SecReg Unit 2 Cases PSE Disclosures

International Securities Regulation Case Digests Atty.
Francis Lim

Agdamag | Magtoto | Quintos | Roco | San Pedro | Vergara
!

UNIT TWO
REGULATION OF LISTED COMPANIES

A. Disclosure Requirements

Law
1. Sections 2, 17, 18, 23, 36, 51, 57, 62 and 63, SRC
2. SRC Rules 17.1, 18.1 and 23
3. Philippine Stock Exchange (PSE) Disclosure Rules

Cases

1. Basic, Inc. v. Levinson
485 U.S. 224 (1988)

Memory Aid of Case in One Sentence: Sellers of stock during period prior to
formal announcement of merger brought Rule 10b-5 action in which it was alleged
that material misrepresentations had been made due to denial of merger
negotiations prior to official announcement.
FACTS:
Prior to December 20, 1978, Basic Incorporated was a publicly traded company
primarily engaged in the business of manufacturing chemical refractories for the
steel industry. As early as 1965 or 1966, Combustion Engineering, Inc., a company
producing mostly alumina-based refractories, expressed some interest in acquiring
Basic, but was deterred from pursuing this inclination seriously because of antitrust
concerns it then entertained.

In December 1978, Combustion Engineering, Inc., and Basic Incorporated agreed
to merge. During the preceding two years, representatives of the two companies
had various meetings and conversations regarding the possibility of a merger;
during that time Basic made three public statements denying that any merger
negotiations were taking place or that it knew of any corporate developments that
would account for heavy trading activity in its stock. Respondents, former Basic
shareholders who sold their stock between Basic's first public denial of merger
activity and the suspension of trading in Basic stock just prior to the merger
announcement, filed a class action against Basic and some of its directors, alleging
that Basic's statements had been false or misleading, in violation of 10(b) and
Rule 10b-5, and that respondents were injured by selling their shares at prices
artificially depressed by those statements. The District Court certified respondents'
class, but granted summary judgment for petitioners on the merits. The Court of
Appeals affirmed the class certification, agreeing that under a "fraud-on-the-
market" theory, respondents' reliance on petitioners' misrepresentations could be
presumed, and thus that common issues predominated over questions pertaining to
individual plaintiffs. The Court of Appeals reversed the grant of summary judgment
and remanded, rejecting the District Court's view that preliminary merger
discussions are immaterial as a matter of law, and holding that even discussions
that might not otherwise have been material, become so by virtue of a statement
denying their existence.

ISSUE: W/N Basic committed fraud? SC ruled Vacated and remanded

HELD:
1. The standard set forth in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438,
96 S.Ct. 2126, 48 L.Ed.2d 757 (1976), whereby an omitted fact is material if there
is a substantial likelihood that its disclosure would have been considered significant
by a reasonable investor, is expressly adopted for the 10(b) and Rule 10b-5
context.
2. The agreement-in-principle test, under which preliminary merger
discussions do not become material until the would-be merger partners
have reached agreement as to the price and structure of the transaction,
is rejected as a bright-line materiality test. Its policy-based rationales do
not justify the exclusion of otherwise significant information from the
definition of materiality.
3. The Court of Appeals' view that information concerning otherwise
insignificant developments becomes material solely because of an
affirmative denial of their existence is also rejected: Rule 10b-5 requires
that the statements be misleading as to a material fact.
4. Materiality in the merger context depends on the probability that the
transaction will be consummated, and its significance to the issuer of the
securities. Thus, materiality depends on the facts and is to be determined
on a case-by-case basis.
5. The courts below properly applied a presumption of reliance, supported in part
by the fraud-on-the-market theory, instead of requiring each plaintiff to show direct
reliance on Basic's statements. Such a presumption relieves the Rule 10b-5 plaintiff
of an unrealistic evidentiary burden, and is consistent with, and supportive of, the
Act's policy of requiring full disclosure and fostering reliance on market integrity.
The presumption is also supported by common sense and probability: an investor
who trades stock at the price set by an impersonal market does so in reliance on
the integrity of that price. Because most publicly available information is reflected in
market price, an investor's reliance on any public material misrepresentations may
be presumed for purposes of a Rule 10b-5 action.
6. The presumption of reliance may be rebutted: Rule 10b-5 defendants may
attempt to show that the price was not affected by their misrepresentation, or that
the plaintiff did not trade in reliance on the integrity of the market price

2. Wachovia Bank v. National Student Marketing Corp.
650 F.2d 342 (D.C. Cir. 1980)

Appellants: Wachovia Bank & Trust Co.
Cross-Appellants: National Student Marketing Corp., etc.

Facts:
In December 1979, Wachovia bought approximately $5M worth of National
Student Marketing Corp (NSMC) stock from the corporation and two of its
directors. The purchase was a private placement transaction governed by
International Securities Regulation Case Digests Atty. Francis Lim

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detailed purchase agreements.
Two months later, the market price of NSMC stock declined more than
60%, and NSMC announced that it expected to report a loss for the
previous fiscal quarter.
The SEC then began a two-year investigation of NSMC, which ended in
February with the filing of an enforcement and injunction action against
NSMC and the other major participants in NSMC's merger with Interstate
National Corporation. The SEC charged that the price of NSMC stock had
been artificially inflated in violation of the securities laws.
The original complaint in this case sought damages from NSMC and
several of its officers and employees and from Peat, Marwick, Mitchell &
Co. (PMM), NSMC's independent auditor, etc. These defendants were
charged with participating in a conspiracy to defraud investors by
artificially inflating the price of NSMC stock and thereby violating various
sections of 1933 and 1934 Acts.
o Alleged that misrepresentations about NSMC's financial
condition had been included in oral statements, in press
releases, in reports filed with the SEC, and in other published
reports not filed with SEC. The fraudulent scheme was allegedly
furthered by NSMC's acquisition of a number of corporations.
The defendants moved to dismiss the complaint on two grounds:
o The action was time-barred under the two-year statute of
limitations of the District of Columbia's blue sky law,
o The sections of the securities acts on which the claims were
based did not provide for or allow a private right of action.
District Court ! Held that a private remedy was implied under Sec. 10(b)
of the 1934 Act and under Sec.17(a) of the 1933 Act, but the court
dismissed the action as untimely.

Issues:
W/N the action is barred by the statute of limitations. ! NO! DC reversed.
W/N an implied right of action is available to Wachovia under Sec. 10(b) of
the 1934 Act
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and the corresponding SEC Rule 10b-5, or whether
plaintiffs are limited to the express remedies available. ! YES, implied
remedies available! DC affirmed. [main]

Ratio:
THE ACTION IS NOT BARRED BY THE STATUTE OF LIMITATIONS
For causes of action under securities laws, the forum state's statute of
limitations rules. At issue here is which limitations period to apply: the
three-year general fraud provision, D.C. Code 12-301(8) (1973), or the
two-year blue sky law provision, id. 2-2413(e).
Appellants bought NSMC stock in December 1969. The statute of
limitations began to run at the end of February 1970, and the suit was
filed in January 1973 more than two years, but less than three years, after
the limitations period had begun to run. The district court found the two-
year period applicable and accordingly dismissed the case for untimely
filing.
The question of the appropriate statute of limitations is an equivocal one
because the trend in the federal case law has shifted. Federal courts once
favored invocation of the general fraud limitations period for Rule 10b-5
actions. But during the last decade, the law has moved toward application
of the blue sky law limitations period.
Forrestal Village v. Graham (1977) ! the two-year blue sky law provision,
rather than the three-year general fraud limitations guideline, " 'best
effectuates the federal policy involved.'
So should the Forrestal decision be applied retroactively? DC applied it
retroactively. CA disagrees! Should be prospective! Hence, the 3 year
period applies.
o Chevron (US SC case) requires nonretroactive application of a
decision that overrules law "on which litigants may have relied."
o Here, Wachovia relied on the law prevailing when the time they
bought the NSMC stock, where the 3-year general fraud provision
still applies.
When should the period start to run? The Court applied the doctrine
of equitable tolling.
The doctrine of equitable tolling permits, with respect to fraud, the tolling
of the limitations period until the plaintiff discovers, or should have
discovered through the exercise of due diligence, the fraudulent activity.
The DC didnt apply this.
CA ! The doctrine applies. The statute of limitations cannot run until the
events that implicated the accountants occurred, and these occurred in
February 1970. The statute of limitations against the accountants should
thus be tolled until that time. Given our holding above that the three-year
statute of limitations applies to this case, appellants filed this suit against
the auditor-defendants within the limitations period.

IMPLYING A CAUSE OF ACTION UNDER SECTION 10(B) AND RULE 10B-5
The SC has recognized an implied cause of action under 10(b) many times.
Moreover, despite many efforts to amend related sections of the national
securities laws, Congress never saw reason to limit or constrict the
application of implied remedies under section 10(b).
The starting point for any inquiry regarding implied remedies is the intent
of Congress in passing the statute in the first place. Cort v. Ash (1975)
outlined the following four-step analysis to guide efforts to determine
legislative intent:
Cort analysis As applied to this case
First, is the plaintiff "one of the
class for whose especial benefit
the statute was enacted" that is,
does the statute create a federal
right in favor of the plaintiff?
Wachovia is within the specific class to
be protected by the statute. Section 10(b)
proclaims as its purpose "the protection of
investors."
Second, is there any indication of
legislative intent, explicit or
implicit, either to create such a
remedy or to deny one?
Secondly, a search of the legislative history
yields little specific. Congress did not spend
much time discussing 10(b), notwithstanding
its clear place as a "catch-all clause to prevent

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manipulative devices."
Third, is it consistent with the
underlying purposes of the
legislative scheme to imply such a
remedy for the plaintiff?
We find more than the requisite link between
the existence of an implied cause of action
and the broad purposes of the 1934 Act. A
private right of action not only compensates
the investors who are the beneficiaries of
section 10(b) in general, but also affords a
broad deterrent force against the fraud that
the statute condemns. And, as the SEC
argues forcefully in its amicus position, a
private remedy is a necessary supplement to
administrative enforcement because the
Commission cannot do the job alone.
Finally, is the cause of action one
traditionally relegated to state law,
in an area basically the concern of
the States, so that it would be
inappropriate to infer a cause of
action based solely on federal law?
Application of the Cort criteria points in favor of Wachovias right to pursue
a cause of action.

APPLICATION OF SECTION 10(B) TO NEWLY ISSUED SECURITIES
NSMCs contention ! The entire 1934 Act, of which Sec. 10(b) is a part,
is inapplicable to this case because the Act was intended to regulate
securities only after distribution. It is the 1933 Act, say cross-appellants,
which was meant to cover newly issued securities.
CA ! Such a rigidly compartmentalized analysis misses the clear intention
of Congress and the overall purposes of the statutory scheme. Section
10(b) by its very terms applies to "any security," whether or not registered
on a national exchange. The language was intended to be sweeping.
Congress wanted securities legislation aimed at protecting against fraud to
be construed "not technically and restrictively, but flexibly to effectuate its
remedial purposes."
Cross-appellants advance the legislative history of the 1934 Act as
supportive of their interpretation. Even if the language of section 10(b)
were not so plain, its legislative history would offer cross-appellants little
solace. That history corroborates Congress' intent, as noted above, that
10(b) act as a "catch-all clause to prevent manipulative devices."
The broad scope of section 10(b) has been widely recognized, and the
section has been applied to newly issued securities and to those
sold in private placements.
Moreover, overlap between the two statutes is neither "unusual nor
unfortunate." The 1933 and 1934 Acts are meant to be interrelated and
interdependent components of a general scheme, and the two should be
read together. There is no conflict between them, and their overlap in no
way diminishes the plain meaning of section 10(b).

THE RELEVANCE OF EXPRESS REMEDIES
NSMCs contention ! Sec. 10(b) may not give rise to an implied
remedy because other specific sections of the 1933 and 1934 Acts provide
pertinent express remedies. The argument smacks somewhat of a "Catch
22" arrangement because in each instance cross-appellants are at the
ready to show that the express remedies are not really available to
Wachovia. And the argument has been unavailing in previous cases for
reasons that are applicable here.
It is true that the SC has expressed concern about implying private rights
of action when express remedies have been created by statute, but that
concern has been limited to cases in which the express remedies would be
nullified if additional remedies were implied. Such circumvention can
hardly be an issue here, where the express remedies are totally different
from the remedy implied under sec. 10(b), and where the express
remedies are meant to treat different problems and to be applied in
different situations.
Nothing in the remedy expressly provided by section 11 is inconsistent
with an implied right of action under section 10(b). Under 10(b),
negligence is not enough one is liable only for fraud. The higher burden of
proof under section 10(b) is clearly a trade-off for the limitations on
section 11 claims, and it accounts in part for the fact that there are two
separate sections dealing with related problems. Moreover, according to
the view urged by cross-appellants, section 10(b) would serve no useful
function because fraud is included within the broad proscription of section
11. Indeed, if no remedies may be implied under 10(b), investors
defrauded in a purchase of unregistered securities are left less protected
than investors suffering losses as the result of typographical errors in a
registration statement.
For the same reasons, implying a remedy under section 10(b) creates no
danger of circumvention of section 12(2) of the 1933 Act, which deals with
false prospectuses and oral communications. The cause of action expressly
provided by that section is available in the event of negligent
misstatements, and again the more stringent fraud requirement of section
10(b) serves as a trade-off for section 12(2)'s short statute of limitations
and apparent restriction of defendants to sellers of securities.
Finally, NSMC points to Sec. 18 of the 1934 Act

as providing an express
remedy that precludes implication of a cause of action under Sec. 10(b).
Section 18 makes any person filing a "false or misleading" statement with
the SEC liable for damages caused by reliance on that statement. We
disagree! There are various differences between the two sections which
militate against regarding them as mutually exclusive. (omitted na. too
long)

Conclusion
It is more than a decade since the collapse of NSMCs stock, thus,
appellants must be given an opportunity to pursue the substance of their
claims and, if appropriate, to recover for losses incurred as NSMC
shareholders and alleged victims of securities fraud.
We reverse the holding of the court below that it is the two-year statute of
limitations for the District of Columbia's blue sky law that applies here and
the holding that the doctrine of equitable tolling is unavailable to
appellants. Accordingly, we find that this action is not time-barred under
the District's three-year limitations period for general fraud claims.
We hold further that appellants may rely on a remedy implicit under Sec.

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10(b) of the 1934 Act, irrespective of the possibility of overlap between
that implied cause of action and express remedies provided by other
sections of the securities laws. Sec. 10(b) is peculiarly appropriate to the
allegations of fraud made by appellants, and we find nothing in the
legislative history of the securities laws or in recent SC opinions
inconsistent with an implied right of action under Sec. 10(b). Reversed
and remanded.

