., 359 U.S. 65 (1959), nn.103, 169

SEC v. W.J. Howey Co., 328 U.S. 293 (1946), nn.37, 39

SEC v. Zandford, 535 U.S. 813 (2002), n.495

Shearson American Express, Inc. v. McMahon, 482 U.S. 220 (1987), n.683

Stoneridge Investment Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148 (2008), 

nn.307, 510, 515, 549

Strong v. Repide, 213 U.S. 419 (1909), n.581

Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6 (1971), n.539

Teicher v. United States, 510 U.S. 976 (1993), n.608

Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 (2007), nn.486, 490

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), nn.403, 407, 418, 511, 514, 

574

United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975), n.41

United States v. Halper, 490 U.S. 435 (1989), n.624

United States v. O’Hagan, 521 U.S. 642 (1997), nn.496, 584, 589, 594, 603

United States v. Turkette, 452 U.S. 576 (1981), n.558

United States v. Ward, 448 U.S. 242 (1980), n.626

Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), nn.412, 419, 539

Wharf (Holdings) Ltd. v. United International Holdings, 532 U.S. 588 (2001), n.497

Yellow Freight System, Inc. v. Donnelly, 494 U.S. 820 (1990), n.566

First Circuit

Atlantic Financial Management, Inc., In re, 784 F.2d 29 (1st Cir. 1986), nn.306, 545

Cleary v. Perfectune, 700 F.2d 774 (1st Cir. 1983), n.308

Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999), n.489

Hillsborough Investment Corp. v. SEC, 276 F.2d 665 (1st Cir. 1960), n.176

H.K. Porter Co. v. Nicholson File Co., 482 F.2d 421 (1st Cir. 1973), n.576

Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st Cir. 1991), n.154

SEC v. Beisinger Industries Corp., 552 F.2d 15 (1st Cir. 1977), n.616

SEC v. Tambone, 579 F.3d 436 (1st Cir. 2010), n.307
Table of Cases

189

Second Circuit

Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959), n.645

Armstrong v. McAlpin, 699 F.2d 79 (2d Cir. 1983), n.308

Baffa v. Donaldson, Lufkin & Jenrette Securities Corp., 222 F.3d 52 (2d Cir. 2000), n.324

Baltia Air Lines, Inc. v. CIBC Oppenheimer Corp., 2001 WL 431528, [2001–2002 Transfer 

Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,421 (2d Cir. 2001), n.701

Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966), n.664

Blau v. Mission Corp., 212 F.2d 77 (2d Cir. 1954), n.654

Carter–Wallace, Inc. Securities Litigation, In re, 150 F.3d 153 (2d Cir. 1998), n.494

Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), n.675

Chasins v. Smith, Barney, 438 F.2d 1167 (2d Cir. 1970), nn.676, 699

Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir. 1984), n.47

Chemical Fund, Inc. v. Xerox Corp., 377 F.2d 107 (2d Cir. 1967), n.636

Chris-Craft Industries, Inc. v. Bangor Punta Corp., 426 F.2d 569 (2d Cir. 1970), n.116

Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir. 1973), n.615

Colby v. Klune, 178 F.2d 872 (2d Cir. 1949), n.639

Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir. 1966), n.681

Corenco Corp. v. Schiavone & Sons, Inc., 488 F.2d 207 (2d Cir. 1973), n.429

Diskin v. Lomasney & Co., 452 F.2d 871 (2d Cir. 1971), n.283

Drexel Burnham Lambert Group, Inc., In re, 960 F.2d 285 (2d Cir. 1992), n.324

Exchange National Bank v. Touche Ross & Co., 544 F.2d 1126 (2d Cir. 1976), n.47

Feder v. Martin Marietta Corp., 406 F.2d 260 (2d Cir. 1969), nn.643, 645

Field v. Trump, 850 F.2d 938 (2d Cir. 1988), nn.455, 468

Franklin Savings Bank of New York v. Levy, 551 F.2d 521 (2d Cir. 1977), n.63

Friedman v. Salomon/Smith Barney, Inc., 313 F.3d 796 (2d Cir. 2002), n.668

GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971), n.429

Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir. 1959), nn.190, 200

Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977), n.501

Greenstein v. Paul, 400 F.2d 580 (2d Cir. 1968), n.499

Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 396 (2d Cir. 1998), n.659

Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969), nn.679–80

Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir. 1985), n.441

IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980), n.313

I. Meyer Pincus & Associates v. Oppenheimer & Co., 936 F.2d 759 (2d Cir. 1991), n.154

Iowa Public Employees’ Retirement System v. MF Global, Ltd., 620 F.3d 137 (2d Cir. 

2010), n.155

Kennecott Copper Corp. v. Curtis-Wright Corp., 584 F.2d 1195 (2d Cir. 1978), n.444

Lehman Bros. Mortgage-Backed Securities Litigation, In re, 2011 WL 1778726 (2d Cir. 

2011), n.188

Lewis v. Varnes, 505 F.2d 785 (2d Cir. 1974), n.646

Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986), n.154

Madison Consultants v. FDIC, 710 F.2d 57 (2d Cir. 1983), n.505

Magida v. Continental Can Co., Inc., 231 F.2d 843 (2d Cir. 1956), n.656
Federal Securities Law

190

Maldonado v. Flynn, 597 F.2d 789 (2d Cir. 1979), n.393

Marbury Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir. 1980), nn.306, 545

Mayer v. Oil Field Systems Corp., 803 F.2d 749 (2d Cir. 1986), nn.290–91

McCarthy v. SEC, 406 F.3d 179 (2d Cir. 2005), n.692

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930 (2d Cir. 1986), n.682

Morales v. Freund, 163 F.3d 763 (2d Cir. 1999), n.635

Moss v. Morgan Stanley, Inc., 719 F.2d 5 (2d Cir. 1983), nn.586, 631

Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000), nn.488, 491, 492

N2K Inc. Securities Litigation, In re, 202 F.3d 81 (2d Cir. 2000), nn.153, 154

Pacific Investment Management Co. LLC v. Mayer Brown LLP, 603 F.3d 144 (2d Cir. 

