Source: https://www.howardnations.com/remedies-for-wronged-investors/
Timestamp: 2019-04-23 12:56:03+00:00

Document:
Until the mid-1990s, plaintiffs seeking recourse for securities-related corporate fraud often turned to §10(b) of the 1934 Securities Exchange Act1 and Rule 10b-5—which was promulgated under the act2—and §12(2) of the 1933 Securities Act.3 State common law and statutory remedies played a secondary role.
Congressional passage of the Private Securities Litigation Reform Act of 1995 (PSLRA) materially reduced the federal rights and remedies of investors seeking redress against corporate wrongdoers, forcing plaintiffs to pursue state law remedies in state courts.4 Although then-President Bill Clinton vetoed the act, saying he was “not . . . willing to sign legislation that [would] have the effect of closing the courthouse door on investors who have legitimate claims,” 5 Congress overrode the veto.
Since then, as Clinton predicted, many citizens seeking redress for losses as a result of negligent or intentional misrepresentation, fraud, breach of fiduciary duty, or other misconduct in the purchase, sale, or offer for purchase or sale of securities have found their federal rights substantially reduced and have been forced to seek redress under state rather than federal law.
The SLUSA created “national standards for securities class-action lawsuits involving nationally traded securities, while preserving the appropriate enforcement powers of state securities regulators and not changing the current treatment of individual lawsuits.”13 Thus, individual securities actions in state courts survived unscathed.
The Court further diminished rights of investors who buy securities in initial private offerings or on the secondary market by holding in Gustafson v. Alloyd Co. that §12(2) of the 1933 Securities Act – one of the most powerful antifraud provisions under federal securities laws – does not apply to such offerings.15 The Court’s denial of this remedy to shareholders in initial private or secondary-market offerings left §10(b) of the 1934 Securities Exchange Act as the primary federal remedy for private litigants.
Common law claims will vary from state to state depending on each jurisdiction’s laws and procedural requirements. Nevertheless, most state actions will be based on similar allegations – negligent misrepresentation, common law fraud, and breach of fiduciary duty.
Remedies. A plaintiff injured by a defendant’s common law fraud or negligent misrepresentation may file suit to recover compensatory damages for economic injury, exemplary damages (in limited circumstances), and prejudgment interest.
In circumstances where there is no adequate remedy at law, a defrauded party can seek the equitable remedies of rescission, specific performance, or reformation.
The investor prosecuting a securities case on the common law theories of negligent misrepresentation or fraud may be confronted with a number of affirmative common law defenses. In most jurisdictions, the following affirmative defenses must be specially pleaded.
Statutes of limitations. The statute of limitations for common law fraud claims is generally four years. Claims of negligent misrepresentation are usually governed by a state’s limitations on negligence claims—usually one or two years.
The limitations statute for a cause of action for fraud or negligent misrepresentation begins running when the conduct occurs, unless the defendant has concealed it from the plaintiff. Then, in most jurisdictions, the statute of limitations is tolled until the plaintiff either discovers the wrongful conduct or, through the exercise of reasonable diligence, should have discovered it.
Plaintiff as a sophisticated investor. Defendants in securities fraud cases often try to avoid liability by claiming the plaintiff knew more about investing or about the specific investment at issue than the defendant did and therefore could not have reasonably relied on the advice of the defendant. Generally, this defense will not preclude recovery by the investor as a matter of law, but it may be considered by the jury in deciding whether the plaintiff’s reliance was reasonable or justifiable.
Disclaimer. The defendant may argue that the transaction included a disclaimer that protects it from liability. Typical disclaimers include an assertion that the seller (or defendant) relies solely on third parties for the truth and completeness of the representations made to the investor. But these disclaimers protect the seller only to the extent that the information is true. They will not protect the seller if it knows that the third-party statements are false, because the seller is then a party to the fraud.
Equitable defenses. The plaintiff must come into court with “clean hands” to assert equitable remedies. The defendant, too, must have clean hands to assert the equitable defenses of estoppel, laches, and in pari delicto.
Investors are not necessarily limited to federal remedies or the state common law theories of fraud and negligent misrepresentation. Investors’ lawyers should also consider bringing actions based on breach of fiduciary duty or on state statutes.
