international securities regulation compiled case digests

7/28/2019 International Securities Regulation Compiled Case Digests

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Securities Regulations Cases 2010-2011Atty. Francis LimSECURITIES AND EXCHANGE COMMISSION:

SEC v. CA & CUALOPING (246 SCRA 738)

Facts: Several certificates of stock of PHILEX Mining representingone million four hundred shares were stolen from the premises ofFIDELITY, stock transfer agent of the former (private respondent).

The said certificates went into the hands of one Agustin Lopez whobrought the same to the CUALOPING (also a private respondent) fortrading and sale with the stock exchange

All the certificates have apparent indorsement in blank from theirrespective owners. The words Signature Verified apparently ofFIDELITY were stamped on each certificate and the usual initials ofthe officers of FIDELITY were also showed. CUALOPING stamped thecertificates with the words Indorsement Guaranteed.

The certificates were now traded and were bought, the same wereall delivered back to FIDELITY for the cancellation of the certificates

and the issuance of the new certificates in favor of the buyers.FIDELITY denied such request on the ground that the signatures inthe certificates were all forged. They found that 2 of theiremployees were involved in the incident of pilfering the certificates.

FIDELITY sought the opinion of the SEC regarding the currentmatter in question. SEC rules that FIDELITY should effect thetransfer of the certificates to the new owners while CUALOPINGmust pay Fifty thousand pesos as fine. SEC En Banc modified theorder to have both brokers pay fine. On appeal, the CA set asidethe order without prejudice to the right of the persons injured to filethe proper action for damages.

Issue: W/N CA was correct in setting aside the order of the SEC

Held: CA is partially correct.

1. Setting aside of the order The proper parties that can bringthe controversy and can cause an exercise by the SEC of itsoriginal and exclusive jurisdiction would be all or any ofthose who are adversely affected by the transfer of thepilfered certificates of stock. In the case at bar, it must be

the stockholders who have been deprived of theircertificates of stock or the persons to whom the forgedcertificates have been transferred must be the properparties to institute the case.

2. Legal propriety of the imposition of the SEC of fine Theregulatory power of the SEC was challenged when the CA

set aside its decision, hence the SEC had a standing as areal party in interest. However, the Revised Securities Actwarrants that the punishable act must be accompanied byfraud or deceit and not mere negligence. Fraud here is akinto bad faith which implies a conscious and intentional designto do a wrongful acts for a dishonest purpose or moralobiquity. Given the factual consideration, neither of the twocan be said to be held liable under the provisions of the saidAct.

Philippine Stock Exchange v. Court of Appeals

Facts: The Puerto Azul Land, Inc. (PALI) wanted to raise funds todevelop its properties and to pay its loans so it sought to offer itsshares to the public. PALI filed an application to the PSE to list itsshares. Before the PSE could act upon its application, the heirs ofFerdinand Marcos claimed that the late Pres. Marcos was the legalowner of the properties forming the Puerto Azul Beach resorts. Inview of this, the PSE rejected PALIs application.

PALI then wrote the SEC asking it to exercise its supervisory powersover the PSE hence it reversed the order of the PSE ordering it thento list PALIs shares in the exchange. This decision was likewiseaffirmed by the CA hence the case at bar.

Issue: W/N the SEC has the authority to reverse PSE decisions andorder it to list the shares of PALI

Held: NO. Although the SEC was granted by the Legislature,through the Revised Securities Act, of powers to supervise allcorporations and partnerships, it does not mean that the PSE isunder its absolute control. It is after all a corporation authorized byits corporate franchise to engage in its proposed and duly approvedbusiness.

Alcantara, Arriola, Bleza, Dialino, Escueta, Imperial, Joaquino, Martinez, Pichay, Rojo, Tancinco, Uy Page 1


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Securities Regulations Cases 2010-2011Atty. Francis Lim

It can only reverse the decision of PSE if it was attended with badfaith. In rendering the disputed decision, PSE considered importantfacts. It looked into the issue concerning the claims of the Marcosfamily which was later on confirmed by the PCGG which led the PSEto doubt the integrity of PALI as a stock issuer. As the primarymarket for securities, PSE has established its name and goodwill

and it has the right to protect such goodwill by maintainingreasonable standards in the entities that choose to transactthrough its facilities.

REGISTRATION OF SECURITIES:

Power Homes Unlimited Corporation vs Securities andExchange Commission

Facts:- Power Homes is a domestic corporation duly registered with SEC- Noel Manero requested SEC to investigation on Power Homes on

the ground that the latter claimed to sell properties that wereinexistent and without any brokers license- Romulo Munsayac inquired from SEC whether Power Homes

business involves legitimate network marketing- SEC held a conference with the incorporators of Power Homes then

visited the business premises- SEC findings: Power Homes is engaged in the sale or offer for sale

or distribution of investment contracts which are consideredsecurities under Section 3.1 (b) of RA8799 (Securities RegulationCode), but failed to register them in violation of Sec 8.1 of thesame Act. Hence, SEC issued a cease and desist order (CDO)

Issue:1. W/N SEC followed due process in the issuance of the assailed CDO2. W/N Power Homes business constitutes an investment contract

which should be registered with SEC before its sale or offer for saleor distribution to the public