3. Financial Industrial Fund v. McDonnell Douglas, 474 F.2d 514 (10
th

Cir. 1973)
Financial Industrial Fund, Inc. v. McDonnell Douglas Corp.
Plaintiff-appellee: Financial Industrial Fund, Inc. (a Maryland corp.)
Defendant-appellant: McDonnell Douglas Corp. (a Maryland corp.)

Gist: The plaintiff, Financial Industrial Fund, Inc., a mutual fund or mgmt
investment company, brought this damage action against McDonnell Douglas Corp.,
and against the underwriter of Douglas, Merrill Lynch, Pierce, Fenner & Smith, Inc.
The action is based on Rule 10b-5. The jury rendered verdicts against McDonnell, et
al. in the amount of $712,500.00.

Facts:
Financial Industrial Fund purchased 100,000 shares of common stock of
Douglas in 1966.
o 21 June The decision to purchase was reached.
o 22 June, 9:15AM (Denver time) The actual purchases of 57,000 shares
in the open market or over the counter began. Financials officer was surprised at
the large # of shares offered so he ordered that purchases stop.
o 23 June, morning. Nevertheless, 23,000 additional shares were purchased
by Financial. No purchases were made from Douglas or Merrill Lynch.
o 24 June. Financial heard of the announcement to the press by Douglas
that its earnings for the last 6-mo. period were 12/share.
The said earnings figure for the period was far below estimates made by
independent market analysts and brokers prior to such date and known to
Financial.
Financial had not consulted with Douglas or Merrill Lynch before the
purchase. The regular quarterly earnings statement for Douglas was not due until
mid-July. This was generally known to investors including Financial. The public
markets reacted to the 24 June special earnings statement of Douglas by beginning
a substantial decline.
1-8 July. Financial sold 80,000 Douglas shares between 1-8 July for a price
substantially below the purchase price.
The appeal presents no issues concerned with any direct purchase and
sale of stock between Financial Industrial Fund and Douglas, nor any issue of inside
dealing or of tipping by Douglas.
Financial is in the position of any purchaser in the open market, and the
information with which the case is concerned was public information. It (being a
mutual fund) is in the business of making money by the investment of the money of
others, and as such holds itself out as an expert or professional.
On 27 May 1966, the president of Douglas was advised that the Aircraft
Division of the company was experiencing delays in deliveries by its suppliers of
components, and that the work force was not as efficient as had been expected.
A group of corporate officials was sent to determine the extent of the
problems and it was reported that the delivery of 18 airplanes could not be made
until the next fiscal year.
On 1 June, an announcement of the delay was made to the press. This
concluded with a statement that earnings for the fiscal year would be adversely
affected. The company had just completed the call of existing convertible
debentures, most of w/c were converted to common stock as it was favorable for
the holders.
On the same date, the directors approved the issuance of new debentures
with Merrill Lynch as the underwriter. In connection therewith, a preliminary
prospectus was soon issued (June 7th) w/c showed the first 5 months earnings
(Dec through Apr) to be slightly below the same period for the prior fiscal year. The
quarterly financial analysis was underway as was an evaluation of the stages of
completion of some 381 airplanes.
Profit figures showing a loss of several millions for May were given on 14
June to an officer preparing the financial reports.
The president of Douglas sent 50-70 engineering, estimating, and
accounting officials to the Aircraft Division to investigate the situation. These people
reported back that the expected 6-mo. earnings figure for the entire company
would be about 49.
During a meeting w/ outside auditors, it was decided that a substantial
inventory write-down was required in view of the losses, and this would reduce the
6-mo. earnings figure from 49 to 12.
The president then ordered a press release to be prepared relating to the
earnings so determined for the past six months. This was done the same day in
time to be made public before the opening of the New York Stock Exchange on 24
June. The market price of Douglas stock declined to $76 on the 24 June. By the
time Financial had sold its shares of Douglas, the stock closed at $64.50 per share.
The market price of the common stock of Douglas fluctuated in its fiscal
year of 1965 between $71.75 and $24.50 per share, and in the following fiscal year
to June, it fluctuated between $108.61 and $68.68. Earnings also fluctuated widely
over the same period and prior thereto, as did annual gross sales. At the time in
issue, Douglas had a backlog of orders for airplanes, which was substantial.

Financials contention: The special earnings report of Douglas should have been
issued some days before it was.
Douglas contention: The elements of an action under Rule 10b-5 were not shown.
Specifically, Financial failed to show facts to meet the scienter standards, w/c were
applicable to a complaint alleging a failure to issue the special earnings statement
at an earlier time.

Issue: Whether the silence of Douglas at the date/s of the stock purchases by
Financial gives rise to a cause of action under Rule 10b-5 NO.

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Ratio:
In Mitchell v. Texas Gulf Sulphur Co. and Gilbert v. Nixon, it is a reqt that
the plaintiff must also exercise good faith in its purchase, due diligence, and
demonstrate reliance on the acts or inaction of the defendant.
In this case, there is silence at the time of the occurrence of the operative
events until the statement was issued. This is different from instances where a
statement is released and the issue is whether the statement is correct. In the
latter, there is a reasonably direct way to test the statement against the facts as
they existed, all of which involve objective matters.
However, where the silence is at issue, the proof must be directed to the
corporate and individual reactions to the facts showing a change in corporate
circumstances, and how the decision was reached to issue a statement at a
particular time.
The silence or the timing are matters w/c require the court to examine
how these decisions were arrived at by using many subjective factors and by
excluding hindsight.

The business judgment rule
Since the timing decision is one concerned fundamentally and almost
exclusively with matters of discretion and the exercise of business judgment, it is
appropriate to consider the rationale of the business judgment rule.
The business judgment rule may be stated that the directors and officers
of a corporation will not be held liable for errors or mistakes in judgment, pertaining
to law or fact, when they have acted on a matter calling for the exercise of their
judgment or discretion, when they have used such judgment, and have so acted in
good faith.
Rationale: In order to make the corporation function effectively, those
having management responsibility must have the freedom to make in good faith the
many necessary decisions quickly and finally without the impairment of having to
be liable for an honest error in judgment.
The rule itself, of course, is not directly applicable, and it is not to be so
applied here, but the reasons for it are considered as extended to the corporate
entity.
Based on the records of the case at bar, the decision of the officers and
the corporate decision of Douglas to issue an earnings statement on other than the
customary date for such statements, and the timing of such statement was a
matter of discretion.
The information about which the issues revolve must be available and
ripe for publication before there commences a duty to disclose, meaning the
contents must be verified sufficiently to permit the officers to have full confidence
in their accuracy. It also means, that there is no valid corporate purpose which
dictates the information be not disclosed.
As to the verification of the data aspect, the hazards arising from an
erroneous statement are apparent, especially when it has not been carefully
prepared and tested. It is equally obvious that an undue delay in revealing facts,
not in good faith, can be deceptive, misleading, or a device to defraud under Rule
10b-5.

McDonnell Douglas was in good faith and exercised due diligence.
Accdg to Financials EVP, his company had been considering the purchase
of either Boeing or Douglas stock since the end of 1965 and news that United had
purchased another $220M of Douglas Aircraft jets triggered him to suggest that it
seemed like an appropriate time to purchase the stock. He was of the opinion that
Douglas could make more money on this particular airplane. He testified as to the
wide fluctuations in the price of Douglas stock. He was also aware that Douglas had
some problems as early as April 1966 (delays in production, slow deliveries, labor
problems, etc.)
The record shows the known slowdown in the assembly of planes with
delays expected in the finished product; the investigation, and the public
announcement of 1 May of the slowdown with the warning that it would have an
adverse effect on earnings for the current period. The problem in May was
indicated and management reacted against on the 14 June when the May figures
began to come in, showing a serious financial impact in May. However, there is
nothing in the record other than speculation that the extent of the May loss could
have been determined and translated into figures at an earlier date to develop a
statement ripe for publication.
The record thus shows without contradiction as to McDonnell Douglas as a
matter of law that there was exercised good faith and due diligence in the
ascertainment, the verification, and the publication of the serious reversal of
earnings in May.
Much of the earnings decline was caused by the large write-down of
inventory, and the need for this as a proper accounting measure is not challenged
by Financial. There were questions as to the timing of the write-down but the
decision was not seriously challenged.
Furthermore there was no showing by Financial of the reliance required
nor facts to meet the standard of due diligence on its part. It is apparent that an
earnings statement issued by a corporation at any but the expected time, which
shows any substantial change is bad news for someone who had been recently in
or out of a fluctuating market.

While there was a strong motive to delay the publication of figures on Douglas
part, there was no proof that the delay was under Rule 10b-5.
To prevail, Financial had the burden of proof to establish that it exercised
due care in making its stock purchase, that Douglas failed to issue the special
earnings statement when sufficient information was available for an accurate
release (or could have been collected by the exercise of due diligence), and to show
there existed a duty owed by Douglas to Financial to so disclose, as to do otherwise
would be a violation of Rule 10b-5, and upon inaction under such showing plaintiff
relied to its detriment.
Douglas could show either good faith or the exercise of good business
judgment in its acts or inaction. The evaluation of the significance of the change in
its earnings as it might affect the corporation, its stockholders, or persons
considering the purchase of stock, called for the exercise of discretion, and upon a
showing of the exercise of due care in the consideration of the facts, a presumption

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arose that the evaluation made was in the exercise of good business judgment
although subsequent events might show the decision to have been in error.
The evidence as to Douglas, as indicated above, shows the presence of a
strong motive to delay the publication of figures showing a decline in earnings, but
there is no proof that there was such a delay within the legal standards set forth
above. There was speculation and innuendo, but no facts.

Fallo: The judgment is reversed and the case remanded with directions to enter
judgment for McDonnell Douglas Corporation, notwithstanding the verdict.

4. State Teachers v. Fluor
654 F.2d 843 (2
nd
Cir. 1981)

SUMMARY:
State Teachers filed a class action for damages against Fluor Corporation due to the
latters nondisclosure of material information about a major contract (SASOL II), in
violation of Sec. 10(b) of Securities Exchange Act of 1934. State Teachers also
sought to recover damages from Manufacturers (a trust company) for allegedly
purchasing Fluors stocks without disclosing that it had material information about
the contract. District Court dismissed the action. State Teachers appealed.

HELD: Court of Appeals found that Fluor did not breach its duty to disclose
information involving SASOL II or to halt trading in Fluors stocks. Moreover, Fluor
only acted in good faith and in compliance with the publicity embargo provided
under the contract. There was no scienter on the part of Fluor hence, there is no
violation of Sec. 10(b).
Fluor cannot also be held liable for misrepresentation and omission (on the basis of
Fluors denial and responses on questions involving the contract). There was no
evidence of State Teachers reliance, which is an essential element of the claim, on
the alleged misrepresentation. Moreover, intent to defraud was lacking on the
part of Fluor.

On the Tipping issue: CA found that State Teachers presented sufficient evidence to
raise factual issues as to the nonpublic nature of information given to a security
analyst and as to whether Fluor and Manufacturers acted with scienter ! this part
was remanded for further proceedings

FACTS:
THE CASE:
An appeal from District Courts DISMISSAL of State Teachers Retirement
Board (State Teachers)s class action against Fluor Corporation (Fluor).
Class action: In behalf of ALL those who sold their Fluors stocks, without
the knowledge of information regarding a construction contract
Prayer: DAMAGES ! for violations of Sec. 10(b) of 1934 Act; for tipping
such info to Manufacturers Hanover Trust Company (Manufacturers) and;
for failure to halt trading of its stocks.

THE PARTIES
FLUOR ! a California corporation with its headquarters in Los Angeles; a
world-wide engineering and construction company
STATE TEACHERS ! a public pension retirement fund; one of the largest
in the US with assets > $3B
MANUFACTURERS ! a trust company that was alleged to have been given
insider info of the SASOL II contract by a security analyst; Bought a large
number of Fluors share, including the ones being sold by State Teachers

BACKGROUND
Sept. 1974: Fluor was invited, along with two other large construction
companies, to submit proposals on a $1 billion project to build a coal
gasification plant in South Africa for the South African Coal, Oil and Gas
Corporation Limited ("SASOL")
Feb. 24, 1975: Lester Winterfeldt (security analyst with Manufacturers)
met with representatives of several companies, including Fluor. He spoke
to Paul Etter (Fluor's Public Relations Manager) with J. Robert Fluor (CEO)
and David Tappan (vice-chairman of Fluor).
Feb. 25: SASOL informed Fluor that, subject to negotiating the terms of an
agreement, Fluor would be awarded the project known as SASOL II
Feb. 28 (3 days later) Fluor SIGNED an agreement with SASOL.
The agreement provided for an EMBARGO on all publicity regarding
the appointment of Fluor as contractor until March 10, 1975.
(note: this was also the date of Fluors Annual Shareholders Meeting)
PURPOSE of confidentiality: SASOL's need to complete delicate
negotiations with the French government for financing prior to the
contract's announcement.
Feb. 28 (AM): Fluor's representative in South Africa telephoned Tappan
and notified him that the SASOL II contract was either signed or
about to be signed.
Walter Russler (Fluor's Director of Investor Relations) began preparation
of a news statement to be released on March 10.
March 3: Winterfeldt discussed with Joel Tirchswell (senior VP at
Manufacturers) what he had learned on his trip (meeting with Fluor etc.)
(here, the tipping allegation arises)
Afterwards, 2 groups of investment officers at Manufacturers decided to
acquire a larger position in Fluor stock: about 200,000 more shares.

THE RUMORS
March 4 (AM) Russler and Etter received numerous inquiries from security
analysts regarding rumors that Fluor had won a contract for a large
project.
Neither Russler nor Etter commented on these rumors.
Starting March 3, the volume of trading in Fluor's stock increased over that
of previous weeks and the price moved up slightly.
March 5: David Geffner (specialist in Fluor stock on the Pacific Coast
Exchange) called to report rumors that Fluor had obtained a large contract
in the Middle East and that there might be a tender offer for its stock.
Moreover, Merill Lynch asked Russler whether Fluor had received the coal

(

gasification contract in South Africa. (note: factual dispute ! W/N Russler
DENIED or NO COMMENT)
Russler contacted Reuters saying that the increased market activity
probably reflected the anticipation of the company's final quarter earnings
report and might also be attributable to the fact that the company
was "being considered for some major orders."
March 6:
o Volume of Fluor stock surged 3-fold
o Price increased from 22- 1/4 to 25.
o Stock activity caused Jonathan Veniar (market analyst at the New
York Stock Exchange) to call Richard Humbert at Fluor's legal
department
o Possible explanations for the increased volume:
" Fluor had been advised that an unknown group was
interested in purchasing one million shares of the
company's common stock;
" Fluor had been awarded the as yet unannounced SASOL
II contract, and
" There were potential new jobs for Fluor in Iran and
Saudi Arabia.
March 7: NYSE halted trading on Fluors stocks pending an
announcement on March 10
DISCLOSURE ! March 10 (AM): Fluor issued a press release announcing
the signing of the SASOL II contract. Trading in Fluors stocks
RESUMED at 11:16 AM

SELLING and BUYING of FLUORs STOCKS
STATE TEACHERS
Between March 3 and March 6: State Teachers SOLD 288,257 Fluors
stocks it held (amount $6.4 billion = 40% of the shares traded that week)
Basis of decision to sell: Belief that the future market price for Fluor stock
would not fully reflect the earnings from projects in foreign countries.
MANUFACTURERS
Purchased 200K Fluor shares (in addition to more than 275,000 shares of
Fluor stock it has)
From March 3 to March 13, Manufacturers purchased a total of 292K
shares of Fluor stock.
Note: Manufacturers bought some of the stocks without knowing that the
stock was being sold by State Teachers.