The duties imposed by law on fiduciary relationships render those who owe fiduciary duties to investors viable targets in corporate-misconduct cases. Recent high-profile corporate-fraud cases, which have been accompanied by America’s largest bankruptcies, have spawned a search for defendants other than the now-bankrupt securities sellers or corporations at the center of these cases. Potential defendants include corporate officers and directors, trustees, accountants, attorneys, brokers and brokerage houses, underwriters, investment bankers, appraisers, and market makers.
In several types of securities transactions, such as those involving bonds, fiduciaries owe specific duties that, when breached, can form the basis of a claim. These fiduciary duties mirror both general and specific duties imposed by the common law on trustees regarding management and investment of trust assets.
In 2002, a combination of federal preemptive legislation, significant changes in the technologies of securities trading and regulation, and substantial increases in the interstate and international aspects of securities prompted the NCCUL to promulgate the modernized Uniform Securities Act (2002).
1. Securities Exchange Act of 1934, 15 U.S.C. §78a (2002).
2. 17 C.F.R. §240.10b-5 (2003).
3. Securities Act of 1933, 15 U.S.C. §77a ( 2002).
4. 15 U.S.C. §78j (2002).
5. 141 Cong. Rec. H15214-06, *H15214 (1995).
6. 15 U.S.C. §77z-2(c)(1) (2002).
8. 15 U.S.C. §78u-4(e)(1) (2002).
9. 15 U.S.C. §78u-4(f)(2)(A) & (B).
10. 141 Cong. Rec. H15214-06, *H15214.
11. Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (1998).
12. Id. §2(2) and (3).
14. 511 U.S. 164, 192 n.1 (1994) (Stevens, J., dissenting).
15. 513 U.S. 561 (1995).
16. RESTATEMENT (SECOND) OF TORTS §552(1) (1977).
17. See, e.g., McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999).
18. RESTATEMENT (SECOND) OF TORTS §525 (1977).
19. See Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998).
20. RESTATEMENT (SECOND) OF TORTS §538 (1977).
24. RESTATEMENT (SECOND) OF TORTS §448 (1965).
25. Texarcadian Fuels, Inc. v. Lone Star Energy Storage, Inc., 896 S.W.2d 233, 237 (Tex. Ct. App. 1995), vacated on other grounds, 922 S.W.2d 549 (Tex. 1996).
26. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 513 (Tex. 1942).
27. Int’l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 576 (Tex. 1963).
28. Faour v. Faour, 789 S.W.2d 620, 621-22 (Tex. Ct. App. 1990).
29. RESTATEMENT (SECOND) OF AGENCY §§377-98 (1958).
30. See Hand v. Dean Witter Reynolds, Inc., 889 S.W.2d 483, 493 n.5 (Tex. Ct. App. 1994).
31. RESTATEMENT (SECOND) OF TRUSTS §170 (1959).
32. RESTATEMENT (THIRD) OF TRUSTS, P.I.R. §227 (1992).
33. RESTATEMENT (SECOND) OF TRUSTS §170 (1959).
37. See, e.g., Hoenig v. Texas Commerce Bank, N.A., 939 S.W.2d 656, 661 (Tex. Ct. App. 1996).
38. RESTATEMENT (SECOND) OF TRUSTS §179 (1959).
39. See, e.g., Upchurch v. Albear, 5 S.W.3d 274, 283 (Tex. Ct. App. 1999).
40. See, e.g., Burrow v. Arce, 977 S.W.2d 229, 238 (Tex. 1999).
41. National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996).
42. Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (1998).
43. TEX. REV. CIV. STAT. ANN. art. 581-33A(2) (West 2003).
44. TEX. BUS. & COM. CODE ANN. §27.01 (West 2003).
45. TEX PROP. CODE ANN. §113.051-113.060 (West 2003).
46. TEX. BUS. & COM. CODE ANN. §17.41-.63 (West 2003).
47. There has been considerable activity at the federal level, including passage of the Sarbanes-Oxley Act (Pub. L. No. 107-204, 116 Stat. 745 (2002)) and rules changes by the Securities and Exchange Commission, which are beyond the scope of this article.
Howard L. Nations practices law in Houston.

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