To engage in any act, practice, or course of business operates or would operate as a fraud or deceit upon any person, In connection with the purchase or sale of any security. Elements (1) Standing Buyer or seller (Blue Chip Stamps) Only applies to private parties, not criminal prosecutions as in misapp insider trading cases (O’Hagan) (2) Materiality Same as TSC Indus/Basic/Texas Gulf Sulphur Always required element of and π’s case Almost always economic – 5% rule If 5% of revenues, assets, or sales would be affected. Management integrity almost always material Doesn’t include personal behavior (divorce) Can be material because of public reaction – affect climate change or censorship. (3) Causation Includes subsidiary issue of reliance Fraud on the Market Theory (4) Scienter (5) Damages Standing Blue Chip Stamps (1975) pg 353 Π was not a buyer or seller of stock Court said no standing – must be a buyer or seller. Causation Affiliated Ute Citizens of Utah v. US (1972) pg 382 Bank screwing over tribal members with their shares. Defense trying to say π didn’t prove reliance – Proof of causation makes proof of reliance unnecessary. Showed causation by showing omission of a material fact and a duty between the parties to disclose. Duty as the surrogate for reliance Materiality of the omission becomes a surrogate for causation. Does this only for non-disclosure cases? If an affirmative misrep, some cases have said π must prove actual reliance. TRANSACTION Causation Really reliance – BUT FOR the fraud, π would have acted differently. LOSS Causation
solicitation itself, rather than the particular defect in the materials, was an essential link in the accomplishment of the transaction. Otherwise, court would be determining fairness – they just care about disclosure. Here, essential link was that though M had 54% shares in E, a 2/3 vote was required, so they couldn’t have done it themselves. Does that make the need to solicit proxies in and of itself the essential link? Yes VA Bank Shares. Virginia Bank Shares (1991) pg 697 Scott- terrible case SC – π failed to establish that the proxy was an essential link – their votes weren’t needed This basically denies standing to SH whose votes aren’t required (Is the Essential Link the only way to show causation?) (5) Remedy Varies. Can be damages, or invalidating proxies, resolicitation and Close Corporations Traits of a CC Small number of SH Owner-managers – almost all owners are managers Desirable to customize the management structure and corp governance rules (due to corp size or owner/manager overlap) – standard structure not as appropriate. Lack of liquidity – no public market for shares Results in difficult valuation. Restrictions on transferability Whereas public corps are generally freely trade-able. Care very much who SH are. Why do we treat CC differently? Our system is one where SH’s major concern is to effectively monitor management and its treatment of SH money – ownership is separated from control. CC, problems are different. Control/ownership overlap – less of a need for costly oversight mechanisms. Compliance statutes can be traps for CC – don’t have the resources to be as informed. Very much resemble partnerships, and may be run like one.