2010), n.307

Pontiac, City of, General Employees’ Retirement System v. MBIA, Inc., 637 F.3d 169 (2d 

Cir. 2011), n.532

Press v. Chemical Investment Services Corp., 166 F.3d 529 (2d Cir. 1999), n.492

Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979), n.479

Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964), n.502

Salomon Analyst Metromedia Litigation, In re, 544 F.3d 444 (2d Cir. 2011), n.521

Sanders v. Thrall Car Manufacturing Co., 730 F.2d 910 (2d Cir. 1984), n.468

Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir. 1974), n.417

Seaboard World Airlines, Inc. v. Tiger International, Inc., 600 F.2d 355 (2d Cir. 1979), 

n.576

SEC v. American Board of Trade, Inc., 830 F.2d 431 (2d Cir. 1987), n.617

SEC v. Chinese Consolidated Benevolent Association, 120 F.2d 738 (2d Cir. 1941), n.184

SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009), n.605

SEC v. Guild Films Co., 279 F.2d 485 (2d Cir. 1960), n.187

SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972), nn.259, 617

SEC v. Rosenthal, No. 10-1204-cv (L), 2011 U.S. App. LEXIS 11684 (2d Cir. June 9, 

2011), nn.621–23

SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), nn.494, 587

SEC v. Vesco, 571 F.2d 129 (2d Cir. 1978), n.613

Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157 (2d Cir. 

1999), n.350

Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943), nn.662, 663

Treadway Co. v. Care Corp., 638 F.2d 357 (2d Cir. 1980), n.433

United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), n.592

United States v. Guterma, 281 F.2d 742 (2d Cir. 1960), n.638

United States v. Matthews, 787 F.2d 38 (2d Cir. 1986), n.425

United States v. Rutkoske, 506 F.3d 170 (2d Cir. 2007), n.520

United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), n.608

United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968), nn.10, 187, 303

Wigand v. Flo-Tek, 609 F.2d 1028 (2d Cir. 1979), n.292

Wilson v. Great American Industries, Inc., 855 F.2d 987 (2d Cir. 1988), nn.414, 420
Table of Cases

191

Third Circuit

Advanta Corp. Securities Litigation, In re, 180 F.3d 525 (3d Cir. 1999), n.492

Bald Eagle Area School District v. Keystone Financial, Inc., 189 F.3d 321 (3d Cir. 1999), 

n.556

Burlington Coat Factory Securities Litigation, In re, 114 F.3d 1410 (3d Cir. 1997), n.489

Data Access Systems, In re, 843 F.2d 1537 (3d Cir. 1988), n.530

Donald J. Trump Casino, In re, 7 F.3d 357 (3d Cir. 1993), n.154

DVI, Inc. Securities Litigation, In re, Nos. 08-8033 & 08-8045, 2011 WL 1125926 (3d Cir. 

Mar. 29, 2011), n.521

EP Medsystems, Inc. v. EchoCath, Inc., 255 F.3d 865 (3d Cir. 2000), n.492

Gould v. American-Hawaiian Steamship Co., 535 F.2d 761 (3d Cir. 1976), n.544

Herskowitz v. Nutri/System, Inc., 857 F.2d 179 (3d Cir. 1988), n.420

Ketchum v. Green, 557 F.2d 1022 (3d Cir. 1977), n.417

Kline v. First Western Government Securities, Inc., 24 F.3d 480 (3d Cir. 1994), n.154

Kubik v. Goldfield, 479 F.2d 472 (3d Cir. 1973), n.220

Lewis v. Mellon Bank, 513 F.2d 921 (3d Cir. 1975), n.646

Malack v. BDO Seidman LLP, 617 F.3d 743 (3d Cir. 2010), n.516

Newton v. Merrill, Lynch, Pierce, Fenner & Smith, 135 F.3d 266 (3d Cir. 1998), n.698

Palumbo v. Deposit Bank, 758 F.2d 113 (3d Cir. 1985), n.405

Penn Central Securities Litigation, In re, 494 F.2d 528 (3d Cir. 1974), n.503

Polaroid v. Disney, 862 F.2d 987 (3d Cir. 1988), nn.466, 578

Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975), nn.306, 313

Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000), n.494

Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir. 1992), nn.263, 287

Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), n.306

Fourth Circuit

Carpenter v. Harris, Upham & Co., 594 F.2d 388 (4th Cir. 1979), n.545

Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216 (4th Cir. 1980), n.468

Newcome v. Esrey, 862 F.2d 1099 (4th Cir. 1988), n.301

Tafflin v. Levitt, 865 F.2d 595 (4th Cir. 1989), n.50

Fifth Circuit

Abell v. Potomac Insurance Co., 858 F.2d 1104 (5th Cir. 1988), n.273

Affco Investments 2001 LLC v. Proskauer Rose LLP, 625 F.3d 185 (5th Cir. 2010), nn.307, 

549

Alabama Farm Bureau Mutual Casualty Co. v. American Fidelity Life Insurance Co., 606 

F.2d 602 (5th Cir. 1979), n.502

Bailes v. Colonial Press, Inc., 444 F.2d 1241 (5th Cir. 1971), n.502

Doran v. Petroleum Management Corp., 545 F.2d 893 (5th Cir. 1977), nn.209, 239

Dottenheim v. Murchison, 227 F.2d 737 (5th Cir. 1955), nn.652, 654

Falls v. Fickling, 621 F.2d 1362 (5th Cir. 1980), n.507

Finkel v. Docutel/Olivetti Corp., 817 F.2d 356 (5th Cir. 1987), n.516
Federal Securities Law

