Because the pension plan did not correspond directly to the employee’s time worked, so the contributions could not be earmarked as on behalf of any specific employee. There are other regulatory schemes dealing with pensions: ERISA. Congressional intent: Congress passed ERISA it thought there was a regulatory void. (another applicable regulatory regime: FDIC) No practical need for securities laws to cover pensions. Note this argument is a safety valve and applied only narrowly to other federal regulatory regimes. (must be another federal regime) Notes: How to determine whether transactions are sufficiently close to the capital market? amount and type of consideration decision-making process of the parties What are the alternatives? other regulatory schemes. Decision of judge or investors, rarely applied Common Enterprise SCOTUS hasn’t defined common enterprise. Circuit split— horizontal commonality – return to a group of investors are pooled and are correlated with one another The pooling of funds among multiple investors and an apportionment of profits from the enterprise to investors based on their pro rata investment in the pool. all tied together; spokes on a wheel with everyone connected by rim with correlated returns vertical commonality – promoter’s efforts impact the individual investors collectively Investors do not necessarily receive the same return relative to their investment. wheel with no rim, just hub broad – promoter or manager does not share returns, and also not at risk narrow – promoter or manager does share return, and also take the risk SEC v. SG Ltd, 265 F.3d 42 (1st Cir. 2001) Facts: SG created virtual stock market (StockGeneration) with a “privileged company” shares of which are guaranteed to return 10%/month (215%/annually). SG claims they can maintain return
Presumption of Reliance: Basic v. Levinson, 485 U.S. 224 (1988): Officers denied merger negotiations, though they were in fact taking place. Ps sold shares before merger announcement. Fraud on the Market Theory: informationally efficient markets rapidly incorporate all publicly available info about the asset being traded. Inaccurate info is likely to yield an inaccurate stock price. Elements: Defendant made a public misrepresentation Misrepresentations were material Shares were traded on an efficient market Plaintiff traded the shares between the time the misrepresentation was made and the time the truth was revealed Fraud on the market presumption of reliance (FOTM presumption): procedural innovation of Basic court. (“In Basic v. Levinson, we held that investors could satisfy this reliance requirement by invoking a presumption that the price of stock traded in an efficient market reflects all public, material information—including material misstatements. In this case, we concluded, anyone who buys or sells the stock at the market price may be considered to have relied on those misstatements.” II (S.Ct. 2014)) Individual proof of reliance was unnecessary in an informationally efficient market because the misstatement was transmitted to the investor “in the processed form of market price”. The court concluded “an investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price”. [BUT J. White’s concurrence in part notes that some investors buy because they don’t think market price is accurate (short sellers or long investors) … Majority opinion of Basic does not focus on such investors.] Efficient Market Hypo Weak Semi-Strong Strong All info concerning historical prices fully reflected in current price Current prices incorporate all historical info and current public info. Prices incorporate all info whether publicly available or not Implication: Prices change only in response to new info Implication: Investors can’t expect to profit from studying available info bcz mkt already incorporated it into price Implication: If true, no identifiable group can earn systematic positive abnormal returns from secs trading (i.e. Can’t beat the mkt) Halliburton
3 broad goals of gun-jumping rules: Mandatory Disclosure Distribution of Prospectus Restrict Information Not in Prospectus Exchange Act Reporting Issuer 1. Listing on a national exchange (§ 12(a)) 2. Over the counter stocks (§ 12(g)(1)(A)—JOBS Act of 2012) “total assets” exceeding $10 million class of equity securities held by at least 2,000 persons (or 500 investors) 3. Filing a registration statement under the Securities Act (§ 15(d)) Issuer Categories Non-reporting issuer: no periodic reports Unseasoned Issuer: Exchange Act reporting issuers not eligible to file Form S-3 (need to file Form S-1) Seasoned Issuer: Eligible to file Form S-3 but not WKSI Well-Known Seasoned Issuer (WKSI) S-3 eligible for primary offerings plus $700m n equity in the hands of non-affiliates. $1b equity in non-convertible securities (non-common