THE COMPLAINT and State Teachers ALLEGATIONS
State Teachers alleged that Fluor committed fraud by:
o FAILURE TO DISCLOSE news of the SASOL II contract
o FAILURE TO HALT trading in Fluors stocks.
Alternative duty to DISCLOSE arose when Fluor became aware of rumors
in the marketplace.
Fluor committed fraud by tipping information regarding the SASOL II
agreement to Manufacturers before making a public announcement.
Prayer: Damages from Fluor and Manufacturers for trading with exclusive
knowledge of the signing of this agreement.

DISTRICT COURT PROCEEDINGS
Amendment to the Complaint ! More than 3years after these allegations
were made, DC granted leave to State Teachers to amend the complaint
to include a claim for violation of the NYSE Listing Agreement and
Company Manual based on Fluor's failure to notify the Exchange
of the SASOL II contract despite the rampant rumors in the
marketplace.
DC also permitted the addition of a claim for fraud based upon 2
incidents:
o Etter's alleged denial to a security analyst on March 5 that Fluor
had received the SASOL II contract
o Russler's failure to tell the Reuters reporter about the contract

DC refused to permit State Teachers to add the other section 10(b) claims
against both Fluor and Manufacturers because they were unrelated to the
SASOL II contract. (mainly because of the delay of the amendment since
it was made 3 years after discovery)
DC also refused to permit State Teachers to add J. Robert Fluor as a party
defendant (situs reasons ! DC California where Fluors HQ was located
has jurisdiction over such claim)
DISTRICT COURT DECISIONS: SUMMARY JUDGMENT in favor of Fluor
1. On the failure to disclose the existence of the SASOL II contract
or to seek a halt in trading of Fluor stock in violation of section
10(b) and Rule 10b-5:
HELD: NO LIABILITY for delay in the release of information where it is
done in a good faith exercise of business judgment. Fluor's delay in
announcing the SASOL II contract was due to a good faith effort to
comply with the terms of the contract.

2. On Fluors alleged misstatement and omission of material facts:
HELD: NO showing that State Teachers or any other stockholder relied on
Fluor's statements to Merill Lynch. Russler's failure to tell the Reuters
reporter that the SASOL II contract might explain the recent activity in
Fluor stock did not exhibit an attempt to defraud investors.

3. On the allegation that Fluor tipped material inside information to
Manufacturers:
HELD: Granted Fluors motion for summary judgment because it found
that the proof did NOT indicate that Manufacturers received any
inside information. Manufacturers learned only that Fluor might be
awarded the SASOL II contract, a fact known to other investors

Hence, this appeal.

ISSUES: (note: FOCUS on 1
st
and 3
rd
issues)

)

1. W/N Fluor may have breached a duty to disclose information regarding
the SASOL II contract or to halt trading in the Fluor stock in violation of
section 10(b)? NO
2. W/N State Teachers has an implied federal right of action for violation of
the New York Stock Exchange Listing Agreement and Company Manual
based on Fluor's failure to notify the Exchange of the SASOL II contract
despite rumors in the marketplace? None.
3. W/N Fluor may have made statements which misrepresented or omitted
material facts in violation of Rule 10b-5? NO
4. W/N Fluor may have tipped inside information of the signing of the SASOL
II contract to Manufacturers who in turn traded with knowledge of this
inside information?

HELD: DC Decision AFFIRMED. REVERSED as to the tipping issue
RATIO: by Court of Appeals, 2
nd
Circuit
1. DUTY TO DISCLOSE OR HALT TRADING
State Teachers: Fluor had a duty to disclose the signing of the SASOL II
contract during the week of March 3 when rumors became rampant and the
price and volume of its stock shot upward
Court of Appeals: Fluor was under NO obligation to disclose the contract.
A company has no duty to correct or verify rumors in the marketplace
unless those rumors can be attributed to the company.
NO evidence that the rumors affecting the volume and price of Fluor stock
can be attributed to Fluor.
Fluor responded to inquiries from analysts between March 4 and March 6
without comment on the veracity of the rumors and without making
any material misrepresentation
Assuming arguendo that there is a duty to disclose, there is no showing
of any intent to defraud investors ! Fluor's actions were made in
a good faith effort to comply with the publicity embargo.
NO evidence of scienter, which a prerequisite to liability under section
10(b).

Fluor had NO duty under section 10(b) to notify the Exchange and
request that trading in its shares be suspended
Fluor first heard of rumors in the marketplace regarding the SASOL II
contract on March 4 when the volume of trading in Fluor stock had
increased over previous weeks but there was no significant change
in price.
It was not until March 6 that the volume of trading in the stock and its
price increased dramatically.
No one at Fluor knew the reason for these market developments.
Moreover, Fluor agreed to the suggestion of the Exchange that trading be
suspended. This belies the claim that Fluor acted recklessly, much less
with the fraudulent intent necessary for liability under section 10(b).
Fluor's good faith is further evidenced by its endorsement of the
Exchange's decision to halt trading. To say that Fluor should have notified
the Exchange at some earlier time would be to create a standard of
liability under section 10(b) which gives undue weight to hindsight.

2. PRIVATE ACTION FOR VIOLATION OF NYSE LISTING AGREEMENT
AND COMPANY MANUAL
Basically, the CA found that State Teachers have NO implied federal right of
action for violation of (sec A2) stock exchange listing agreement and company
manual.
Contrary to its previous ruling in Van Gemert (which held that Exchange's
Listing Agreement and Company Manual could provide a private right of action
against issuers of securities), CA found that in Van Gemert there was a failure
to comply with notice requirements of the Exchange which specifically apply to
redemptions.
On the other hand, in the case at bar Fluors obligation to disclose general
corporate news is broader than the other cases specific notice requirements.
Unlike the rules in Van Gemert, section A2 of the Exchange's Company Manual
touches upon areas of corporate activity already extensively regulated by
Congress and the Securities and Exchange Commission.

Thus, a legislative
intent to permit a federal claim for violation of the Exchange's Company
Manual rules regarding disclosure of corporate news cannot be inferred.

3. MISREPRESENTATION AND OMISSION
State Teachers: Fluor violated Rule 10b-5 when Russler falsely denied a rumor
that Fluor had received the SASOL project and his response to Reuters that a
possible explanation for the recent activity in Fluor stock was that Fluor was
"going to announce earnings soon" and there had "been some rumors about
big projects floating around." ! Misleading omission of a material fact
because Russler knew on that day that Fluor had received the billion dollar
SASOL contract.

CA:
As to the misrepresentation claim: There was NO evidence of reliance
Court found no factual issues regarding State Teachers' lack of reliance on
the misstatement.
Reliance is an essential element of a 10b-5 claim based upon an
affirmative misrepresentation.

As to the omission claim: Intent to defraud was lacking
There is a distinction between a company's right "to maintain a secret
when no statements are issued, and the affirmative obligations that attach
under Rule 10b-5 when a corporation makes any sort of statement."
It is simply not realistic to say that a corporation may determine when it
will release information and then hold it liable when its representatives
make comments as they inevitably will in the normal course of business
that do not mention this information
NO evidence that Russler or any other Fluor officer acted with
scienter.
Thus, it is immaterial whether or not Russler's statement to Reuters
omitted any references to the signing of the SASOL contract.

*

4. TIPPING NEWS OF SASOL CONTRACT
State Teachers: Manufacturers traded with knowledge of material inside
information regarding the SASOL contract. Winterfeldt's notes from the
February 24 meeting which indicate that he was told that a $2 billion coal
gasification project "could go" in South Africa in 1975.

CA: No violation the tipped info was NOT a MATERIAL inside
information and the tipper did NOT act with SCIENTER
Assuming that Fluor told Winterfeldt that a $2 billion coal gasification
project "could go" in South Africa that year, no Rule 10b-5 violation
occurred because this was NOT material inside information.
The very most Winterfeldt could have learned from Fluor regarding the
SASOL project was that Fluor representatives were optimistic about the
possibility of getting the contract.
It was not until February 25 that Fluor learned from SASOL that they were
the preferred contractor for the project.
(Info was already public knowledge) There was evidence of existing public
knowledge that SASOL II was in the planning stages, that Fluor was one
of the few companies that could handle the SASOL II project and that
Fluor had been the contractor for a previous SASOL project.
Elkind case: A skilled analyst with knowledge of the company and the
industry may piece seemingly inconsequential data together with public
information into a mosaic which reveals material non-public information.
Whenever managers and analysts meet elsewhere than in public, there is
a risk that the analysts will emerge with knowledge of material
information which is not publicly available.

Tipping liability requires that the tipped information be material and
that the tipper-defendant act with scienter
Materiality issue: Whether the tipped information, if divulged to the public,
would have been likely to affect the decision of potential buyers and
sellers
Scienter requirement (more difficult question in this case)
o Elkind case: One who deliberately tips information which he
knows to be material and non-public to an outsider who may
reasonably be expected to use it to his advantage has the
requisite scienter."
o In the case at bar, there is evidence to suggest that Etter knew
at the meeting with Winterfeldt that information about the
possibility of Fluor receiving the SASOL contract was non-public
and material. (factual question remain on W/N Fluor
acted with scienter)

Tipping liability against the Manufacturers also requires a showing of
scienter ! that Manufacturers knowingly received inside information
and used it to its advantage without disclosing it to the public.
o State Teachers said that Winterfeldt entered the February 24
meeting with a written summary of available public
information and left the meeting with several added
notations regarding the SASOL project.
o Manufacturers asserts that Winterfeldt did not discuss with
anyone else at Manufacturers anything about Fluor stock
until 8 days after the meeting. Had Winterfeldt known that
he had received inside information he presumably would
have notified the officers at Manufacturers much sooner.
o The fact remains, however, that these same investment
officers purchased a block of Fluor shares the day after the
meeting with Winterfeldt. (factual issue regarding
Manufacturers' scienter)

Discussion on claims NOT related to SASOL II contract deleted.

5. Mitchell v. Texas Gulf Sulphur Co
446 F.2d 90 (10
th
Cir.)
FACTS: Texas Gulf Sulphur detected an anomaly on a plot of land dubbed as Kidd 55
in Ontario, Canada during its extensive mineral exploration. In 1963, TGS drilled a
hole on it and concluded after visual examination that it had high ore content
(copper, zinc, silver). During this stage, TGS only owned a fraction of the Kidd 55
property. As such, extreme precautions were taken such that no outsider would
gain knowledge of the results of the explorations. By March 1964, TGS had
acquired a substantial interest of the drill site.

Drilling continued from April 10 to 12. On the morning of April 13, they encountered
substantial copper mineralization.

As much as they tried to suppress the nature and extent of their discovery, by early
1964, rumors generated excitement about TGS discovery. These rumors began to
take effect in the Toronto Stock Exchange and would eventually reach the US. By
April 11, the New York Times & New York Herald Tribune inquired as to the
discovery. As a response, TGS officers prepared an official TGS statement which
was released in April 12. A statement was drafted based on the data gathered
on April 10 and they announced that they could not yet conclude that a
commercial ore body existed and that no calculations as to the size or
grade of ore could be made without further drilling.

Also, by April 13 1964, TGS invited a journalist to visit the drill site. His article
stated that the discovery was one of the most impressive drill holes completed in
modern times. This article was published in April 16. Another press release was
also given by its EVP Fogarty on the same day which revealed in some detail the
magnitude of the discovery.

Reynolds, Mitchell, and Stout were stockholders of TGS. They claimed that after
relying on the April 12 press release but before hearing about the April 16 release,
they sold their TGS stock. REYNOLDS claimed that he sold 500 of his TGS shares on

!+

April 16 before learning of the said press release. He asserts that had he known of
the discovery, he would have doubled his holdings. As for MITCHELL, upon his
reliance on the April 12 press release, he instructed his broker to sell 400 TGS
shares. Realizing that he still had 20 TGS shares unsold, he instructed his broker on
April 17 to likewise sell the remaining TGS shares. As for STOUT, after hearing the
April 12 press release and that the TGS discovery was overrated, he sold 1,000 TGS
shares on April 21.

They now seek to recover damages for violations of Sec. 10b of the Securities Act
as well as Rule 10-B-5 for (1) failure to disclose on April 12 and prior to April 16
information as to the results of the drilling; and (2) for issuing an inaccurate,
misleading, and deceptive press release published in April 12.

Trial court found that the April 12 press release was false, misleading, deceptive,
and fraudulent with respect to material matters disclosed by TGS drilling efforts
and that they already knew at that time of the presence of ore-grade copper and
zinc.

ISSUE: WHETHER OR NOT TGS ISSUED A MISLEADING STATEMENT IN HIS APRIL 12 RELEASE

HELD: REYNOLDS SALE: YES. MITCHELLS SALE OF 400 SHARES: YES; BUT NOT THE 20 SHARES;
STOUTS SALE: NO
Rule 10b-5 is plain, concise and unambiguous. It provides as follows:

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,

(1) To employ any device, scheme, or artifice to defraud,
(2) 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
(3) 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.

The misleading, misrepresented or untruthful character of the release may appear
from the nature of the statement considered alone, or, when the facts are fully
disclosed, from the half truths, omissions or absence of full candor concealed
therein. Misrepresented or omitted facts become material, hence actionable
under 10b-5, when, considering the complaining parties as reasonable investors,
the disclosure of the undisclosed facts or candid revelation of misleading
facts would affect their trading judgment. The implicit variables to be
weighed in a materiality analysis are the magnitude and probability of the
occurrence of the event, set against the size and total activity of the subject
company.

The contested press release was issued during the afternoon of Sunday, April
12, and purported to be based on "work done to date" and "drilling done to
date." This misrepresents and distorts the actual fact that the information
upon which TGS formulated the release was current as of 7:00 p. m., April
10. Only in light of the rapid progression of available drilling information does this
become forcefully significant.

The recitation that "work to date has not been sufficient to reach definite
conclusions and any statement as to size and grade of ore would be premature and
possibly misleading" is a one-sided statement. No one could dispute that TGS
could not have accurately defined the outer limits of the ore body as of
April 12, but that is not the test. When TGS undertook to deny and clarify
rumor and fact, they were bound to accurately depict the situation as they
then knew it. The full magnitude may yet have been a mystery, but armed with
the data available on the 12th, TGS was in a position to unveil the then
known dimensions and drilling data of their discovery. Having failed to
accurately portray what they knew, and commenting that the information was
current when in fact it was sorely outdated, TGS misrepresented the facts of
the Kidd 55 discovery.

