LIABILITIES UNDER THE FEDERAL SECURITIES LAWS

1 August 2013 Wachtell, Lipton, Rosen & Katz LIABILITIES UNDER THE FEDERAL SECURITIES LAWS SECTIONS 11, 12, 15 AND 17 OF THE SECURITIES ACT OF 1933 AND SECTIONS 10, 18 AND 20 OF THE SECURITIES EXCHANGE ACT OF 1934 Paul Vizcarrondo, Jr. Paul Vizcarrondo, Jr. is a partner of Wachtell, Lipton, Rosen & Katz. The author thanks his former partner Andrew C. Houston, who helped prepare the original version of this outline in 1988, his partner George T. Conway III for his comments on the current version, and in particular Zachary B. Savage for his outstanding assistance in the preparation of the current version of this outline.

2 2013 Wachtell, Lipton, Rosen & Katz All rights reserved. -i- Table of Contents I. Introduction ..1 A. Scope of the SECURITIES Act and of the Exchange Act ..3 B. Extraterritorial Application of the FEDERAL SECURITIES Laws ..4 C. Disclosure Philosophy ..8 D. Duty to E. Materiality ..11 F. Bespeaks Caution Doctrine and Reform Act Safe G. FEDERAL and State Law 19 II. LIABILITIES UNDER the SECURITIES Act ..23 A. Overview of 11 and 1. Sections 11 and 12 Contrasted ..23 2. Overlap Between 11 and 12 ..23 3. Exclusivity of 11 or 12 Remedies.

3 24 4. Rule 9(b) and 11 and 12 ..24 B. Section 11 ..25 1. Persons Liable ..25 2. Scienter ..26 3. Defenses ..27 4. Reliance ..32 5. Measure of Damages ..32 6. Causation and Standing ..33 7. Statute of Limitations ..36 8. Contribution ..38 C. Section 12 ..38 1. Persons Liable ..40 2. Scienter and Defenses ..44 3. Reliance ..45 4. Remedies and Measure of Damages ..46 5. Statute of Limitations ..47 D. Section 17 ..48 1. Private Right of Action UNDER 17(a).

4 48 2. The Contrast Between 17(a) and 10(b) ..49 3. Scienter ..50 4. Standing ..51 5. Persons Liable ..52 -ii- 6. Reliance ..52 7. Remedies and Damages ..53 8. Section 17(b) ..53 9. Statute of Limitations ..54 III. LIABILITIES UNDER the Exchange Act ..55 A. Section 10 ..55 1. Private Right of Action UNDER Rule 10b-5 ..56 2. Standing ..56 3. Persons Liable ..60 4. Basis of Liability ..62 5. Scienter ..64 6. Reliance and Causation ..66 a. Transaction Causation.

5 66 b. Loss Causation .. 73 7. Heightened Pleading Requirements UNDER the Reform Act ..78 a. Pleading Fraudulent Conduct with Particularity .. 78 b. Pleading Scienter .. 80 c. The Group Pleading Doctrine .. 89 8. Remedies and Measure of Damages ..93 9. Statute of Limitations ..96 10. Defenses ..102 11. Insider Trading ..105 12. Section 10(a) ..115 B. Selective Disclosure ..117 1. Basis of Liability and Enforcement ..118 2. Covered Communications ..118 3. Material Nonpublic Information.

6 120 4. Timing of Public Disclosure ..121 5. Form of Public Disclosure ..122 C. Section 18 ..123 1. Standing ..124 2. Persons Liable ..124 3. Scienter and Good Faith ..124 4. Reliance and Causation ..125 5. Remedies and Measure of Damages ..125 6. Statute of Limitations ..126 7. Contribution ..126 -iii- IV. Secondary Liability, Contribution and Indemnification ..128 A. Controlling Person Liability UNDER 15 of the SECURITIES Act and 20 of the Exchange Act ..128 1. Control ..129 2. Scienter and Defenses.

7 134 3. Statute of Limitations ..134 4. Remedies and Damages ..135 B. Respondeat Superior ..135 C. Aiding and Abetting versus Direct Participation ..137 D. Conspiracy ..144 E. Contribution ..145 F. Indemnification and -1- I Introduction This outline deals with certain of the liability provisions of the FEDERAL SECURITIES laws: 11, 12, 15 and 17 of the SECURITIES Act of 1933 (the SECURITIES Act ), and 10, 18 and 20 of the SECURITIES Exchange Act of 1934 (the Exchange Act ). It does not address other potential sources of liability and sanction, such as FEDERAL mail and wire fraud statutes, state fraud statutes and common law remedies, RICO and the United States SECURITIES and Exchange Commission s ( SEC ) disciplinary powers.

8 On December 22, 1995, the Private SECURITIES Litigation Reform Act of 1995 (the Reform Act or PSLRA ) became law after the Senate overrode President Clinton s veto. Pub. L. No. 104-67, 109 Stat. 737. Where relevant, this outline discusses changes and additions that the PSLRA made to the liability provisions of the SECURITIES Act and the Exchange Act. The SECURITIES Litigation Uniform Standards Act of 1998 ( SLUSA ) amended portions of the SECURITIES Act and the Exchange Act to preempt certain class actions that allege fraud UNDER state law. Specifically, SLUSA precludes a private party from bringing a covered class action in FEDERAL or state court based on state law alleging a misrepresentation or omission of a material fact or the use of any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

9 15 78bb(f)(1) (West Supp. 2003); see also 77p(b). Generally, a covered class action involves common questions of law or fact brought on behalf of more than 50 persons or an action brought on behalf of one or more unnamed parties. Prager v. Knight/Trimark Group, Inc., 124 F. Supp. 2d 229, 231 ( 2000) (citing 15 78bb(f)(5)(B)); see also 15 77p(f)(2)(A). SLUSA effectively makes FEDERAL court the exclusive venue for nearly all SECURITIES fraud class actions. On December 21, 2000, Congress enacted the Commodities Futures Modernization Act (the CFMA), which revamped the Commodity Exchange Act and amended the SECURITIES , banking and bankruptcy laws to update the FEDERAL regulatory structure and to clarify the legal status of derivative products.

10 Pub. L. No. 106-554, 114 Stat. 2763 (2000). The CFMA made two noteworthy changes to the SECURITIES laws. First, it lifted the ban on single stock futures and included security future[s] and security futures product[s] in the definition of security UNDER the Exchange Act. See 15 78c(a)(10), (55) and (56) (West 1997 & Supp. 2003). Because of this inclusion, security futures and -2- security futures products are now subject to the reporting and recordkeeping, as well as the antifraud and antimanipulation, provisions of the Exchange Act. Second, the CFMA excluded swap agreements, either security-based or non-security-based, from the definition of security UNDER both the SECURITIES Act and the Exchange Act, thus excluding swap agreements from the SEC s reporting and recordkeeping requirements.