equity) offerings over last three years—but only for registered offerings of non-convertible securities. Must offer only non-convertible securities (other than common equity) unless meets the $75 million float requirement of Form S-3. (OPTIONAL) Majority owned sub offerings (on parent’s registration statement) of non-convertible securities (non-common equity) that have a full and unconditional guarantee from parent WKSI issuer [shelf registration offering] (e.g. countrywide trust 1) (OPTIONAL) §5 of the 1933 Act (starting point for public offering and private placement) §5(a) “Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly to … sell [a] security through the use or medium of any prospectus or otherwise; or to carry … in interstate commerce … any … security for the purpose of sale or for after sale. In practice, registration statement comes to effect when SEC gives green light, issuer usually waive the period. §5(c) “It shall be unlawful for any person … to offer to sell or offer to buy … any security, unless a registration statement has been filed as to such security… FN 1: Get started by going in registration” (at the latest by signing letter of intent with lead underwriter)
Holding: Although Barchris says that you can rely on expertised section, reliance must be reasonable. If there is a “red flag” it’s not reasonable to rely. where “red flag” regarding the reliability of an audited financial statement emerge, mere reliance on an audit will not be sufficient to ward off liability”. Red flag: any info that “strips a defendant of his confidence in the accuracy of those potions of a registration statement premised on audited financial statements is a red flag, whether or not it relates to accounting fraud or an audit failure….” The red flag here is the E/R ratio, line costs to revenue of WorldCom compared to that of other companies. Ct says that WorldCom’s low E/R ratio is a red flag. But actually it doesn’t look that suspicious: WorldCom – 43%, AT&T – 46.8%, Sprint 54.2%. This doesn’t seem so suspiciously low. Note that no one in the marketplace saw this as a red flag at all! Maybe the court is basically just trying to get past summary judgment stage and on to trial. Another thing going on in the background is that underwriters had some knowledge WorldCom changes the way everyone looks at the reliance defense, which made people think you need a hugely obvious smoking gun red flag. Court didn’t just accept industry practice Basically, court saying you should slow down the process. Problem is there is a business cost to slowing down the process What should underwriters do to satisfy the due diligence defense for non-expertised sections of the registration statement? Unclear. But the following things are not enough: Relying on a comfort letter alone (comfort letter is non-expertised) Limited number of conversations with the issuer or its auditor Cursory nature of the inquiries Failure to go behind any of the almost formulaic answers given to questions Failure to inquire into issues of particular prominence in the underwriter defendants’ own internal evaluations of the financial condition of the issuer or in the financial press. Reasoning in WorldCom For expertised part
Timely periodic disclosure requirements for prior 12 months Non-reporting: 15c2-11 gives partial list of info (not on exam) Less than 6 months 6 months to 1 year 1 year + Non-Affiliate and Reporting Issuer No resales 144(d)(1)(i) Resales allowed but 144(c) info applies 144(d)(1)(i) No restrictions on resales Non-Affiliate and Non-Reporting Issuer No Resales 144(d)(1)(ii) No Resales 144(d)(1)(ii) No restrictions on resales Affiliate and Reporting Issuer No Resales of restricted securities 144(d)(1)(i) Resales of unrestricted securities allowed but must comply with all 144 req’ts – volume, info, broker’s transaction, notice Resales allowed but must comply with all 144 req’ts – volume, info, broker’s transaction, notice Resales allowed but must comply with all 144 req’ts– volume, info, broker’s transaction, notice Affiliate and Issuer No Resales of restricted securities 144(d)(1)(i) Resales of unrestricted securities allowed but must comply with all 144 req’ts– volume, info, broker’s transaction, notice No Resales of restricted securities 144(d)(1)(i) Resales of unrestricted securities allowed but must comply with all 144 req’ts– volume, info, broker’s transaction, notice Resales allowed but must comply with all 144 req’ts– volume, info, broker’s transaction, notice 144(e) Volume Limit Limit on affiliate resales for a three-month period is the greatest of: 1% of the outstanding shares or units of the same class of securities average weekly reported trading volume of the same class of securities during 4 calendar weeks preceding the filing of notice of the sale with SEC