192

G.A. Thompson & Co. v. Partridge, 636 F.2d 945 (5th Cir. 1981), n.305

Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680 (5th Cir. 1971), 

n.210

Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir. 1960), n.502

Landry v. All American Assurance Co., 688 F.2d 381 (5th Cir. 1982), nn.301, 541

Lone Star Ladies Investment Club v. Schlotzsky’s Inc., 238 F.3d 363 (5th Cir. 2001), 

nn.263, 285

Meyers v. C & M Petroleum Producers, Inc., 476 F.2d 427 (5th Cir. 1973), n.260

National Bank v. All American Assurance Co., 583 F.2d 1295 (5th Cir. 1978), n.506

Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 

2007), n.521

Paul F. Newton & Co. v. Texas Commerce Bank, 630 F.2d 1111 (5th Cir. 1980), nn.306, 

545

Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994), n.154

Sargent v. Genesco, Inc., 492 F.2d 750 (5th Cir. 1974), n.499

SEC v. Cuban, 620 F.3d 551 (5th Cir. 2010), n.604

Smallwood v. Pearl Brewing Co., 489 F.2d 579 (5th Cir. 1974), n.576

Smith v. Ayers, 845 F.2d 1360 (5th Cir. 1988), n.502

Smith International, Inc. v. Texas Commerce Bank, 844 F.2d 52 (5th Cir. 1988), n.49

United States v. Olis, 429 F.3d 540 (5th Cir. 2005), n.520

Woodward v. Metro Bank of Dallas, 522 F.2d 84 (5th Cir. 1975), nn.308, 315

Sixth Circuit

Aries Aluminum Corp. v. King, 1999 U.S. App. LEXIS 24827 (6th Cir. Sept. 30, 1999), 

n.556

Arrow Distributing Corp. v. Baumgartner, 783 F.2d 1274 (6th Cir. 1986), nn.657, 662

Davis v. Avco Financial Services, Inc., 739 F.2d 1057 (6th Cir. 1984), n.294

Florida State Board of Administration v. Brick, [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,758, 2000 WL 178416 (6th Cir. 2000), n.322

Frank v. Dana Corp., No. 09-4233, 2011 U.S. App. LEXIS 10437 (6th Cir. May 25, 2011), 

n.553

Freeman v. Laventhol & Horwath, 915 F.2d 193 (6th Cir. 1990), n.517

Friedrich v. Bradford, 542 F.2d 307 (6th Cir. 1976), n.630

Herm v. Stafford, 663 F.2d 669 (6th Cir. 1981), n.553

Mader v. Armel, 402 F.2d 158 (6th Cir. 1968), n.501

Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017 (6th Cir. 1979), n.505

SEC v. Coffey, 493 F.2d 1304 (6th Cir. 1974), nn.308, 310–13

Sinay v. Lamson & Sessions Co., 948 F.2d 1037 (6th Cir. 1991), n.154

Seventh Circuit

Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496 (7th Cir. 1989), n.101

Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490 (7th Cir. 1986), n.552

Bath Industries v. Blot, 427 F.2d 97 (7th Cir. 1970), n.430

Board of Trade v. SEC, 187 F.3d 713 (7th Cir. 1999), n.86
Table of Cases

193

Buttry v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir. 1969), n.681

Chicago Mercantile Exchange v. SEC, 883 F.2d 537 (7th Cir. 1989), n.86

Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir. 1967), n.501

Frederiksen v. Poloway, 637 F.2d 1147 (7th Cir. 1981), n.42

Haas v. Wieboldt Stores, Inc., 725 F.2d 71 (7th Cir. 1984), n.395

Henricksen v. Henricksen, 640 F.2d 880 (7th Cir. 1981), nn.306, 545

Ho v. SEC, No. 06-3788, 2007 WL 1224027 (7th Cir. Apr. 25, 2007), n.692

Hochfelder v. Midwest Stock Exchange, 503 F.2d 364 (7th Cir. 1974), n.308

Kademian v. Ladish Co., 792 F.2d 614 (7th Cir. 1986), n.415

Lincoln National Bank v. Herber, 604 F.2d 1038 (7th Cir. 1979), n.506

Mills v. Electric Auto-Lite Co., 552 F.2d 1239 (7th Cir. 1977), nn.403, 426

Oliff v. Exchange International Corp., 669 F.2d 1162 (7th Cir. 1980), n.657

Otto v. SEC, 253 F.3d 960 (7th Cir. 2001), n.692

Portnoy v. Kawecki Berylco Industries, Inc., 607 F.2d 765 (7th Cir. 1979), n.654

Roots Partnership v. Land’s End, Inc., 965 F.2d 1411 (7th Cir. 1992), nn.149, 411

Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980), nn.289, 293

Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010), n.521

Schlifke v. Seafirst Corp., 866 F.2d 935 (7th Cir. 1989), n.301

Sears v. Likens, 912 F.2d 889 (7th Cir. 1990), n.287

Wielgos v. Commonwealth Edison, 892 F.2d 509 (7th Cir. 1989), nn.149, 411

Eighth Circuit

Ackerberg v. Johnson, 892 F.2d 132 (8th Cir. 1989), n.213

Austin v. Loftsgaarden, 675 F.2d 168 (8th Cir. 1982), n.288

Chromalloy American Corp. v. Sun Chemical Corp., 611 F.2d 240 (8th Cir. 1979), n.468

Commerford v. Olson, 794 F.2d 1319 (8th Cir. 1986), n.306

Crookham v. Crookham, 914 F.2d 1027 (8th Cir. 1990), nn.302, 480, 541, 542

Harris v. Union Electric Co., 787 F.2d 355 (8th Cir. 1986), n.523

Krause v. Perryman, 827 F.2d 346 (8th Cir. 1987), n.301

Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), n.550

Morrissey v. County Tower Corp., 717 F.2d 1227 (8th Cir. 1983), n.415

Stokes v. Lokken, 644 F.2d 779 (8th Cir. 1981), n.273

Union National Bank v. Farmers Bank, 786 F.2d 881 (8th Cir. 1986), n.49

Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d 736 (8th Cir. 1965), n.664