The duty evolving upon a company facing these circumstances is to speak
truthfully, accurately and with total candor as to the material facts. That is
not too much to ask of any company with the interest of its shareholders central to
its commentary. It is what the SEC demands, what the law requires, and what
every stockholder is entitled to. Simply stated, when the material
information is available and ripe for publication, the difficulties inherent
in formulating a release cannot overbear the accuracy of the statements
contained therein. Nor is it reasonable to conclude that the detail of a full release
will preclude its publication in these circumstances. Indeed, the thoroughness of the
April 16 release stands as evidence to the contrary.

RULE 10-B-5 ACTION DOES NOT REQUIRE THAT THE INSIDERS MUST BE TRADING IN THE MARKET
In SEC v. Texas Gulf Sulphur Company, it was stated that:

Rule 10b-5 is violated whenever assertions are made in a
manner reasonably calculated to influence the investing
public, e. g., by means of the financial media if such
assertions are false or misleading or are so incomplete as
to mislead irrespective of whether the issuance of the
release was motivated by corporate officials for ulterior
purposes. It seems clear, however, that if corporate
management demonstrates that it was diligent in ascertaining
that the information it published was the whole truth and that
such diligently obtained information was disseminated in good
faith, Rule 10b-5 would not have been violated.

!!

The Second Circuit in the Texas Sulphur case expanded this rationale to
include protection for open market investors, including speculators, when
misled by nontrading insiders.

RELIANCE ON THE APRIL 12 PRESS RELEASE
The dispute over the Mitchell sale is that he timed his decision to sell on
speculation as to what the market was going to do. Again, the evidence of record
does not clearly refute the finding that the primary motivation was the
deceptive April 12 release. The Stouts' case is more difficult due to the time
lapse between the corrective April 16 release and the sell order more than 5
days later. But even with that entanglement, we cannot, on the basis of
clear error, conclude from the record that the April 12 release was not a
substantial factor in the Stouts' decision to sell.

Greater difficulty is encountered with the second of appellants' two-pronged
argument which directs itself to the issue of due diligence and good faith
required of investors trading in the market. REYNOLDS traded within a
reasonably brief time following the April 16 release and should not be denied his
recovery. MITCHELL is in exactly the same position with regard to the 400
shares which were sold by April 17. Both testified that they were attempting to
reap the maximum profit before the "gloomy" release took its toll. We conclude that
good faith and due diligence were exercised in the sale of these shares.
On the other hand, although mala fides is not involved, the record will not support
a claim of due diligence in the Stouts' sale and in Mitchell's late sale of the
20 shares.

At some point in time after the publication of a curative statement such as
that of April 16, stockholders should no longer be able to claim reliance on
the deceptive release, sell, and then sue for damages when the stock
value continues to rise. This is but a requirement that stockholders too act in
good faith and with due diligence in purchasing and selling stock. Although
Mitchell alleges that he ordered the 20 shares sold on the 17th, there is no dispute
that they were not in fact sold until the 23rd. His explanation is that somehow the
sell order was not properly communicated until the 22nd when he called his broker
to inquire into their status. In the Stouts' case, there was no miscommunication.
They simply did not intend to sell until the 21st. While in some circumstances such
delays may not be unreasonable, we conclude that under the circumstances of
this case it would unjustifiably extend TGS liability to intolerable limits.

Between April 13 and April 22, TGS stock had increased in value from 301/8 to a
high of 47, with the volume of sales going from 126,500 to over 326,000. But most
significant is the abundance of publicity given the April 16 statement during
the following few days. The business news of every major news
publication carried the story with bold headlines. Indeed, the 45 pages of
press clippings and stock quotations in the record gives force to the proposition that
the April 16 release received saturation coverage. We conclude that by
Wednesday, April 22 when the Stouts sold their stock, and Thursday, April
23 when Mitchell sold the 20 shares, the reasonable investor would have
become informed of the April 16 release and could no longer rely on the
earlier release in selling TGS stock.

6. Herman & MacLean v. Huddleston
459 U.S. 375 (1983)

Facts: Texas International Speedway, Inc. (TIS), filed a registration statement and
prospectus with SEC offering a total of $4,398,900 in securities to the public to
finance the construction of an automobile speedway. The entire issue was sold on
the offering date, October 30, 1969. TIS did not meet with success and filed for
bankruptcy.

A class action was instituted against TIS and other participants including its
accounting firm Herman & Maclean by Huddleston and other purchasers of TIS
securities for alleged violations of 10(b) and SEC Rule 10b-5. Herman & MacLean
issued an opinion concerning certain financial statements and a pro forma balance
sheet that were in the registration statement and prospectus. Allegation of
engagement in a fraudulent scheme to misrepresent or conceal material facts
regarding the financial condition of TIS, including the costs incurred in building the
speedway.

It was submitted to the jury with the instruction that liability could be found only if
the defendants acted with scienter and thru preponderance of evidence. The jury
and district court ruled against TIS & company.

TIS et al appealed and the CA held that cause of action under 10(b) for
fraudulent misrepresentations and omissions can be raised even when actionable
under 11 of the 1933 Act. 640 F.2d 534, 540-543 (1981). However, according to
CA the appropriate standard of proof for an action under 10(b) is "clear and
convincing" evidence. CA reversed and remanded for New trial.

It was raised to the SC on certiorari.

Issues:
1) whether purchasers of registered securities who allege they were
defrauded by misrepresentations in a registration statement may maintain an action
under 10(b) notwithstanding the express remedy for misstatements and
omissions in registration statements provided by 11 of the Securities Act of 1933?
YES!

2) whether persons seeking recovery under 10(b) must prove their cause of
action by clear and convincing evidence, rather than by a preponderance of the
evidence? NO!

Ratio:

!#

I. The Acts created several express private rights of action and federal courts have
implied private remedies under other provisions. A private right of action under
10(b) of the 1934 Act and Rule 10b-5 has been consistently recognized for more
than 35 years. The two provisions involve distinct causes of action, and were
intended to address different types of wrongdoing.

Section 11 allows purchasers of a registered security to sue when false or
misleading information is included in a registration statement. Plaintiff need only
show a material misstatement or omission to establish his prima facie case. Liability
against the issuer of a security is virtually absolute, even for innocent
misstatements. Other defendants bear the burden of demonstrating due diligence.

In contrast, 10(b) is a "catch-all" antifraud provision, requires burden to establish
a cause of action. It can be brought by a purchaser or seller of "any security"
against "any person" who has used "any manipulative or deceptive device or
contrivance" in connection with the purchase or sale of a security. Most
significantly, he must prove that the defendant acted with scienter, i.e., with intent
to deceive, manipulate, or defraud.

Since 11 and 10(b) address different types of wrongdoing, we see no reason to
carve out an exception to 10(b) for fraud occurring in a registration statement
just because the same conduct may also be actionable under 11.

Same was held in Ernst v. Ernst which held that actions under 10(b) require proof
of scienter, and do not encompass negligent conduct. In so holding, we noted that
each of the express civil remedies in the 1933 Act allowing recovery for negligent
conduct is subject to procedural restrictions not applicable to a 10(b) action.

A cumulative construction of the securities laws also furthers their broad remedial
purposes. In furtherance of that objective, 10(b) makes it unlawful to use "any
manipulative or deceptive device or contrivance" in connection with the purchase or
sale of any security. The effectiveness of the broad proscription against fraud in
10(b) would be undermined if its scope were restricted by the existence of an
express remedy under 11.

Accordingly, we hold that the availability of an express remedy under 11 of the
1933 Act does not preclude defrauded purchasers of registered securities from
maintaining an action under 10(b) of the 1934 Act. To this extent, the judgment
of the Court of Appeals is affirmed.

II. In a typical civil suit for money damages, plaintiffs must prove their case by a
preponderance of the evidence. Similarly, in an action by the SEC to establish fraud
under 17(a) of the 1933 Act, 15 U.S.C. 77q(a), we have held that proof by a
preponderance of the evidence suffices to establish liability. The same standard
applies in administrative proceedings before the SEC, and has been consistently
employed by the lower courts in private actions under the securities laws.

The Court of Appeals nonetheless held that plaintiffs in a 10(b) suit must establish
their case by clear and convincing evidence. The Court of Appeals relied primarily
on the traditional use of a higher burden of proof in civil fraud actions at common
law. The antifraud provisions of the securities laws are not coextensive with
common law doctrines of fraud.

Where Congress has not prescribed the appropriate standard of proof and the
Constitution does not dictate a particular standard, we must prescribe one.Thus, we
have required proof by clear and convincing evidence where particularly important
individual interests or rights are at stake. By contrast, imposition of even severe
civil sanctions that do not implicate such interests has been permitted after proof by
a preponderance of the evidence.

A preponderance of the evidence standard allows both parties to "share the risk of
error in roughly equal fashion." The balance of interests in this case warrants use of
the preponderance standard.

CA decision affirmed in part and reversed in part. Remanded.

7. Elkind v. Liggett & Myers
635 F.2d 156 (2
nd
1980)

SUMMARY PARAGRAPH: THIS CASE PRESENTS A NUMBER OF ISSUES ARISING OUT OF WHAT
HAS BECOME A FORM OF CORPORATE BRINKMANSHIP-NON-PUBLIC DISCLOSURE OF BUSINESS-
RELATED INFORMATION TO FINANCIAL ANALYSTS. THE ACTION IS A CLASS SUIT BY ARNOLD B.
ELKIND ON BEHALF OF CERTAIN PURCHASERS (MORE FULLY DESCRIBED BELOW) OF THE STOCK OF
LIGGETT & MYERS, INC. (LIGGETT) AGAINST IT. THEY SEEK DAMAGES FOR ALLEGED FAILURE OF ITS
OFFICERS TO DISCLOSE CERTAIN MATERIAL INFORMATION WITH RESPECT TO ITS EARNINGS AND
OPERATIONS AND FOR THEIR ALLEGED WRONGFUL TIPPING OF INSIDE INFORMATION TO CERTAIN
PERSONS WHO THEN SOLD LIGGETT SHARES ON THE OPEN MARKET.

FACTS: Liggert is a diversified company listed with the NYSE with business in the
tobacco industry, liquor (importer of J&B Scotch), pet food (Alpo). In order that the
financial community appreciate its market activity, Liggert initiated an Analyst
Program wherein it encouraged closer contact between financial analysts and
Liggerts management.

In 1971, Liggert had a record year with $4.22 per share. This spilled over to the
first quarter of 1972. In March and May 1972, it issued a press release as well as its
first quarter figures showing its prosperity which led to optimism in the financial
community over Liggerts prospects. In said reports, it indicated that it predicted a
10% increase in earnings in 1972 over the 1971 earnings and that it was well-
positioned to take advantage of industry trends. It did nothing to deflate the
enthusiasm.


!$

However, figures in April and May 1972 showed a sharp decline and that, internally,
only a 2% increase in earnings was projected. Share prices were also projected to
decline from $4.30 to $3.95. No public disclosure of the adverse financial
developments were made at this time.

On July 10, 1972, Peter Barry (analyst for Kuhn Loeb & Co.) spoke by phone with
Daniel Provost (Liggerts Director of Corporation Communications). Provost
confirmed with Barry that J&B Scotch sales were going down due to stockpiling by
consumers who were anticipating for a price increase for said commodity.
Moreover, it was also revealed that a new dog food was adversely affecting Alpos
sales. Provost did not also give a definitive answer when asked if the 10% earnings
projection was realistic. After their conversation, Barry relayed the information to
his firm and conveyed to its clients who had interests in Liggert. As a result of this,
a client who sold 100 Liggert sales he owned. However, an investor owning
600,000 shares did not.

On July 17, 1972, Robert Cummings (analyst of Loeb Rhodes & Co) questioned
Ralph Moore (Chief Financial Officer of Liggert) about its financial condition. Moore
grudgingly affirmed that there was a possibility that earnings would go down.
Moore added that the information was confidential. Nonetheless, Cummings relayed
this information to his firm and another stockholder who immediately sold 1,800
shares of Liggert stock.

On July 18, 1972, the Board issued a press release at 2:15 PM and disclosed their
preliminary earnings data showing that the June earnings was $.20 per share
compared to the $.44 per share in June of 1971. Liggert attributed the decline to
short comings in all of Liggerts product lines.

Elkin brought a securities fraud class suit against Liggert on the ground that (1)
Liggert violated the Securities Act by issuing misleading statements, nondisclosure
of material information, and failure to correct the projections; and (2) Liggert
unlawfully traded on the basis of tipped inside information during the period of July
10 until its press release in July 18, 1972.

District court dismissed the charge that Liggert had the obligation to disclose and
correct the projections but held Liggert liable on the charge of trading on tipped
information.

ISSUE/HELD: WHETHER LIGGERT HAD THE DUTY TO DISCLOSE/CORRECT PROJECTIONS. NO.
Liggett assumed no duty to disclose its own forecasts or to warn the
analysts (and the public) that their optimistic view was not shared by the
company.

While we find no liability for non-disclosure in this aspect of the present case, it
bears noting that corporate pre-release review of the reports of analysts is
a risky activity, fraught with danger. Management must navigate carefully
between the Scylla of misleading stockholders and the public by implied
approval of reviewed analyses and the Charybdis of tipping material inside
information by correcting statements which it knows to be erroneous. A
company which undertakes to correct errors in reports presented to it for review
may find itself forced to choose between raising no objection to a statement which,
because it is contradicted by internal information, may be misleading and making
that information public at a time when corporate interests would best be served by
confidentiality.

Management thus risks sacrificing a measure of its autonomy by engaging in
this type of program. Since Liggett had not undertaken to pass on earnings
forecasts, however, it did not violate any duty to correct these figures.

ISSUE/HELD: WHETHER LIGGERT WAS ENGAGED IN FALSE/MISLEADING STATEMENTS
Plaintiff's second argument on appeal is that Liggett's officers intentionally engaged
in misleading behavior by their repeated assertions that 1972 was expected to be a
good year, knowing that the listening analysts might understand this to confirm
their predictions of a 10% increase in earnings, when in fact Liggett expected a less
bountiful harvest and had figures showing that the company had fared poorly in
April. The district court found this claim to be substantially a restatement of
the duty to disclose claim which it had rejected.

The misleading character of a statement is not changed by its vagueness or
ambiguity. Liability may follow where management intentionally fosters a
mistaken belief concerning a material fact, such as its evaluation of the
company's progress and earnings prospects in the current year.

We cannot conclude as a matter of law that comments such as we expect
another good year in 1972 were likely to confirm the optimistic
projections then in circulation or to lead the sophisticated and
experienced listeners astray or that they misrepresented the views of
management at the time.

