Liability in Securities Offerings
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Transcript of Liability in Securities Offerings
Liability in Securities Offerings
Underwriter and accountant due diligence
Last updated 06 Feb 12
Securities Class Action
Software Toolworks(Issuer)
Deloitte & Touche(auditor)
DirectorsOfficers
Investors• Plaintiffs• Defendants • Claims
– ’33 Act § 11– ’34 Act Rule 10b-5
• Defenses
Montgomery SecuritiesPaineWebber
(lead underwriters)
Section 11 Liability(’33 Act)
Prospectus• Issuer – strict• Ds / Os / UWs – due
diligence defense (reasonable investigation + reasonable belief true)
• Auditor (expert) – no liability
Financials• Issuer – strict• Ds / Os / UWs – not
believe false• Auditor (expert) – due
diligence defense (reasonable investigation + reasonable belief true)
Rule 10b-5 (’34 Act)
Securities fraud• Material misrepresentation • Scienter (actual knowledge or reckless
disregard)• Reliance• Causation• Damages
Securities Class Action• Underwriters (Montgomery
Securities and PaineWebber)– granted summary judgment on
Section11 and Rule 10b-5– what does this mean? – What do plaintiffs appeal?
• Accountant (Deloitte & Touche)– granted summary judgment on
Section 11 and 10b-5– What do plaintiffs appeal? – Why don’t plaintiffs appeal Section
11 judgment for defendants?Software Toolworks
(Issuer)
Deloitte & Touche(auditor)
DirectorsOfficers
Montgomery SecuritiesPaineWebber
(lead underwriters)
Investors
Underwriter defense …
Underwriter defense’33 Act § 11
•“after reas investigation, believed true” OR
(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Underwriter defense’33 Act § 11
•“after reas investigation, believed true” OR
(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Underwriter defense’33 Act § 11
•“after reas investigation, believed true” OR
(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Underwriter defense’33 Act § 11
•“after reas investigation, believed true” OR
(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Auditor defense …
Auditor defense’33 Act § 11
(1)“after reas investigation, believed true”
Not appealed
’34 Act Rule 10b-5
(1) No “actual knowledge”(2) No “recklessness – no extreme
departure ordinary care”
Recognition of OEM revenue
• OEM agreements poorly documented• Management under “extraordinary pressure” • Deloitte only got oral assurances on some
contracts• No information on return policies
SEC letters • SEC told that June data not available• Sample OEM contract differed from actual
contracts
Auditor defense’33 Act § 11
(1)“after reas investigation, believed true”
Not appealed
’34 Act Rule 10b-5
(1) No “actual knowledge”(2) No “recklessness – no extreme
departure ordinary care”
Recognition of OEM revenue
• OEM agreements poorly documented• Management under “extraordinary pressure” • Deloitte only got oral assurances on some
contracts• No information on return policies
SEC letters • SEC told that June data not available• Sample OEM contract differed from actual
contracts
Auditor defense’33 Act § 11
(1)“after reas investigation, believed true”
Not appealed
’34 Act Rule 10b-5
(1) No “actual knowledge”(2) No “recklessness – no extreme
departure ordinary care”
Recognition of OEM revenue
• OEM agreements poorly documented• Management under “extraordinary pressure” • Deloitte only got oral assurances on some
contracts• No information on return policies
SEC letters • SEC told that June data not available• Sample OEM contract differed from actual
contracts
The end(mercifully)