Ninth Circuit

Bosse v. Crowell Collier & MacMillan, 565 F.2d 602 (9th Cir. 1977), n.507

Buhler v. Audio Leasing Corp., 807 F.2d 833 (9th Cir. 1987), n.305

Carrott v. Shearson Hayden Stone, Inc., 724 F.2d 821 (9th Cir. 1984), n.681

Durham v. Kelly, 810 F.2d 1500 (9th Cir. 1987), n.305

Gaines v. Haughton, 645 F.2d 761 (9th Cir. 1981), n.147

Glazer Capital Management LP v. Magistri, 549 F.3d 736 (9th Cir. 2008), n.486

Green v. Occidental Petroleum Corp., 541 F.2d 1335 (9th Cir. 1976), n.524

Harmsen v. Smith, 693 F.2d 932 (9th Cir. 1982), n.553
Federal Securities Law

194

Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990), nn.306, 545

Mego Financial Corp. Securities Litigation, In re, 213 F.3d 454 (9th Cir. 2000), n.348

Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049 (9th Cir. 2008), n.486

Mihara v. Dean Witter, 619 F.2d 814 (9th Cir. 1980), n.677

Nesbit v. McNeil, 896 F.2d 380 (9th Cir. 1990), n.677

Northstar Financial Advisors Inc. v. Schwab Investments, 615 F.3d 1106 (9th Cir. 2010), 

n.541

Powers v. Eichen, 229 F.3d 1249 (9th Cir. 2000), n.340

Scientex Corp. v. Kay, 689 F.2d 879 (9th Cir. 1982), n.638

SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945 (9th Cir. 1985), n.441

SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir. 2001), n.699

SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), n.40

SEC v. M & A West, Inc., 538 F.3d 1043 (9th Cir. 2008), n.195

SEC v. Platforms Wireless International Corp., 617 F.3d 1072 (9th Cir. 2010), n.189

SEC v. Rogers, 790 F.2d 1450 (9th Cir. 1986), n.312

SEC v. United States Financial Group, Inc., 474 F.2d 354 (9th Cir. 1973), n.614

SG Cowen Securities Corp. v. U.S. District Court, 31 Sec. Reg. & L. Rep. (BNA) 1199 (9th 

Cir. 1999), n.344

Silicon Graphics, Inc. Securities Litigation, In re, 183 F.3d 970 (9th Cir. 1999), n.493

South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008), n.486

Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985), n.305

United States v. Berger, 587 F.3d 1038 (9th Cir. 2009), n.520

United States v. Smith, 155 F.3d 1051 (9th Cir. 1998), n.608

Vaughn v. Teledyne, Inc., 628 F.2d 1214 (9th Cir. 1980), n.415

Whistler Investments, Inc. v. Depository Trust & Clearing Corp., 539 F.3d 1159 (9th Cir. 

2008), n.700

Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), n.662

Williams v. MGM–Pathe Communications Co., 129 F.3d 1026 (9th Cir. 1997), n.341

Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987), n.523

Worlds of Wonder Securities Litigation, In re, 35 F.3d 1407 (9th Cir. 1994), n.154

Z-Seven Fund, Inc. v. Motocar Parts & Accessories, 231 F.3d 1215 (9th Cir. 2000), n.322

Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979), n.629

Tenth Circuit

Busch v. Carpenter, 827 F.2d 653 (10th Cir. 1987), nn.175, 178

Christy v. Cambron, 710 F.2d 669 (10th Cir. 1983), n.42

Jensen v. Voyles, 393 F.2d 131 (10th Cir. 1968), n.499

Kerbs v. Fall River Industries, Inc., 502 F.2d 731 (10th Cir. 1974), n.314

Maher v. Durango Metals, 144 F.3d 1302 (10th Cir. 1998), n.543

San Francisco–Oklahoma Petroleum Exploration Corp. v. Carstan Oil Co., Inc., 765 F.2d 

962 (10th Cir. 1985), n.305

United States v. Nacchio, 573 F.3d 1062 (10th Cir. 2009), n.520
Table of Cases

195

Eleventh Circuit

Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th Cir. 1999), n.493

Buffo v. Graddick, 742 F.2d 592 (11th Cir. 1984), n.311

Currie v. Cayman Research Corp., 835 F.2d 780 (11th Cir. 1988), n.288

Foster v. Jesup & Lamont Securities Co., Inc., 759 F.2d 838 (11th Cir. 1985), n.272

Gund v. First Florida Banks, Inc., 726 F.2d 682 (11th Cir. 1984), n.657

King v. Winkler, 673 F.2d 342 (11th Cir. 1982), n.42

Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir. 1987), n.517

Liberty National Insurance Holding Co. v. Charter Co., 734 F.2d 545 (11th Cir. 1984), 

n.468

Pelletier v. Stuart-James Co., 863 F.2d 1550 (11th Cir. 1989), nn.494, 682

Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir. 1986), n.312

SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998), n.608

District of Columbia Circuit

Business Roundtable v. SEC, 2011 WL 2936808 (D.C. Cir. 2011), n.402

InterBank Funding Corp. Securities Litigation, In re, 629 F.3d 213 (D.C. Cir. 2010), n.516

PAZ Securities, Inc. v. SEC, 494 F.3d 1059 (D.C. Cir. 2007), n.692

SEC v. Falstaff Brewing Corp., 629 F.2d 62 (D.C. Cir. 1980), n.394

SEC v. Savoy Industries, Inc., 587 F.2d 1149 (D.C. Cir. 1978), n.433

SEC v. Wall Street Publishing Institute, Inc., 851 F.2d 365 (D.C. Cir. 1988), nn.299, 300

United States v. Andrews, 146 F.3d 933 (D.C. Cir. 1998), n.627

District Courts (alphabetically by state)

Burke v. Ruttenberg, 102 F. Supp. 2d 1280 (N.D. Ala. 2000), nn.323, 330

Draney v. Wilson, Morton, Assaf & McElligott, 592 F. Supp. 9 (D. Ariz. 1984), n.265

Pet Quarters, Inc. v. Depository Trust & Clearing Corp., 545 F. Supp. 2d 845 (E.D. Ark. 