ISSUE/HELD: WHETHER OR NOT LIGGERT IS LIABLE FOR TRADING BASED ON TIPPED
INFORMATION. ONLY FOR THE JULY 17 TIP
The knowing use by corporate insiders of non-public information for their own
benefit or that of tippees by trading in corporate securities amounts to a violation
of Rule 10b-5, which may give rise to a suit for damages by uninformed outsiders
who trade during a period of tippee trading.

The duty imposed on a company and its officers is an alternative one: they
must disclose material inside information either to no outsiders or to all
outsiders equally. As with any claim under Rule 10b-5, scienter must be proven.
However, if there is no trading by tippees (or those to whom the tippees
convey their information), there can be no damages for tipping under s 10(b).

Trades by tippees are attributed to the tipper. Tippee trading, therefore, is the
primary and essential element of the offense. The investor otherwise has no
right to confidential undisclosed data from the company's files even though it
might, if disclosed, influence his investment decision.

!%

The corporate officer dealing with financial analysts inevitably finds himself
in a precarious position, which we have analogized to a fencing match
conducted on a tightrope. A skilled analyst with knowledge of the company and
the industry may piece seemingly inconsequential data together with public
information into a mosaic which reveals material non-public information.
Whenever managers and analysts meet elsewhere than in public, there is a risk
that the analysts will emerge with knowledge of material information
which is not publicly available.

Despite the risks attendant upon these contacts, the SEC and the stock
exchanges as well as some commentators have taken the view that meetings
and discussions with analysts serve an important function in collecting,
evaluating and disseminating corporate information for public use. The
reconciliation of this outlook with the SEC's mandate that material facts may be
disclosed to investors, provided they are made available to all (through filings with
the SEC) and not merely to analysts, has led to a case-by-case approach.

The PREREQUISITES OF TIPPING LIABILITY, in addition to the revelation of non-public
information about a company to someone who then takes advantage of this
superior knowledge by trading in the company's stock, are that the tipped
information must be MATERIAL, and that the tipper-defendant must have ACTED
WITH SCIENTER.

Thus a relevant question in determining MATERIALITY in a case of alleged tipping
to analysts is whether the tipped information, if divulged to the public, would
have been likely to affect the decision of potential buyers and sellers.

As for the scienter requisite, the Supreme Court defined SCIENTER as knowing
or intentional misconduct. One who deliberately tips information which
he knows to be material and non-public to an outsider who may reasonably
be expected to use it to his advantage has the requisite scienter.

JULY 10 TIP: NOT MATERIAL & NO SCIENTER
Viewed under this standard, we cannot agree that the July 10 tip was
material. The disclosure in that conversation consisted of confirmation that J&B
sales were slowing due to earlier stockpiling and that Alpo sales were being
adversely affected by Campbell's competing product and by the information that a
preliminary earnings statement would be coming out in a week. The news
about J&B and Alpo was already common knowledge among the analysts
indeed, Liggett had publicly stated that a decline in J&B sales was expected. The
confirmation of these facts, which were fairly obvious to all who followed the stock
and were not accompanied by any quantification of the downturns, cannot be
deemed reasonably certain to have a substantial effect on the market price of the
security.

Similarly, we cannot agree that in this context the bare announcement that
preliminary earnings would be released in a week was material. No
information concerning the amount of those earnings was disclosed, and the mere
fact that there would be a release added little to the already available
wisdom of the market place (reflected by stock prices which had been falling for
two weeks) that Liggett might be in a downturn. It would serve little purpose to
require a corporation to call a press conference in order to announce that it would
be making an announcement in another week.

Further indication of the lack of materiality may be found in the reaction of those
who were exposed to the inside information. The institutional investors, holders of
600,000 shares of Liggett, did not sell any of them. The sale of 100 shares by
one stockholder, who may have been influenced by public information rather
than the tipped information in the wire, does little to offset the indication that
the tip was not one of material information.

Applying the scienter standard to the present case, we conclude that the July 10
tip was not accompanied by scienter. There is no evidence to indicate that
when Provost acknowledged what was commonly known by the analysts and
mentioned that preliminary earnings would be released in a week, he believed that
he was disclosing information that would be of significance in any analyst's or
investor's assessment of Liggett stock, much less used for any trading advantage.
Absent evidence from which it may be inferred that the tipper knows or
should certainly appreciate that the disclosure could reasonably be
expected to be used by the tippee to his advantage, the essential state of
mind for 10b-5 liability is lacking.

JULY 17 TIP: MATERIAL & WITH SCIENTER
The July 17 tip, however, was sufficiently directed to the matter of earnings
to sustain the district court's finding of materiality. 1,800 shares were sold
by a stockbroker on behalf of his customers, after speaking with Cummins by
telephone. The stockbroker was left with the impression that the second quarter
was going to be very poor, which he considered significant enough to prompt the
sale. We therefore conclude that the July 17 tip was one of material inside
information.

There was ample evidence of scienter in connection with the July 17 tip.
One could reasonably infer that an official commenting on earnings shortly
before their public release will know that the tip could reasonably be
expected to be used by the tippee for trading advantages. It is therefore
material. Indeed, Moore's request that the disclosure be kept confidential
strongly supports this inference. The district court's finding that the
information was disclosed in order to keep the analysts (whose job it was to advise
clients in their trading of stock) a step ahead of public knowledge supports this
conclusion.

We therefore conclude that the tip of July 10 was not material and was not
accompanied by the requisite scienter to furnish the basis for liability under

!&

Rule 10b-5. The tip of July 17, however, was material and made with
scienter. We turn, then, to the computation of damages.

(Discussion on damages omitted)

8. Ross v. A.H. Robins Co., Inc.
607 F2d 545 (2d Cir. 1979)

9. Time Warner, Inc. v. Securities Litigation
9 F.3d 259 (2d Cir. 1993)

Memory Aid of Case in One Sentence: Purchasers of stock in corporation
brought fraud action under federal securities law and state law against corporation
and corporate principals.

FACTS:
On June 7, 1989, Time, Inc. received a surprise tender offer for its stock from
Paramount Communications. Paramount's initial offer was $175 per share, in cash,
and was eventually increased to $200 per share. Time's directors declined to submit
this offer to the shareholders and continued discussions that had begun somewhat
earlier concerning a merger with Warner Communications, Inc. Eventually, Time
and Warner agreed that Time would acquire all of Warner's outstanding stock for
$70 per share, even though this acquisition would cause Time to incur debt of over
$10 billion. Time shareholders and Paramount were unsuccessful in their effort to
enjoin the Warner acquisition, which was completed in July 1989.

Thus, in 1989, Time Warner Inc., the entity resulting from the merger,
found itself saddled with over $10 billion in debt, an outcome that drew
criticism from many shareholders. The company embarked on a highly
publicized campaign to find international strategic partners who would
infuse billions of dollars of capital into the company and who would help
the company realize its dream of becoming a dominant worldwide
entertainment conglomerate. Ultimately, Time Warner formed only two
strategic partnerships, each on a much smaller scale than had been
hoped for. This particular strategic partnership made Time Warner
drowning in debt.

Faced with a multi-billion dollar balloon payment on the debt, the company was
forced to seek an alternative method of raising capitala new stock offering that
substantially diluted the rights of the existing shareholders. The company first
proposed a variable price offering on June 6, 1991. This proposal was rejected by
the SEC, but the SEC approved a second proposal announced on July 12, 1991.
Announcement of the two offering proposals caused a substantial decline in the
price of Time Warner stock. From June 5 to June 12, the share price fell from $117
to $94. By July 12, the price had fallen to $89.75. The plaintiff class, which has not
yet been certified, consists of persons who bought Time Warner stock between
December 12, 1990, and June 7, 1991.

Hence, Purchasers of stock in corporation brought fraud action under federal
securities law and state law against corporation and corporate principals.

Their complaint, containing causes of action under sections 10(b) and 20(a) of the
Securities Exchange Act, 15 U.S.C. 78j(b), 78t(a) (1988), and state law, alleges
that a series of statements from Time Warner officials during the class
period were materially misleading in that they misrepresented the status
of the ongoing strategic partnership discussions and failed to disclose
consideration of the stock offering alternative. The parties have classified the
challenged statements into two categories: (1) press releases and public statements
from the individual defendants, and (2) statements to reporters and security
analysts emanating from sources within the company but not attributed to any
identified individual. The statements consist of generally positive messages
concerning the progress of the search for strategic partners, and imply to varying
degrees that significant partnerships will be consummated and announced in the
near future. None of the statements acknowledged that negotiations with
prospective partners were going less well than expected or that an alternative
method of raising capital was under consideration.

The United States District Court for the Southern District of New York dismissed,
and purchasers appealed. The Court of Appeals Jon O. Newman, Chief Judge, held
that: (1) purchasers did not plead fraud with sufficient particularity with respect to
challenged anonymous statements to reporters and analysts; (2) nondisclosure of
problems in announced strategic alliance negotiations was not actionable; and (3)
purchasers stated securities fraud claim based on nondisclosure of alternative to
announced plan for raising capital.

ISSUE: Did Time Warner Officials issue misleading statements? SC ruled Affirmed
in part, reversed in part, and remanded.

HELD:
Attributed statements and press releases of corporation that allegedly
exaggerated likelihood that strategic alliance would be made with other
companies were not actionable as affirmative misrepresentations, absent
any allegations that corporate principals either did not have favorable
opinions on future prospects when they made statements or that
favorable opinions were without basis in fact. The press release of Time
Warner is not yet actionable in this case. A corporation is not required to disclose a
fact merely because a reasonable investor would very much like to know that fact.
Rather, an omission is actionable under the securities laws only when the
corporation is subject to a duty to disclose the omitted facts.

Duty on part of corporation to update opinions and projections may arise if original
opinions or projections have become misleading as result of intervening events.


!'

Allegations of purchasers of stock in corporation that corporation failed to disclose
that it was considering new stock offering that would substantially dilute rights of
existing shareholders to raise capital, as alternative to highly publicized campaign to
find international strategic partners, stated actionable omission under securities
laws.

Statements of corporation regarding desired strategic alliances lacked sort of
defining positive projections that might later impose duty to update on corporation;
statements suggested only hope of any company, embarking on talks with multiple
partners, that talks would go well, and no identified corporate principal stated that
he thought deals would be struck by certain date, or even that it was likely that
deals would be struck at all.

Omission is actionable under securities laws only when corporation is subject to
duty to disclose omitted fact, such as when disclosure is necessary to make prior
statements not misleading.

When corporation is pursuing specific business goal and announces that goal as
well as intended approach for reaching it, it may come under obligation to disclose
other approaches to reaching goal when those approaches are under active and
serious consideration; whether consideration of alternative approach constitutes
material information, and whether nondisclosure of alternative approach renders
original disclosure misleading, remain questions for trier of fact, and may be
resolved by summary judgment when there is no disputed issue of material fact.
Duty to disclose arises under securities law whenever secret information renders
prior public statements materially misleading, not merely when that information
completely negates public statements.

As an alternative basis for its dismissal order, the District Court found
that plaintiffs had failed to adequately plead scienter. Scienter is necessary
element of every Rule 10b5 fraud action, and though it need not be pleaded with
great specificity, facts alleged in complaint must give rise to strong inference of
fraudulent intent. There are two distinct ways in which plaintiff may plead scienter
without direct knowledge of defendant's state of mind: first approach is to allege
facts establishing motive to commit fraud and opportunity to do so; second
approach is to allege facts constituting circumstantial evidence of either reckless or
conscious behavior.

Purchasers of stock in corporation sufficiently pleaded scienter element of securities
fraud, with respect to corporation's failure to disclose alternative being considered
to announced plan to raise capital, by alleging motive to commit fraud and
opportunity to do so; it was arguable that corporate principals acted in belief that
they could somewhat reduce degree of dilution caused by alternative stock offering
by artificially enhancing price of stock by way of announced goal of seeking
strategic alliances, and they had sufficient opportunity to do so. Securities
Purchasers of stock in corporation did not adequately plead scienter through
circumstantial evidence of conscious or reckless behavior approach, with respect to
corporation's failure to disclose alternative being considered to announce plan to
raise capital, where purchasers made single mention of newspaper report alleged to
state that corporation was quietly working for months on alternative plan

10. Blackie v. Barrack
524 F.2d 891 (9
th
Cir. 1975)

Defendant-Appellants: William Blackie, Ampex Corp and its principal officers
Plaintiff-Appellees: Leonard Barrack and other Ampex shareholders

Facts:
The litigation is a product of the financial troubles of Ampex Corporation.
The annual report for fiscal 1970, reported a profit of $12 million. By
January 1972, the company was predicting an estimated $40 million loss
for fiscal 1972 (ending April 1972). Two months later the company
disclosed the loss would be much larger, in the $80 to $90 million range;
finally, in the annual report for fiscal 1972, the company reported a loss of
$90 million, and the company's independent auditors withdrew certification
of the 1971 financial statements, and declined to certify those for 1972,
because of doubts that the loss reported for 1972 was in fact suffered in
that year.
Several suits were filed following the 1972 disclosures of Ampex's losses.
The plaintiffs (Barrack etc.) in the various complaints involved in these
appeals purchased Ampex securities during the 27 month period between
the release of the 1970 and 1972 annual reports, and seek to represent all
purchasers of Ampex securities during the period.
The gravamen of all the claims is the misrepresentation by reason
of annual and interim reports, press releases and SEC filings of
the financial condition of Ampex from the date of the 1970 report
until the true condition was disclosed by the announcement of losses in
August of 1972.
Plaintiffs' complaint alleges that the price of the company's stock was
artificially inflated because: "the annual reports of Ampex for fiscal years
1970 and 1971, various interim reports, press releases & other documents
(a) overstated earnings, (b) overstated the value of inventories & other
assets, (c) buried expense items & other costs incurred for research and
development (d) misrepresented the companies' current ratio, (e) failed to
establish adequate reserves for receivables, (f) failed to write off certain
assets, (g) failed to account for the proposed discontinuation of certain
product lines, (h) misrepresented Ampex's prospects for future earnings."
District Court ! granted class certification of all claimants (those who
purchased Ampex securities). Denied the MR of defendants. Hence they
seek interlocutory appeal with CA.
Plaintiffs filed a motion to dismiss the various appeals the purportedly
direct appeals on the ground that the certification order is not appealable,
and that it has been prosecuted in a dilatory manner.

Issues: W/N whether the district court order certifying the class was proper. YES!

!(

Ratio: (Merits of class certification)
Defendants question this suit's compliance with each of the various
requirements of Rule 23(a) and (b)(3) except numerosity (understandably,
as it appears that the class period of 27 months will encompass the
purchasers involved in about 120,000 transactions involving some
21,000,000 shares).
All of defendants' contentions can be resolved by addressing 3 underlying
questions: 1) whether a common question of law or fact unites the class;
2) whether direct individual proof of subjective reliance by each class
member is necessary to establish 10b-5 liability in this situation; and 3)
whether proof of liability or damages will create conflicts among class
members and with named plaintiffs sufficient to make representation
inadequate?