2008), n.702

Cherednichenko v. Quarterdeck Corp., [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,108 (C.D. Cal. 1997), n.153

Dalarne Partners, Ltd. v. Sync Research, Inc., 103 F. Supp. 2d 1209 (C.D. Cal. 2000), 

n.493

Takeda v. Turbodyne Technologies, Inc., 67 F. Supp. 2d 1129 (C.D. Cal. 1999), n.330

2The Mart.com, Inc. Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 91,037 (C.D. Cal. 2000), n.152

Bowman v. Legato Systems, Inc., 195 F.R.D. 655 (N.D. Cal. 2000), n.329

Diamond Multimedia Sys., Inc. Securities Litigation, In re, [1997 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 99,561, 1997 WL 773733 (N.D. Cal. 1997), n.345

Fortune Systems Securities Litigation, In re, [1987 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 93,390 (N.D. Cal. 1987), n.265

Lopez v. Dean Witter Reynolds, Inc., 591 F. Supp. 581 (N.D. Cal. 1984), n.682

McKesson HBOC, Inc. Securities Litigation, In re, 97 F. Supp. 2d 993 (N.D. Cal. 1999), 

n.321
Federal Securities Law

196

United States v. Kim, 173 F. Supp. 2d 1035 (N.D. Cal. 2001), n.595

Wells Fargo Securities Litigation, In re, 156 F.R.D. 223 (N.D. Cal. 1994), n.338

Wenderhold v. Cylink Corp., 191 F.R.D. 600 (N.D. Cal. 2000), n.338

Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999), nn.329, 338

Wininger v. SI Management, L.P., 33 F. Supp. 2d 838 (N.D. Cal. 1998), n.341

Tumolo v. Cymer, Inc., No. 98-CV-1599TW, 1999 U.S. Dist. LEXIS 22105 (S.D. Cal. Jan. 

22, 1999), n.329

Ribozyme Pharmaceuticals, Inc. Securities Litigation, In re, 192 F.R.D. 656 (D. Colo. 

2000), n.328

Brill v. Burlington Northern, Inc., 590 F. Supp. 893 (D. Del. 1984), n.455

Energy Ventures, Inc. v. Appalachian Co., 587 F. Supp. 734 (D. Del. 1984), n.444

Rosenberg v. XM Ventures, 129 F. Supp. 2d 681 (D. Del. 2001), n.635

Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (D. Del. 1985), n.449

Warner Communications v. Murdoch, 581 F. Supp. 1482 (D. Del. 1984), n.415

Baan Co. Securities Litigation, In re, 186 F.R.D. 214 (D.D.C. 1999), n.329

Berman v. Metzger, [1981 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,857 (D.D.C. 

1981), n.467

Foltz v. U.S. News & World Report, Inc., 627 F. Supp. 1143 (D.D.C. 1986), n.494

SEC v. Mattel, Inc., [1974–1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,807 

(D.D.C. 1974), n.613

SEC v. Morgan Stanley & Co. Inc., No. 1:05CV00166(HHK) (D.D.C. 2005), Litigation 

Release No. 19050, 2005 WL 156766 (SEC Jan. 25, 2005), n.696

SEC v. National Student Marketing Corp., 457 F. Supp. 682 (D.D.C. 1978), n.314

Stoppelman v. Owens, [1982–1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,208 

(D.D.C. 1984), n.213

SEC v. Florida Bank Fund, [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,707 

(M.D. Fla. 1978), n.614

SEC v. Yun, 148 F. Supp. 2d 1287 (M.D. Fla. 2001), n.595

SEC v. R.J. Allen & Associates, Inc., 386 F. Supp. 866 (S.D. Fla. 1974), n.617

Sherleigh Associates, LLC v. Windmere–Durable Holdings, Inc., 186 F.R.D. 669 (S.D. Fla. 

1999), nn.335, 338

Sides v. Simmons, No. 07-80347-CIV-Ryskamp/Vitunac, 2007 WL 3344405 (S.D. Fla. 

Nov. 7, 2007), n.54

Zuckerman v. Franz, 573 F. Supp. 351 (S.D. Fla. 1983), n.443

Ray v. Lehman Bros. Kuhn Loeb, Inc., 624 F. Supp. 16 (N.D. Ga. 1984), n.476

Sanders v. Robinson Humphrey/Am. Express, Inc., 634 F. Supp. 1048 (N.D. Ga. 1986), 

n.517

Morrison Knudsen Corp. v. Heil, 705 F. Supp. 497 (D. Idaho 1988), n.467

American Bakeries Co. v. Pro-Met Trading Co., [1981 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 97,925 (N.D. Ill. 1981), n.468

Amino Acid Lysine Antitrust Litigation, In re, 918 F. Supp. 1190 (N.D. Ill. 1996), n.338

Gateway Industries, Inc. v. Agency Rent A Car, Inc., 495 F. Supp. 92 (N.D. Ill. 1980), 

n.468

Greenberg v. Boettcher & Co., 755 F. Supp. 776 (N.D. Ill. 1991), n.517
Table of Cases

197

Holstein v. UAL Corp., 662 F. Supp. 153 (N.D. Ill. 1987), n.441

Kaliski v. Hunt International Resources Corp., 609 F. Supp. 649 (N.D. Ill. 1985), n.310

Miller v. Material Sciences Corp., 31 Sec. Reg. & L. Rep. (BNA) 1007 (N.D. Ill. 1999), 

n.335

Nanophase Technologies Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 90,686, 1999 WL 965468 (N.D. Ill. 1999), n.327

Raftery v. Mercury Financial Co., No. 97C624, 1997 WL 529553 (N.D. Ill. Aug. 7, 1997), 

n.337

Stearns v. Navigant Consulting Corp., 89 F. Supp. 2d 1014 (N.D. Ill. 2000), n.333

Steinberg v. Illinois Co., 659 F. Supp. 58 (N.D. Ill. 1987), n.305

Atkins v. Tony Lama Co., 624 F. Supp. 250 (S.D. Ind. 1985), n.406

Conseco, Inc. Securities Litigation, In re, [2000–2001 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 91,234 (S.D. Ind. 2000), n.324

Sakhrani v. Brightpoint, Inc., 78 F. Supp. 2d 845 (S.D. Ind. 1999), n.330

Citizens First Bancorp, Inc. v. Harreld, 559 F. Supp. 867 (W.D. Ky. 1982), n.423

Tarica v. McDermott International, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 90,946, 2000 WL 377817 (E.D. La. 2000), n.336

Dyer v. Eastern Trust Co., 336 F. Supp. 890 (N.D. Me. 1971), n.441

Martin v. Pepsi-Cola Bottling Co., 639 F. Supp. 931 (D. Md. 1986), n.313

SEC v. American International Savings & Loan Association, 199 F. Supp. 341 (D. Md. 

1961), n.165

Brockton Savings Bank v. Peat, Marwick, Mitchell & Co., 577 F. Supp. 1281 (D. Mass. 

1983), n.50

Gillette Co. v. RB Partners, 693 F. Supp. 1266 (D. Mass. 1988), n.420

Kilmartin v. H.C. Wainwright & Co., 580 F. Supp. 604 (D. Mass. 1984), n.312

Ludlow Corp. v. Tyco Laboratories, Inc., 529 F. Supp. 62 (D. Mass. 1981), n.442

Quincy Co-Operative Bank v. A.G. Edwards & Sons, Inc., 655 F. Supp. 78 (D. Mass. 

1986), n.274

S-G Securities, Inc. v. Fuqua Investment Co., 466 F. Supp. 1114 (D. Mass. 1978), n.443

F & M Distribs., Inc. Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,621 (E.D. Mich. 1999), n.341

Harrison v. Equitable Life Assurance Society, 435 F. Supp. 281 (W.D. Mich. 1977), n.64

Weber v. Contempo Colours, Inc., 105 F. Supp. 2d 769 (W.D. Mich. 2000), n.493

Antinore v. Alexander & Alexander Service, Inc., 597 F. Supp. 1353 (D. Minn. 1984), 

n.311

Flight Transportation Corp. Securities Litigation, In re, 593 F. Supp. 612 (D. Minn. 1984), 

n.265

Lutheran Brotherhood Variable Insurance Products Co., In re, 105 F. Supp. 2d 1037 (D. 

Minn. 2000), n.366

Medtox Scientific, Inc. v. Morgan Capital L.L.C., 50 F. Supp. 2d 896 (D. Minn. 1999), 

n.636

SEC v. McDonald Investment Co., 343 F. Supp. 343 (D. Minn. 1972), n.174

Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520 (D. Minn. 1986), n.43

Bankamerica Corp. Securities Litigation, In re, 95 F. Supp. 2d 1044 (D. Mo. 2000), n.368
Federal Securities Law

198

Mid-Continent Bancshares, Inc. v. O’Brien, [1982 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 98,734 (E.D. Mo. 1981), n.431

Police Retirement System v. Midwest Investment Advisory Services, Inc., 706 F. Supp. 708 

(E.D. Mo. 1989), n.560

Conagra, Inc. v. Tyson Foods, Inc., 708 F. Supp. 257 (D. Neb. 1989), n.467

Green v. Ameritrade, Inc., 120 F. Supp. 795 (D. Neb. 2000), n.362

Tyco International Ltd. Securities Litigation, In re, No. 00-MD-1335-B, 2000 WL 1513772 

(D.N.H. Aug. 17, 2000), nn.325, 330

Cendant Corp. Litigation, In re, 182 F.R.D. 144 (D.N.J. 1998), nn.335, 337–38

Cendant Corp. Prides Litigation, In re, 98 F. Supp. 2d 602 (D.N.J. 2000), n.338

Cendant Corp. Prides Litigation, In re, 51 F. Supp. 2d 537 (D.N.J. 1999), n.341

Local 144 Nursing Home Pension Fund v. Honeywell International, Inc., [2000–2001 

Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,261, 2000 U.S. Dist. LEXIS 16712 

(D.N.J. Nov. 16, 2000), n.325

Lucent Technologies, Inc. Securities Litigation, In re, 194 F.R.D. 137 (D.N.J. 2000), n.338

Nice Systems, Ltd. Securities Litigation, In re, 188 F.R.D. 206 (D.N.J. 1999), n.329

P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F. Supp. 2d 546 (D.N.J. 

1999), n.153

Cyber Media Group v. Island Mortgage Network, 183 F. Supp. 2d 559 (E.D.N.Y. 2002), 

n.563

Feit v. Leaseco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971), 

n.265

Seamans v. Aid Auto Stores, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,902 (E.D.N.Y. 2000), n.331

Beaumont v. American Can Co., 621 F. Supp. 484 (S.D.N.Y. 1984), n.441

Benisch v. Cameron, 81 F. Supp. 882 (S.D.N.Y. 1948), n.652

Blech Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,978, 2000 WL 661680 (S.D.N.Y. 2000), n.348

Buchholtz v. Renard, 188 F. Supp. 888 (S.D.N.Y. 1960), n.276

Condec Corp. v. Farley, 573 F. Supp. 1382 (S.D.N.Y. 1983), n.423

C.R.A. Realty Corp. v. Goodyear Tire & Rubber Co., 705 F. Supp. 972 (S.D.N.Y. 1989), 

n.636

Dietrich v. Bauer, 192 F.R.D. 119 (S.D.N.Y. 2000), n.332

District 65, UAW v. Harper & Row Publishers, 576 F. Supp. 1468 (S.D.N.Y. 1983), n.405

Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968), n.265

Gas Reclamation, Inc. Securities Litigation, In re, 659 F. Supp. 493 (S.D.N.Y. 1987), n.311

Global Intellicom, Inc. v. Thomson Kernaghan & Co., [1999 Transfer Binder] Fed. Sec. L. 