1. Common questions of law or fact
The class certified runs from the date Ampex issued its 1970 annual report
until the company released its 1972 report 27 months later.
The plaintiffs estimate that there are some 45 documents issued during
the period containing the financial reporting complained of, including two
annual reports, six quarterly reports, and various press releases and SEC
filings.
Defendants contention ! Because the alleged misrepresentations are
contained in a number of different documents, each pertaining to a
different period of Ampex's operation, the purchasers throughout the class
period do not present common issues of law or fact.
o Proof of 10b-5 liability will require inspection of the underlying set of
facts to determine the falsity of the impression given by any particular
accounting item; The facts fluctuate as the business operates.
o Thus, proof of the actionability of a current accounting representation
or omission will apply only to those who purchased while a financial
report was current; from which they conclude no common question is
presented and a class is improper.
CA ! We disagree. The overwhelming weight of authority holds that
repeated misrepresentations of the sort alleged here satisfy the
"common question" requirement. Confronted with a class of
purchasers allegedly defrauded over a period of time by similar
misrepresentations, courts have taken the common sense
approach that the class is united by a common interest in
determining whether a defendant's course of conduct is in its
broad outlines actionable, which is not defeated by slight
differences in class members' positions, and that the issue may
profitably be tried in one suit.
Advisory Committee on the Rule ! "(A) fraud perpetrated on numerous
persons by the use of similar misrepresentations may be an appealing
situation for a class action . . . "
The availability of the class action to redress such frauds has been
consistently upheld, in large part because of the substantial role that the
deterrent effect of class actions plays in accomplishing the objectives of
the securities laws.
While the nature of the interrelationship and the degree of similarity which
must obtain between different representations in order to come within the
outer boundaries of the "common course of conduct" test is somewhat
unclear, the test is more than satisfied when a series of financial reports
uniformly misrepresent a particular item in the financial statement. In that
situation, the misrepresentations are "interrelated, interdependent, and
cumulative; " One misrepresentation causes subsequent statements to fall
into inaccuracy and distortion when considered by themselves or
compared with previous misstatements.
The class members also share an interest in establishing the standard of
care required of the various defendants under the White v. Abrams,
flexible duty standard. The flexible duty of any defendant, while depending
on his particular relationship to Ampex and to the financial reporting
involved, will be owed identically to all market purchasers, who are for
practical purposes identically situated. The culpability of each defendant's
conduct is to be measured against the statutorily imposed duty not to
manipulate the market. Differences in sophistication, etc., among
purchasers have no bearing in the impersonal market fraud
context, because dissemination of false information necessarily
translates through market mechanisms into price inflation which
harms each purchaser identically.
Moreover, because of the relative similarity of the various
documents involved, the duty owed by a defendant with respect
to such documents will probably be uniform or nearly so, further
uniting the positions of all class purchasers.

2. Predominance and reliance.
Defendants contention ! Any common questions which may exist do
not predominate over individual questions of reliance and damages.
CA ! The amount of damages is invariably an individual question and
does not defeat class action treatment. Moreover, in this situation we are
confident that should the class prevail the amount of price inflation during
the period can be charted and the process of computing individual
damages will be virtually a mechanical task. Individual questions of
reliance are likewise not an impediment subjective reliance is not a distinct
element of proof of 10b-5 claims of the type involved in this case.
The Court has recognized that under such circumstances involving
primarily a failure to disclose, positive proof of reliance is not a
prerequisite to recovery. All that is necessary is that the facts
withheld be material in the sense that a reasonable investor
might have considered them important in the making of this
decision. This obligation to disclose and this withholding of a
material fact establish the requisite element of causation in fact.
Moreover, proof of subjective reliance on particular
misrepresentations is unnecessary to establish a 10b-5 claim for
a deception inflating the price of stock traded in the open market.

!)

Proof of reliance is adduced to demonstrate the causal connection
between the defendant's wrongdoing and the plaintiff's loss. We think
causation is adequately established in the impersonal stock exchange
context by proof of purchase and of the materiality of misrepresentations,
without direct proof of reliance. Materiality circumstantially establishes the
reliance of some market traders and hence the inflation in the stock price
when the purchase is made the causational chain between defendant's
conduct and plaintiff's loss is sufficiently established to make out a prima
facie case.
Defendants contention ! Proof of causation solely by proof of
materiality is inconsistent with the requirement of the traditional fraud
action that a plaintiff prove directly both that the reasonable man would
have acted on the misrepresentation (materiality), and that he himself
acted on it, in order to establish the defendant's responsibility for his loss,
which justifies the compensatory recovery.
CA ! Disagree. The 10b-5 action remains compensatory; it is not
predicated solely on a showing of economic damage (loss causation). We
merely recognize that individual "transactional causation" can in these
circumstances be inferred from the materiality of the misrepresentation,
and shift to defendant the burden of disproving a prima facie case of
causation.
Defendants may do so in at least 2 ways: 1) by disproving materiality or
by proving that, despite materiality, an insufficient number of traders
relied to inflate the price; and 2) by proving that an individual plaintiff
purchased despite knowledge of the falsity of a representation, or that he
would have, had he known of it.
That the prima facie case each class member must establish differs from
the traditional fraud action, and may, unlike the fraud action, be
established by common proof, is irrelevant; although derived from it, the
10b-5 action is not coterminous with a common law fraud action. As we
recently recognized in White v. Abrams, the fraud action must be and has
been flexibly adopted to the overriding purpose of enforcing the Federal
securities laws.
Here, we eliminate the requirement that plaintiffs prove reliance
directly in this context because the requirement imposes an
unreasonable and irrelevant evidentiary burden. A purchaser on the
stock exchanges may be either unaware of a specific false representation,
or may not directly rely on it; he may purchase because of a favorable
price trend, price earnings ratio, or some other factor. Nevertheless, he
relies generally on the supposition that the market price is validly set and
that no unsuspected manipulation has artificially inflated the price, and
thus indirectly on the truth of the representations underlying the stock
price whether he is aware of it or not, the price he pays reflects material
misrepresentations.
Requiring direct proof from each purchaser that he relied on a
particular representation when purchasing would defeat recovery
by those whose reliance was indirect, despite the fact that the
causational chain is broken only if the purchaser would have purchased
the stock even had he known of the misrepresentation. We decline to
leave such open market purchasers unprotected. The statute and rule are
designed to foster an expectation that securities markets are free from
fraud an expectation on which purchasers should be able to rely.
Thus, in this context we think proof of reliance means at most a
requirement that plaintiff prove directly that he would have acted
differently had he known the true facts.
The standards of proof of causation we have set out apply to all fraud
on the market cases, individual as well as class actions.

3. Conflicts among class members
Defendants contention ! Conflicts among class members preclude
class certification. The interests of class members in proving damages
from price inflation (and hence the existence and materiality of
misrepresentations subsumed in proving inflation) irreconcilably conflict,
because some class members will desire to maximize the inflation existing
on a given date while others will desire to minimize it.
CA ! We agree that class members might at some point during this
litigation have differing interests. We altogether disagree, for a spate of
reasons, that such potential conflicts afford a valid reason at this time for
refusing to certify the class.
Defendants' position depends entirely on adoption of the out of pocket loss
measure of damages, rather than a rescissory measure. Under the out of
pocket standard each purchaser recovers the difference between the
inflated price paid and the value received, plus interest on the difference.
If the stock is resold at an inflated price, the purchaser-seller's damages,
limited by 28(a) of 15 U.S.C. 78bb(a) to "actual damages," must be
diminished by the inflation he recovers from his purchaser. Thus, he is
interested in proving that some intervening event, such as a corrective
release, had diminished the inflation persisting in the stock price when he
sold.
While out of pocket loss is the ordinary standard in a 10b-5 suit, it is
within the discretion of the district judge in appropriate circumstances to
apply a rescissory measure. It is for the district judge, after becoming
aware of the nature of the case, to determine the appropriate measure of
damages in the first instance; the possible creation of potential conflicts by
that decision does not render the class inappropriate now. The Rule
provides the mechanism of subsequent creation of subclasses, Rule
23(c)(4), to deal with latent conflicts which may surface as the suit
progresses. As a result, courts have generally declined to consider
conflicts, particularly as they regard damages, sufficient to defeat
class action status at the outset unless the conflict is apparent,
imminent, and on an issue at the very heart of the suit.
Here, the conflict, if any, is peripheral, and substantially
outweighed by the class members' common interests. Even
assuming arguendo that the out of pocket standard applies, the class is
proper. Every class member shares an overriding common interest in
establishing the existence and materiality of misrepresentations. The major

!*

portion of the inflation alleged is attributed to causes which allegedly
persisted throughout the class period. It will be in the interest of each
class member to maximize the inflation from those causes at every point in
the class period, both to demonstrate the sine qua non liability and to
maximize his own potential damages the more the stock is inflated, the
more every class member stands to recover.
Moreover, because the major portion of the inflation is attributed to causes
persisting throughout the period, interim corrective disclosures (of which
there appear to have been only two or three) do not necessarily bring
predisclosure purchasers into conflict with post-disclosure purchasers.
Because both share an interest in maximizing overall inflation, the latter
purchaser will no doubt strive to show a substantial market effect from
disclosure of the lesser (or partial) causes of inflation to maximize the
inflation attributable to more serious causes persisting when he bought a
showing which will increase the recovery of the earlier purchaser. In that
light, any conflicting interests in tracing fluctuations in inflation during the
class period are secondary, and do not bar class litigation to advance
predominantly common interests. Courts faced with the same situation
have repeatedly, either explicitly or implicitly, rejected defendants'
position, for the potential conflict is present in most prolonged classes
involving a series of misrepresentations. Affirmed.

11. Kohn v. American Metal Climax, Inc
458 F.2d 255 (1972)
Harold E. Kohn (trustee) v. American Metal Climax, Inc. (1972)

Facts:
The case arises out of the amalgamation of defendants Roan Selection
Trust Limited (RST), a Zambian corporation, into American Metal Climax,
Inc. (AMAX), a New York corporation, which prior to the consummation of
the amalgamation owned 42.3% of the outstanding stock of RST.
In Aug 1969, the President of the Republic of Zambia issued the Matero
Declaration which expressed the Governments intention to acquire a
controlling equity interest in operating copper properties within Zambia. At
that time, RST was a Zambian corporation and had its principal place of
business in that country. Its operations involved primarily the production,
smelting, and refining of Zambian copper.
After the issuance of the declaration, RST negotiated the sale of a 51%
interest in its operating assets to the Zambian Govt. The chief concern of
the corporation in the negotiations was to secure from the Govt the right
to transfer the corporate domicile and externalize the corporations non-
operating assets. In this manner, a significant part of RSTs total worth
would be free from Zambian exchange controls.
In Nov 1969, the board of directors of RST approved, in principle, an
agreement between RST, the Govt of Zambia, and Industrial Devt Corp.
of Zambia (aka INDECO a Zambian dominated corporation).
Under the agreement:
o the mining operations of RST would be merged into a company to
be formed under the name Roan Consolidated Mining, Ltd. (RCM)
in which INDECO would own 51% and RST would own 36.75%.
The remaining 12.25% would be held by the Anglo-American
Group;
o all assets of RST, except those nationalized by Zambia, might be
transferred to a new corporation outside Zambia and would
consist principally of cash worth $60M; a 30% interest in
Botswana RST, Ltd.; Ametalco (a group of corporations wholly
owned by RST International Metals Ltd. which, in turn, was a
wholly owned subsidiary of RST); the INDECO bonds; and RSTs
interest in RCM.
Seeking alternative means by which to externalize the RST assets not
nationalized by the Zambian Govt, the RST board eventually began
negotiations with AMAX, a New York corporation. In Mar 1970, RST board
approved in principle an agreement to effect the externalization through
an amalgamation of RST with AMAX. The agreement provided for: (1) the
consolidation of RSTs Zambian operating assets into RCM, 51% of which
would be sold to INDECO in exchange for INDECO bonds and (2) the
acquisition of the remainder of RST by AMAX, for which non-AMAX
shareholders of RST would be paid approximately $76M principal amount
of 8% AMAX subordinated debentures with common stock warrants
attached and $6.3M in cash.
Kohn, as trustee of American Depositary Receipts representing 2000
shares of RST, filed a complaint on behalf of RST and as representative of
all non-AMAX shareholders of RST. He sought to enjoin the proposed
amalgamation and alleged that:
o AMAX, et al. violated the disclosure provisions of 10(b) of
the Securities and Exchange Act of 1934 and Rule 10b-5;
o the proposed amalgamation would violate 7 of the Clayton Act;
&
o the terms of the amalgamation evidenced a fraud on non-AMAX
shareholders of RST (also, unfair and a breach of fiduciary duty).
The approval of both the High Court of Zambia and the RST shareholders
was necessary before the amalgamation could be effected.
On July 8, 1970, the district court enjoined the distribution of proxy
material to RST shareholders, unless AMAX and RST included therewith a
letter prepared by Kohn setting forth his bases for claiming that the
proposed amalgamation was unfair. The Courts order specifically provided
that inclusion of Kohns letter was without prejudice to Kohns claims that
[the proxy material] was in substance materially misleading or otherwise
violative of Section 10(b) and Rule 10b-5. This condition was met and the
shareholders were sent an Explanatory Statement with Appendices setting
forth the details of the RST-AMAX reorganization.
IMPT: The proxy materials w/c the shareholders received presented the
amalgamation agreement and the Zambian nationalization in the form of
one resolution. Thus, there was no opportunity to approve the transfer of
RST assets from within Zambia without also endorsing the agreement

#+

negotiated between RST and AMAX. In separate meetings, RST
shareholders and non-AMAX shareholders of RST voted in favor of the
resolution.
The proposed plan of externalization was to be submitted to the High
Court of Zambia for its approval. However, the district court preliminarily
enjoined this because of Kohns complaint. A lengthy trial ensued.
AMAX and RST appealed the District Courts findings (in substance, DC
ruled in favor of Kohn).

Issue: WON there is a violation of 10b-5 Yes

Held: (I think the headings pertain to the provisions of the proxy materials
presented to the shareholders)

A. CREATING THE FALSE IMPRESSION THAT THE AMAX RST AMALGAMATION WAS
A NECESSARY CONSEQUENCE OF THE NATIONALIZATION
The district court held that RSTs proxy materials inaccurately portrayed
the proposed amalgamation between AMAX and RST. In reaching its
decision, it found that the proxy materials, particularly the descriptive
language contained in the initial pages of the Explanatory Statement, were
designed to create the false impression that the amalgamation was an
inevitable consequence of Zambian nationalization. Thus, fraud was found.
AMAX & RST contend that certain parts of the materials accurately point
out that amalgamation and nationalization were independent.
Court ruling: An examination of the proxy materials suggests that its
authors made a studied effort to avoid stating explicitly that either
amalgamation and nationalization were absolutely independent or they
were absolutely interdependent. The proxy materials made a manifest
and obvious impression upon the reader that amalgamation and
nationalization were required to be a unitary package. This is a material
misrepresentation.