Rep. (CCH) ¶ 90,534, 1999 WL 544708 (S.D.N.Y. 1999), n.429

Hahn v. Breed, 587 F. Supp. 1369 (S.D.N.Y. 1984), n.410

Humana, Inc. v. American Medicorp, Inc., 445 F. Supp. 613 (S.D.N.Y. 1977), n.577

Inter-County Resources, Inc. v. Medical Resources, Inc., 49 F. Supp. 2d 682 (S.D.N.Y. 

1999), n.350

Jacobson v. Peat, Marwick, Mitchell & Co., 445 F. Supp. 518 (S.D.N.Y. 1977), n.479

King v. Livent, 36 F. Supp. 2d 187 (S.D.N.Y. 1999), n.323
Table of Cases

199

Klock v. Lehman Bros. Kuhn Loeb, Inc., 584 F. Supp. 210 (S.D.N.Y. 1984), n.681

Koppel v. 4987 Corp., 191 F.R.D. 360 (S.D.N.Y. 2000), n.335

Krauth v. Executive Telecard, Ltd., 890 F. Supp. 269 (S.D.N.Y. 1995), n.411

Lane Bryant, Inc. v. Hatleigh Corp., 517 F. Supp. 1196 (S.D.N.Y. 1981), n.429

Mendell v. Greenberg, 612 F. Supp. 1543 (S.D.N.Y. 1985), n.410

Mezzonen, S.A. v. Wright, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,704, 1999 WL 1037866 (S.D.N.Y. Nov. 16, 1999), nn.556, 563

Mishkin v. Peat, Marwick, Mitchell & Co., 658 F. Supp. 271 (S.D.N.Y. 1987), n.312

Morales v. Lukens, Inc., 593 F. Supp. 1209 (S.D.N.Y. 1984), n.664

Neuwirth Inv. Fund, Ltd. v. Swanton, 422 F. Supp. 1187 (S.D.N.Y. 1975), n.213

Osborne v. Mallory, 86 F. Supp. 869 (S.D.N.Y. 1949), n.480

Popkin v. Dingman, 366 F. Supp. 534 (S.D.N.Y. 1973), n.644

Quintel Corp., N.V. v. Citibank, N.A., 589 F. Supp. 1235 (S.D.N.Y. 1984), n.314

Refco, Inc. Securities Litigation, In re, No. 05 Civ. 8626 (GEL), 2008 WL 3843343 at *4 

(S.D.N.Y. Aug. 14, 2008), n.189

Reingold v. Deloitte Haskins & Sells, 599 F. Supp. 1241 (S.D.N.Y. 1984), n.517

Richter v. Achs, 174 F.R.D. 316 (S.D.N.Y. 1997), n.350

Saddleback Partners, Ltd. v. Hiatt, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

91,051, 2000 WL 1182793 (S.D.N.Y. 2000), n.324

Schnell v. Schnall, 550 F. Supp. 650 (S.D.N.Y. 1982), n.467

SEC v. Boesky, [1986–1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,991 (S.D.N.Y. 

1986), n.621

SEC v. Certain Unknown Purchasers of Common Stock & Call Options of Santa Fe International Corp., [1985–1986 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,484 

(S.D.N.Y. 1986), n.621

SEC v. First Jersey Securities, Inc., [1984–1985 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 91,923 (S.D.N.Y. 1985), n.616

SEC v. Johnson, No. 03 Civ. 177, Fed. Sec. L. Rep. (CCH) ¶ 93,205, 2005 WL 696891 

(S.D.N.Y. Mar. 24, 2005), n.699

SEC v. Kidder Peabody & Co., 19 Sec. Reg. & L. Rep. (BNA) 811 (S.D.N.Y. 1987), n.621

SEC v. May, 134 F. Supp. 247 (S.D.N.Y. 1955), n.424

SEC v. Vaskevitch, 657 F. Supp. 312 (S.D.N.Y. 1987), n.617

Strauss v. American Holdings, Inc., 902 F. Supp. 475 (S.D.N.Y. 1995), n.429

Strauss v. Kapp Inv. Advisors, Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 90,666 (S.D.N.Y. 1999), n.635

Superintendent of Insurance v. Freedman, 443 F. Supp. 628 (S.D.N.Y. 1977), n.417

Ultrafem, Inc. Securities Litigation, In re, 91 F. Supp. 2d 678 (S.D.N.Y. 2000), nn.263, 285

Unicorn Field, Inc. v. Cannon Group, Inc., 60 F.R.D. 217 (S.D.N.Y. 1973), n.275

Union Carbide Corp. Consumer Products Business Securities Litigation, In re, 676 F. 

Supp. 458 (S.D.N.Y. 1987), n.553

United States v. Chestman, 704 F. Supp. 451 (S.D.N.Y. 1989), nn.599–601

United States v. Sherwood, 175 F. Supp. 480 (S.D.N.Y. 1959), n.191

United States v. Willis, 737 F. Supp. 269 (S.D.N.Y. 1990), n.602
Federal Securities Law

200

Value Line Income Fund, Inc. v. Marcus, Fed. Sec. L. Rep. (CCH) ¶ 91,523 (S.D.N.Y. 

1965), n.213

Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979), nn.440, 444

WorldCom Inc. Securities Litigation, In re, No. 02 Civ. 3288 (DLC), 2005 WL 638268 

(S.D.N.Y. Mar. 21, 2005), n.265

Conner Bonds Litigation, In re, [1988–1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 93,969 (E.D.N.C. 1988), n.288

Burns v. Prudential Securities, 116 F. Supp. 2d 917 (N.D. Ohio 2000), n.363

Fradkin v. Ernst, 571 F. Supp. 829 (N.D. Ohio 1983), n.420

Hoover Co. v. Fuqua Industries, Inc., [1979–1980 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 97,107 (N.D. Ohio 1979), n.440

Telxon Corp. Securities Litigation, In re, 67 F. Supp. 2d 803 (N.D. Ohio 1999), nn.326, 

329

Cattlemen’s Investment Co. v. Fears, 343 F. Supp. 1248 (W.D. Okla. 1972), n.444

Yuan v. Bayard Drilling Technologies, Inc., 96 F. Supp. 2d 1259 (W.D. Okla. 1999), n.285

Collins v. Signetics Corp., 443 F. Supp. 552 (E.D. Pa. 1977), n.275

Craftmatic Securities Litigation, In re, 703 F. Supp. 1175 (E.D. Pa. 1989), n.275

Ellis v. Merrill Lynch & Co., 664 F. Supp. 979 (E.D. Pa. 1987), n.494

Ikon Office Solutions, Inc. Securities Litigation, In re, [1999–2000 Transfer Binder] Fed. 

Sec. L. Rep. (CCH) ¶ 90,972 (E.D. Pa. 2000), n.348

Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946), n.480

Krangel v. Golden Rule Res., Inc., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 

¶ 91,025 (E.D. Pa. 2000), nn.347–48

Neuberger v. Shapiro, [1999–2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,061 

(E.D. Pa. 2000), n.348

Nutis v. Penn Merchandising Corp., 610 F. Supp. 1573 (E.D. Pa. 1985), n.410

Kline v. Henrie, 679 F. Supp. 464 (M.D. Pa. 1988), n.64

Scotch v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 709 F. Supp. 95 (M.D. Pa. 

1988), n.275

United States v. Pray, 452 F. Supp. 788 (M.D. Pa. 1978), n.64

Levin v. Marder, 343 F. Supp. 1050 (W.D. Pa. 1972), n.64

Coates v. Heartland Wireless Communications, Inc., 100 F. Supp. 2d 417 (N.D. Tex. 

2000), n.491

Netsky v. Capstead Mortgage Corp., [1999–2000 Transfer Binder] Fed. Sec. L. Rep. 

(CCH) ¶ 91,020 (N.D. Tex. 2000), n.319

Griffin v. GK Intelligent Systems, Inc., 196 F.R.D. 298 (S.D. Tex. 2000), n.335

Griffin v. GK Intelligent Systems, Inc., 87 F. Supp. 2d 684 (S.D. Tex. 1999), n.487

Paracelsus Corp. Securities Litigation, In re, 61 F. Supp. 2d 591 (S.D. Tex. 1998), n.493

Tenneco Securities Litigation, In re, 449 F. Supp. 528 (S.D. Tex. 1978), n.417

Dahl v. Gardner, 583 F. Supp. 1262 (D. Utah 1984), n.314

Leitner v. Kuntz, 655 F. Supp. 725 (D. Utah 1987), n.63

Ameribanc Investors Group v. Zwart, 706 F. Supp. 1248 (E.D. Va. 1989), n.405

Switzenbaum v. Orbital Sciences Corp., 187 F.R.D. 246 (E.D. Va. 1999), n.329
Table of Cases

201

Bradshaw v. Jenkins, [1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,645 (W.D. 

Wash. 1984), n.406

Jabend, Inc. v. Four-Phase Systems, Inc., 631 F. Supp. 1339 (W.D. Wash. 1986), n.43

SEC v. Joseph Schlitz Brewing Co., 452 F. Supp. 824 (E.D. Wis. 1978), n.147

State Courts

First Jersey Securities, Inc. v. SEC, 476 A.2d 861 (N.J. Super. 1984), n.59

Nanopierce Technologies, Inc. v. Depository Trust & Clearing Corp., 168 P.3d 73 (Nev. 

2007), n.702

Small v. Fritz Companies, 65 P.3d 1255 (Cal. 2003), n.497

SEC Decisions

Cady, Roberts & Co., In re, 40 S.E.C. 907 (1961), nn.583, 586

Carl M. Loeb, Rhoades & Co., In re, 38 S.E.C. 843 (1959), nn.110, 116

Franchard Corp., 42 S.E.C. 163 (1964), n.147

Ira Haupt & Co., In re, 23 S.E.C. 589 (1946), nn.10, 185, 224

Universal Camera Corp., In re, 19 S.E.C. 648 (1945), n.145
The Federal Judicial Center

Board

The Chief Justice of the United States, Chair

Judge Susan H. Black, U.S. Court of Appeals for the Eleventh Circuit

Magistrate Judge John M. Facciola, U.S. District Court for the District of Columbia

Judge James B. Haines, Jr., U.S. Bankruptcy Court for the District of Maine

Judge James F. Holderman, Jr., U.S. District Court for the Northern District of Illinois

Judge Edward C. Prado, U.S. Court of Appeals for the Fifth Circuit

Chief Judge Loretta A. Preska, U.S. District Court for the Southern District of New York

Judge Kathryn H. Vratil, U.S. District Court for the District of Kansas

James C. Duff, Director of the Administrative Office of the U.S. Courts

Director

Judge Barbara J. Rothstein

Deputy Director

John S. Cooke

About the Federal Judicial Center

The Federal Judicial Center is the research and education agency of the federal judicial 

system. It was established by Congress in 1967 (28 U.S.C. §§ 620–629), on the recommendation of the Judicial Conference of the United States.

By statute, the Chief Justice of the United States chairs the Center’s Board, which also 

includes the director of the Administrative Office of the U.S. Courts and seven judges 

elected by the Judicial Conference.

The organization of the Center reflects its primary statutory mandates. The Education 

Division plans and produces education and training programs for judges and court staff, 

including video programs, publications, curriculum packages for in-court training, and 

Web-based programs and resources. The Research Division examines and evaluates current and alternative federal court practices and policies. This research assists Judicial Conference committees, who request most Center research, in developing policy recommendations. The Center’s research also contributes substantially to its educational programs. 

The two divisions work closely with two units of the Director’s Office—the Systems Innovations & Development Office and Communications Policy & Design Office—in using 

print, broadcast, and online media to deliver education and training and to disseminate 

the results of Center research. The Federal Judicial History Office helps courts and others 

study and preserve federal judicial history. The International Judicial Relations Office 

provides information to judicial and legal officials from foreign countries and assesses 

how to inform federal judicial personnel of developments in international law and other 

court systems that may affect their work.