B. LINKING AMALGAMATION AND NATIONALIZATION IN A UNITARY PROPOSAL
TO THE SHAREHOLDERS
Amalgamation and nationalization were presented for a shareholder vote
as a unitary proposal. Shareholders could not approve one while rejecting
the other. The choice was to accept both or to reject both. The district
court found this unitary presentation as a manipulative scheme to coerce
shareholder approval of the amalgamation.
AMAX & RST contend that compelling business reasons dictated that the
proposals be presented in unitary form, because if nationalization and
externalization did not proceed simultaneously, the RST assets remaining
non-nationalized would be subject to substantial political risks.
Court ruling: AMAX & RST failed to explain why RST could not have
sought approval of the externalization plan first, followed by
nationalization. It also does not explain why alternative externalization
plans could not have been presented. This is also a material
misrepresentation.

C. THE IMPLICATION THAT SHAREHOLDER APPROVAL WAS PREREQUISITE TO
NATIONALIZATION
Court doubts the correctness of the district courts ruling that there was a
violation of Rule 10b-5, but chose not to decide upon the issue.

D. FAILURE TO DISCLOSE THAT EXTERNALIZATION WAS DISCRETIONARY AND
NEED NOT HAVE BEEN SIMULTANEOUS WITH NATIONALIZATION
District court found that RST failed to disclose in the proxy materials that
externalization of assets was discretionary under the agreement with
Zambia and, if approved, need not have been simultaneous with
nationalization. This violated Rule 10b-5. Court agrees.

E. FAILURE TO DISCLOSE ALTERNATIVE PLANS FOR EXTERNALIZATION
Because the underlying findings of the district court are inconsistent, Court
decided not to rule upon the issue.

F. FAILURE OF THE PROXY MATERIALS TO ADEQUATELY DISCLOSE THE BASIS
UPON WHICH RSTS ASSETS WERE EVALUATED
Ordinarily, the SEC and the courts discourage presentations of future
earnings, appraised asset valuations, and other hypothetical data in proxy
materials. This general rule should apply here. No truly reliable estimates
of value ever materialized. The figures which the district court concluded
should have been disclosed were all advanced by the parties during
negotiations only and as part of their bargaining strategies. Under such
circumstances, the omission of the RST asset valuations was
immaterial.

G. INADEQUATE DISCLOSURE OF THE UNIQUE BENEFITS AMAX WAS TO OBTAIN
INCIDENT TO THE AMALGAMATION

AMAX & RST contend that although their presentation may have been
piecemeal, the shareholders were fully apprised of the benefits accruing to
AMAX by means of the letter of Kohn w/c was included in the proxy
materials sent pursuant to court order.
Court ruling: In view of the close ties between AMAX and RST, the
disclosure of the unique benefits
1
to AMAX would have been particularly
important. The piecemeal presentation of these benefits scattered
throughout the proxy materials and the appendices was inadequate
disclosure under the securities laws. Furthermore, any otherwise material
violation of the disclosure rules is not obviated by referring to the
materials of an opposing party (Kohns letter).

H. STATEMENT THAT RST SHAREHOLDERS WOULD, BY VOTING FOR THE

1
(1) an increase of $7 million in annual income; (2) an improvement of $134 million in cash-flow during the
period 1970 to 1975; (3) an improvement of $91 million in the corporation's balance of payments; and (4)
the acquisition of high-yielding assets

#!

PROPOSAL, OBTAIN THE MAXIMUM POSSIBLE INTEREST IN ZAMBIAN MINING
OPERATIONS
District court found this statement misleading because of its implication
that the shareholders by adopting amalgamation would receive the
maximum interest allowable in the RCM shares and other assets.
On analysis (court looked into some figures for this purpose, I decided to
omit), it becomes clear that as to the RCM shares, the shareholders did
in fact receive the maximum interest it was permissible to distribute.
Hence, the Explanatory Statement was not misleading as to the
proportion of RCM stock available for distribution to the non-AMAX
shareholders of RST.

I. CONFLICTS OF INTEREST OF RST DIRECTORS AND BANKING ADVISERS
adequately disclosed
While we recognize the necessity for shareholders to be informed of the
extensive conflicts of interest present, we cannot agree with the district
courts conclusion that such were not adequately disclosed.
Directly after the paragraph of the Explanatory Statement which sets forth
the recommendation of the RST Board, this heading appears in boldfaced
type: 6. Interests of Directors, Advising Bankers and Others. This section
and the appendices referred to therein fully document all the relevant
conflicts of interest. We think this presentation satisfied the equal
prominence rule.
Among others, the recommendation of the RST Board also is in boldfaced
type. Appearing in Item 5 of the Statement, it urges shareholders to
approve the proposal. Item 6 and Appendix O disclosed AMAXs 42.3%
ownership of RST and the interrelationship between AMAX and RST
resulting from the fact that certain named individuals were officers and/or
directors of both companies. Item 6 also sets forth the shareholdings of
various individuals in AMAX and RST.

J. FAILURE TO DISCLOSE THAT RSTS BANKING ADVISERS DID NOT MAKE AN
INDEPENDENT SURVEY OF RSTS ASSETS
That the bankers approval of the proposed amalgamation relied solely on
data supplied by the RST management was only disclosed in Appendix Q.
However, no reference is made to this appendicized disclosure at
the outset of the Explanatory Statement where the investment advisers
approval of the amalgamation proposal appears.
Considering that disclosure of the basis for the advisers recommendation
was of signal importance, the failure to direct the readers to the
disclosures made in Appendix Q constituted a material omission
violative of Rule 10b-5.

K. THE FAILURE TO DISCLOSE THE ROLE OF THE NY LAW FIRM, SULLIVAN &
CROMWELL no omission
District courts finding that there was a material omission arising from the
failure of the proxy materials to disclose the role of Sullivan & Cromwell
was based on a clearly erroneous factual premise that the firm was in
a conflict of interest position with respect to the negotiation of the terms
of the amalgamation.
Defendants admit that representation by Sullivan & Cromwell of both
AMAX and RST continued until late Dec 1969. This was when
amalgamation with AMAX was a possible alternative considered by RST.
Defendants contend, however, that at no time during this period were the
interests of AMAX opposed to those of the other RST shareholders. Rather,
the conflict first arose when AMAX and RST commenced to negotiate
amalgamation of RST with AMAX as a means of externalization. When this
occurred, Sullivan & Cromwell immediately advised RST that it
could not represent it in such negotiations and that RST retained new
counsel for purposes of the amalgamation bargaining. In fact, the district
court found that RST was represented by the New York firm of Winthrop,
Stimson, Putnam & Roberts, as well as by English counsel.
Nothing in the record demonstrates that during this time Sullivan &
Cromwell attempted dual representation of AMAX and RST concerning the
amalgamation proposal.

CONCLUSION
Based on these findings, court said, the misrepresentations are material
when they are related to subject matter which might have been
considered important by a reasonable shareholder who was in the process
of deciding how to vote. (Mills v. Electric Auto-Lite)
Although Mills involved section 14, the materiality test is equally
applicable to an alleged 10b-5 violation. It is not a defense to a finding
of material violations of 10b-5 to say that some stockholders discovered
the misrepresentations before the vote and thus were not misled, and
therefore, since they were the class representatives, the entire class is
precluded from obtaining any remedy.
Those alleging a violation of Rule 10b-5 have an obligation to show a
fraudulent and material misrepresentation and that, to the extent a
reliance factor is required, in the present context it is encompassed by the
finding that the misrepresentation was material.

12. People vs. Tan (Thank God, Philippine case!!)
G.R. No. 167526, July 26, 2010.

FACTS:
A petition for review on certiorari seeking to set aside the Resolution CA
affirming RTCs decision of dismissal of the case

Dante Tan (accused) was charged for violation of Rule 36 (a)-1
2
in relation
to Sections 32 (a)-1
3
and 56
4
of the Revised Securities Act before RTC
Pasig

2
Sec. 36. Directors, officers and principal stockholders. (a) Every person who is directly or indirectly the
beneficial owner of more than ten (10%) per centum of any class of any equity security which is registered

##

Note: there are 2 information involved in this case, same contents lang. The
difference lies on the ff:
1
st
complaint: Criminal Case No. 119831 ! December 10, 1998 84,030,000
shares (18.6%)
2
nd
complaint: Criminal Case No. 119832 ! June 18, 1999 75,000,000 shares
(same 18.6%)
Tan is the beneficial owner of 84,030,000 (in 2
nd
complaint 75,000,000)
Best World Resources Corporation (BWRC) shares, a registered security
sold pursuant Revised Securities Act
Having a beneficial ownership of 18.6% (which is way above the 10%
required by law to be reported), Tan has the obligation to file with
the SEC and PSE a sworn statement of the amount of all BWRC
shares of which he is the beneficial owner, within ten (10) days
after he became such beneficial owner
BUT Tan FAILED to do it, in violation of the Revised Securities Act and/or
the rules and regulations

Arraignment: Tan pleaded not guilty to both charges and the trial
ensued.
November 24, 2003: Prosecution made its formal offer of evidence
(madaming exhibits: A to E with sub-exhibits, Q-W with sub-exhibits, and
X)
December 11, 2003: RTC issued an Order

admitting Exhibits "A," "B," "W"
and "X," but denied admission of all the other exhibits on the grounds
stated therein.
Prosecution filed MR, but it was DENIED.

pursuant to this Act, or who is a director or an officer of the issuer of such security, shall file, at the time of
the registration of such security on a securities exchange or by the effective date of a registration statement
or within ten (10) days after he becomes such a beneficial owner, director, or officer, a statement with the
Commission and, if such security is registered on a securities exchange, also with the exchange, of the
amount of all equity securities of such issuer of which he is the beneficial owner, and within ten (10) days
after the close of each calendar month thereafter, if there has been a change in such ownership during such
month, shall file with the Commission, and if such security is registered on a securities exchange, shall also
file with the exchange, a statement indicating his ownership at the close of the calendar month and such
changes in his ownership as have occurred during such calendar month.

3
Sec. 32. Reports. (a) (1) Any person who, after acquiring directly or indirectly the beneficial ownership of
any equity security of a class which is registered pursuant to this Act, is directly or indirectly the beneficial
owner of more than ten (10%) per centum of such class shall, within ten days after such acquisition or such
reasonable time as fixed by the Commission, submit to the issuer of the security, to the stock exchanges
where the security is traded, and to the Commission a sworn statement

4
Sec. 56. Penalties. Any person who violates any of the provisions of this Act, or the rules and regulations
promulgated by the Commission under authority thereof, or any person who, in a registration statement filed
under this Act, makes any untrue statement of a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not misleading, shall, upon conviction, suffer
a fine of not less than five thousand (P5,000.00) pesos nor more than five hundred thousand (P500,000.00)
pesos or imprisonment of not less than seven (7) years nor more than twenty-one (21) years, or both in the
discretion of the court. If the offender is a corporation, partnership or association or other juridical entity, the
penalty shall be imposed upon the officer or officers of the corporation, partnership, association or entity
responsible for the violation, and if such officer is an alien, he shall, in addition to the penalties prescribed,
be deported without further proceedings after service of sentence.
December 18, 2003: Tan filed an Omnibus Motion for Leave to File
Demurrer to Evidence

and to admit the attached Demurrer to Evidence.
January 29, 2004, the RTC granted Tans Motion for Leave to File the
Demurrer and admitted the attached Demurrer. The RTC also ordered
petitioner to file an opposition.
February 18, 2004: Prosecution filed its Opposition to the Demurrer to
Evidence. Tan filed a Reply
March 16, 2004: RTC issued an Order granting Tans Demurrer to
Evidence

Prosecution filed a Petition for Certiorari before the CA. CA DENIED the
petition
CA: The dismissal of a criminal action by the grant of a Demurrer to
Evidence is one on the merits and operates as an acquittal, for
which reason, the prosecution cannot appeal therefrom as it would
place the accused in double jeopardy
MR DENIED. Hence, this appeal.

ISSUE: (relevant to SecReg) W/N Tan is guilty of violating the RSA for
failure to disclose certain information? NO!
Prosecution failed to present evidence which will determine that Tan indeed had the
obligation to disclose.

(They did not present the Articles of Incorporation of BWRC a very important
document!! - which will serve as the basis of the % beneficial ownership of Tan.
Ultimately, this will also be the basis if Tan has the duty to disclose the required
information pursuant to RSA)

HELD: Petition has NO MERIT. DISMISSED.

RATIO:
Discussion on Demurrer and Double Jeopardy
People v. Sandiganbayan: GR ! Grant of a demurrer to evidence operates
as an acquittal and is, thus, final and unappealable. Such dismissal of a
criminal case by the grant of demurrer to evidence may not be appealed,
for to do so would be to place the accused in double jeopardy. The verdict
being one of acquittal, the case ends there.

Elements of double jeopardy:
1. Complaint or information was sufficient in form and substance to
sustain a conviction;
2. Court had jurisdiction;
3. Accused had been arraigned and had pleaded; and
4. Accused was convicted or acquitted, or the case was dismissed
without his express consent
Applying these elements in the case at bar:
1. Informations filed in Criminal Cases Nos. 119831 and 119832 against
Tan were sufficient in form and substance to sustain a conviction;

#$

2. RTC had jurisdiction over Criminal Cases Nos. 119831 and 119832;
3. Tan was arraigned and entered a plea of not guilty; and
4. RTC dismissed Criminal Cases Nos. 119831 and 119832 on a demurrer
to evidence on the ground of insufficiency of evidence which amounts
to an acquittal from which no appeal can be had
Exceptions to the rule on Double Jeopardy:
The only instance when double jeopardy will not attach is when the trial
court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction, such as where the prosecution was denied the opportunity to
present its case or where the trial was a sham.
The petitioner in such an extraordinary proceeding must clearly
demonstrate that the trial court blatantly abused its authority to a point so
grave as to deprive it of its very power to dispense justice.

SC: After citing many cases which fall under the exception
Exception is inapplicable in the case at bar. ! RTC did not abuse its
discretion in the manner it conducted the proceedings of the trial, as well
as its grant of Tans demurrer to evidence.
Question to be resolved: "Did the RTC violate prosecutions right to due
process?" ! No, in fact prosecution was given more than ample
opportunity to present its case as gleaned from the factual antecedents
which led to the grant of Tans demurrer.

Another argument of prosecution: involving RTCs bias when it chose to grant
respondents demurrer to evidence notwithstanding that it had filed a "Motion to
Hold in Abeyance the Resolution of Accused Dante Tans Demurrer to Evidence and
The Prosecutions Opposition Thereto."

While it would have been ideal for the RTC to hold in abeyance the
resolution of the demurrer to evidence, nowhere in the rules, however, is
it mandated to do so.
Moreover, the same would merely constitute an error of procedure or
of judgment and not an error of jurisdiction.
Errors or irregularities, which do not render the proceedings a nullity, will
not defeat a plea of acquittal
To reiterate, the only instance when double jeopardy will not
attach is when the trial court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction which cannot be
attributed to the RTC simply because it chose not to hold in abeyance the
resolution of the demurrer to evidence.

ON THE MERITS: (IMPORTANT!!!)
TAN IS NOT LIABLE FOR VIOLATIONS UNDER THE RSA DUE TO
PROSECUTIONS FAILURE TO ADDUCE EVIDENCE NECESSARY TO PROVE
THE ELEMENTS OF SUCH VIOLATION
One of the main reasons for the RTCs decision to grant the demurrer was
the absence of evidence to prove the classes of shares that the
Best World Resources Corporation stocks were divided into,
whether there are preferred shares as well as common shares, or even
which type of shares respondent had acquired.

To secure conviction for the violations of RSA Secs. 32 (a-1) and 36 (a), it
is necessary to prove the following:
1. BWRC has equity securities registered under the RSA
2. that the equity securities of BWRC are divided into classes, and that
these classes are registered pursuant to the RSA;
3. the number of shares of BWRC (authorized capital stock) and the total
number of shares per class of stock;
4. the number of shares of a particular class of BW stock acquired by the
accused;
5. the fact of the exact date when Tan became the beneficial owner of
10% of a particular class of BW shares; and
6. the fact that Tan failed to disclose his 10% ownership within 10 days
from becoming such owner.

It is very clear from the evidence formally offered, that the
foregoing facts were not proven or established.
These cases were for Violations of RSA Rule 32 (a)-1 and Section 56 of
Revised Securities Act, however, it is very surprising that the prosecution
never presented in evidence the Article of Incorporation of
BWRC.
Without the Article of Incorporation, the Court has no way of knowing the
capitalization authorized capital stock of the BWRC, the classes of shares
into which its stock is divided and the exact holdings of Dante Tan in the
said corporation.
Articles of Incorporation NOT being a prosecutions evidence renders
impossible the determination of the 10% beneficial ownership of accused
Dante Tan, as there is no focal point to base the computation of his
holdings, and the exact date of his becoming an owner of 10%

13. United States vs. Simon
425 F.2d 796 (2
nd
Cir. 1969), cert. denied, 397 U.S. 1006 (1970)

CAVEAT: The facts of this case is heavily laden with accounting shit. I hate
accounting. Ergo, hindi ko naintindihan yung kaso. In any case, the point of this
case is that even if an accountant complies with the Generally Accepted Accounting
Principles, if compliance therewith causes non disclosure of materially misleading
information, the accountant can still be held liable under the Securities Act.

FACTS: Carl Simon (senior partner), Robert Kaiser (junior partner), Melvin Fishman
(senior associate) belonged to the internationally known accounting firm Lybrand,
Ross Bros & Montgomery (Lybrand). They stand convicted under 3 counts of
drawing up and certifying a false or misleading financial statement of Continental
Vending Machine Corporation (Continental) for the year ending Sep 30, 1962.


#%

They were convicted under Sec. 32 of the Securities Act of 1934 which provides
that:

Whoever, in any matter within the jurisdiction of any department
or agency of the United States knowingly and willfully falsifies,
conceals or covers up by any trick, scheme, or device a material
fact, or makes any false, fictitious or fraudulent statements or
representations, or makes or uses any false writing or document
knowing the same to contain any false, fictitious or fraudulent
statement or entry, shall be fined not more than $10,000 or
imprisoned not more than five years, or both

Continental is corporation whose President was Harold Roth who likewise owned
25% of its stocks. Valley Commercial Corporation (Valley) was Continentals
affiliate. Roth also ran Valley. Lybrand was the accounting firm hired to audit
Continentals books.

Valley engaged in landing Continental money at interest in relation to its vending
machine business. Continental would then issue negotiable notes to Valley. Valley
would then endorse these in blank and use them as collateral for drawing 2 credit
lines of $1M each at Franklin Bank and Meadowbrook Bank. The discounted amount
of the notes would then be transferred to Continental.

As early as 1956, these transactions gave rise to Valley payables. By the end of
1962, $543,345 of the $1,029,475 payable were due within said year.

In addition, there were also Valley receivables resulting from Continental loans to
Valley. Starting 1957, Roth would use Continental and Valley as sources of cash to
finance his stock market transactions. At the end of 1962, the amount of Valley
receivables amounted to $3.5M and had arisen to $3.9M by February 1963. The
Valley payable could not be offset with Valley receivables because Continentals
obligations to Valley were in the form of negotiable notes endorsed in blank to
Franklin and Meadowbrook banks and used as collateral to obtain the cash which it
lent to Continental.

Essentially, when Lybrand audited Continental, it discovered that Valley could not
pay its obligation with Continental as it already knew that Valley loaned the money
to Roth and that Roth was bankrupt. In the financial statement in question, it Note
2 thereof stated that:

The amount receivable from Valley Commercial Corp. (an
affiliated company of which Mr. Harold Roth is an officer, director
and stockholder) bears interest at 12% a year. Such amount, less
the balance of the notes payable to that company, is secured by
the assignment to the Company of Valley's equity in certain
marketable securities. As of February 15, 1963, the amount
of such equity at current market quotations exceeded the
net amount receivable.

The accountants were thus charged with drawing up and certifying misleading
financial statements of Continental.

In their defense, the accountants called expert independent accountants to testify
for them. Specifically, they testified that neither generally accepted accounting
principles nor generally accepted auditing standards required disclosure of
the make-up of the collateral or of the increase of the receivable after the
closing date of the balance sheet, although three of the eight stated that in
light of hindsight they would have preferred that the make-up of the collateral be
disclosed. The witnesses likewise testified that disclosure of the Roth
borrowings from Valley was not required, and seven of the eight were of the
opinion that such disclosure would be inappropriate. The principal reason
given for this last view was that the balance sheet was concerned solely with
presenting the financial position of the company under audit; since the
Valley receivable was adequately secured in the opinion of the auditors and was
broken out and shown separately as a loan to an affiliate with the nature of the
affiliation disclosed, this was all that the auditors were required to do.

ISSUE: WHETHER ACCOUNTANTS CAN BE HELD CRIMINALLY LIABLE FOR CREATING FRAUDULENT OR
MATERIALLY MISLEADING INFORMATION IN COMPLYING WITH THE GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.

HELD: YES.
The trial judge said that the "critical test" was whether the financial
statements as a whole "fairly presented the financial position of
Continental as of September 30, 1962, and whether it accurately reported
the operations for fiscal 1962." If they did not, the basic issue became
whether defendants acted in good faith.

Proof of compliance with generally accepted standards was "evidence
which may be very persuasive but not necessarily conclusive that he
acted in good faith, and that the facts as certified were not materially false
or misleading."

We think the judge was right in refusing to make the accountants'
testimony so nearly a complete defense. The critical test according to the
charge was the same as that which the accountants testified was critical. We do not
think the jury was also required to accept the accountants' evaluation whether a
given fact was material to overall fair presentation, at least not when the
accountants' testimony was not based on specific rules or prohibitions to which they
could point, but only on the need for the auditor to make an honest judgment and
their conclusion that nothing in the financial statements themselves negated the
conclusion that an honest judgment had been made. Such evidence may be highly
persuasive, but it is not conclusive, and so the trial judge correctly charged.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES instruct an accountant what to do
in the usual case where he has no reason to doubt that the affairs of the

#&

corporation are being honestly conducted. Once he has reason to believe
that this basic assumption is false, an entirely different situation
confronts him. Then, as the Lybrand firm stated in its letter accepting the
Continental engagement, he must "extend his procedures to determine
whether or not such suspicions are justified." If as a result of such an
extension or, as here, without it, he finds his suspicions to be confirmed, full
disclosure must be the rule, unless he has made sure the wrong has been
righted and procedures to avoid a repetition have been established. At
least this must be true when the dishonesty he has discovered is not some minor
peccadillo but a diversion so large as to imperil if not destroy the very solvency of
the enterprise.

Even if there were no satisfactory showing of motive, we think the Government
produced sufficient evidence of criminal intent. Its burden was not to show
that defendants were wicked men with designs on anyone's purse, which they
obviously were not, but rather that they had certified a statement knowing
it to be false.

14. Dura Pharmaceuticals, Inc. vs. Broudo
544 U.S. 336 (2005)

Caveat: This digest is based on digests, scholarly reviews by law schools, etc found
on the net. Sorry but I couldnt find a copy of the original case online.

Facts: Brouda et al. were stockholders who filed a securities fraud class action
alleging that petitioners, Dura Pharmaceuticals, Inc., and some of its managers and
directors made misrepresentations leading respondents to purchase Dura securities
at an artificially inflated price. Some of the misrepresentations were false
statements concerning profits, claiming that drug sales were expected to be
profitable, that the FDA would soon approve their asthmatic spray device. However,
Dura subsequently announced that earnings would be lower than expected due to
slow drug sales and the shares price declined. Also, 8 months after the sales
announcement, they stated that the asthmatic spray would not be approved by the
FDA, resulting in further decline in share price.

District Court dismissed on the finding that the complaint failed adequately to allege
loss causationi.e., a causal connection between the spray device
misrepresentation and the economic loss, 15 U.S.C. 78u4(b)(4) and the drug-
profitability claim failed to allege an appropriate scienter. The Ninth Circuit
reversed, finding that a plaintiff can satisfy the loss causation requirement simply
by alleging that a securitys price at the time of purchase was inflated because of
the misrepresentation and their claim that the price at the time of purchase was
overstated is sufficient.

The case was raised on review to the Supreme Court due to varying opinions of the
different circuit.

Summary of the circuits varying opinion on loss-causation: (I just included this but
this isnt really very important so you can do away with this summary)

Second circuit held that plaintiff cant just allege that had he known the true value
of the shares he would not have bought it. There has to be causal connection
between alleged misstatements and actual harm suffered.
Third circuit held that if the value of security doesnt actually decline due to
misrepresentation then there can be no claim of economic loss. Further there must
be correction in the market price for the inflated price to drop, otherwise its still
inflated and they can sell at the inflated price.
Seventh circuit compared loss causation to tort law
Ninth circuit held it is satisfied by mere allegation that price at time of purchase was
inflated and there is no need to allege subsequent price drop because injury occurs
at the time of transaction.
Eleventh circuit held that there is no need to prove misstatement as sole cause of
loss but its merely substantial proof.

Issue: Whether a securities fraud invoking the fraud-on-the-market theory must
demonstrate loss causation by pleading and proving a causal connection between
the alleged fraud and the investment's subsequent decline in price?

Held: YES! Inflated purchase price approach is insufficient to show loss causation.

Ratio:
1. An inflated purchase price will not by itself constitute or proximately cause the
relevant economic loss needed to allege and prove loss causation. The basic
elements of a private securities fraud actionwhich resembles a common-law tort
action for deceit and misrepresentationinclude economic loss and loss causation.
The Ninth Circuit erred in following an inflated purchase price approach to showing
causation and loss. First, the moment the transaction takes place, the plaintiff has
suffered no loss because the inflated purchase price is offset by ownership of a
share that possesses equivalent value at that moment. Thereafter, other factors
may affect the price. Thus, inflated purchase price suggests that misrepresentation
touches upon a later economic loss, but to touch upon a loss is not to cause a
loss, as 15 U.S.C. 78u4(b)(4) requires.
The common-law deceit and misrepresentation actions that private securities fraud
actions resemble require a plaintiff to show not only that had he known the truth he
would not have acted, but also that he suffered actual economic loss. The securities
laws make clear Congress intent to permit private securities fraud actions only
where plaintiffs adequately allege and prove the traditional elements of cause and
loss, but the Ninth Circuits approach would allow recovery where a
misrepresentation leads to an inflated purchase price, but does not proximately
cause any economic loss.

2. Respondents complaint was legally insufficient in respect to its allegation of
loss causation. While Federal Rule of Civil Procedure Rule 8(a)(2) requires only a
short and plain statement of the claim showing that the pleader is entitled to

#'

relief, and while the Court assumes that neither the Rules nor the securities
statutes place any further requirement in respect to the pleading, the short and
plain statement must give the defendant fair notice of what the plaintiffs claim is
and the grounds upon which it rests, The complaint contains only allegation that
their loss consisted of artificially inflated purchase prices. However, such a price is
not itself a relevant economic loss. And the complaint nowhere else provides Dura
Pharma with notice of what the relevant loss might be or of what the causal
connection might be between that loss and the misrepresentation. Ordinary
pleading rules are not meant to impose a great burden on a plaintiff, but it should
not prove burdensome for a plaintiff suffering economic loss to provide a defendant
with some indication of the loss and the causal connection that the plaintiff has in
mind. Allowing a plaintiff to forgo giving any indication of the economic loss and
proximate cause would bring about the very sort of harm the securities statutes
seek to avoid, namely the abusive practice of filing lawsuits with only a faint hope
that discovery might lead to some plausible cause of action.

SC reversed and remanded.

15. SEC vs. National Student Marketing Corp.
457 F. Supp. 682 (D.D.C. 1978)

B. Proxy Solicitation

Law

1. Sections 20, 57, 62 and 63, SRC
2. SRC Rule 23

Cases

a. Causation

1. Mills v. Electric Autolite
398 U.S. 375 (1970)

2. Virginia Bankshares v. Sandberg
501 U.S. 1083 (1991)

b. Materiality

1. TSC vs. Northway
426 U.S. 438 (1976)

c. Culpability

1. Gerstle v. Gamble-Skogmo
478 F.2d 1281 (2d Cir. 1973)

d. Relief

1. Berkman v. Rust Craft
454 F. Supp. 787 (S.D.N.Y. 1978)

2. Gladwin v. Medfield
540 F.2d 1266 (5
th
Cir. 1976)

C. Tender Offers

Law
3. Secs. 19, 57, 62 and 63, SRC
4. SRC Rule 19

Cases

1. Cemco Holdings, Inc. v. National Life Insurance Co.
529 SCRA 355 (2007)

2. Osmea III v. Social Security System of the Philippines
533 SCRA 313 (2007)

3. Piper v. Chris-Craft
430 U.S. 1 (1977)

4. Rondeau v. Mosinee
422 U.S. 49 (1975)

5. Smallwood v. Pearl
489 F.2d 579 (5
th
Cir. 1974)

6. Electronic v. International
409 F.2d 937 (2d Cir. 1969)

7. Paine v. McCabe
797 F.2d 713 (9
th
Cir. 1986)

8. Panter v. Marchall Field
646 F.2d 271 (7
th
Cir. 1981)

9. United States v. Chestman
947 F.2d 551 (2d Cir. 1991)

#(

10. Epstein v. MCA Corp.
50 F.3d 644 (9
th
Cir. 1995)

11. SEC v. Carter Hawley Hale Stores, Inc.
760 F.2d 945 (1985)

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