Held:1. Yes, SEC followed due process in the issuance of the assailed CDO2. Yes, Power Homes is engaged in the sale or distribution of an

investment contract

Ratio:1. SEC properly examined the business operations when it:

a. Called into conference 3 of the incorporatorsb. Requested information from the incorporators

regarding the nature of the businessc. Asked them to submit pertinent documents

d. Visited the business premises and gatheredinformation thereatAll these were done before the CDO was issued by SEC. A formaltrial or hearing is not necessary to comply with the requirements ofdue process. Its essence is simply the opportunity to explain onesposition

2. SEC found that Power Homes is a marketing company thatpromotes and facilitates sales of real properties and other relatedproducts of real estate developers through effective leveragemarketing

- Business scheme of Power Homes: an investor enrolls in the

program of Power Homes by paying$234. This entitles him torecruit 2 investors who pay the same amount each and out ofwhich amount he receives $92. A minimum requirement of 4investors by these 2 recruits, who then recruits at least 2 each,entitles the principal investor to $184 and the pyramid goes on

- The business operation or the scheme of Power Homes constitutesan INVESTMENT CONTRACT,1 thus it must be registered with SECbefore its sale or offer for sale or distribution to the public pursuantto Section 8.1 of RA8799.2 As Power Homes failed to register thesame, its offering to the public was rightfully enjoined by SEC. theCDO was proper even without finding of fraud. As an investmentcontract that is security under RA8799, it must be registered with

SEC, otherwise the SEC cannot protect the investing public from1 A contract, transaction or scheme whereby a person invests hismoney in a common enterprise and is led to expect profitsprimarily form the efforts of others (Amended IRR of RA8799)2 Securities shall not be sold or offered for sale or distribution withinthe Philippines, without a registration statement duly filed with andapproved by the Commission. Prior to such sale, information on thesecurities, in such form and with such substance as theCommission may prescribe, shall be made available to eachprospective purchaser.



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Securities Regulations Cases 2010-2011Atty. Francis Limfraudulent securities. The strict regulation of securities is foundedon the premise that the capital markets depend on the investingpublics level of confidence in the system.Unionbank v. SEC

Facts: Petitioner by virtue of sec.5 (a)(3) of the revised securitiesact(RSA) was exempt from registering its securities. As such, it was

also in the opinion that it is also exempt from the reportorialrequirements issued by SEC under the IRR which provides: rule 11(a)-1 requiring the filing of annual, quarterly, current, predecessorand successor reports; rule 34 (a)-1 requiring submission of proxystatements and rule 34(c)-1 requiring the submission of informationstatements.

Due to its belief, it failed to submit the aforementionedrequirements so SEC imposed a fine of 50k per day of delay.Petitioner argues that it is not bound by the said rules becausesince said rules in effect amends the exemption provided by theRSA and that SEC cannot exercise supervisory powers over the

petitioner since it is already under the supervision of BSP and SEC

Issue: W/N petitioner should comply with the requirement

Decision: The court ruled that petitioner should comply. It must beemphasized that petitioner is a commercial banking institutionlisted in the stock exchange. Thus it must adhere not only to thebanking rules but also with the rules of SEC. SEC is tasked not onlywith the enforcement of the RSA but also with the supervision ofall corp, partnerships or associations which are grantees of govtissued primary franchises. The aforementioned rules require thesubmission of certain reports to ensure full, fair and accurate

disclosure of information for the protection of the investing publicpursuant to the authority conferred by sec 3 of the RSA.

Pursuant to its regulatory authority, SEC adopted the policy of fullmaterial disclosure where all companies listed or applying forlisting are required to divulge truthfully and accurately all materialinformation about themselves and the securities that they sell forthe protection of the investing public and under the pain ofadministrative criminal or civil actions.

The said rules do not amend sec 5.a.3 of the RSA because they donot amend or revoke the exemption from registration of securitiesenumerated thereunder. They are reasonable regulations imposedupon banking corp trading its securities in the stock market. Thepetitioner is under the supervision of the BSP and PSE does notexempt it from complying with the continuing disclosurerequirements embodied in the said rules. Petitioner as a bank is

primarily governed by BSP and as a corp trading its securities in themarket, it is under the supervision of SEC.

Nestle Philippines, Inc. v. Court of Appeals

Facts:- Nestle increased its capital stockfrom P300 million dividedinto 3 million shares to P600 million divided into 6 million shares.- The SEC approved the said increase after Nestle paid the filing feeof P50,000- Subsequently, the board of directors and stockholders of Nestleapproved resolutions authorizing the issuance of 344,500 shares

out of the previously authorized but unissued sharesexclusively to its 2 only stock holders, San Miguel and nestle S.A.- Nestle wrote a letter to the SEC seeking exemption of theissuance of the 344,500 previously authorized but unissued sharesfrom the requirement of registration and the registration feeas required by the Revised securities act .- Nestle contends that the issuance of the previously authorizedbut unissued shares is an exempt transaction falling under section6 (a) (4) of the revised securities act. The pertinent part of which isas follows:Exempt transaction the issuance of additional capitalstockof a corporation sold or distributed by it among its

stockholders exclusively, where no commission orremuneration is paid or given directly or indirectly inconnection with the sale or distribution of such increasedcapital stock- Nestle contends that the issuance of previously authorized butunissued shares should be deemed included under the phrase theissuance of additional capital stock.- The SEC on the other hand contended that the provision cited byNestle only covers shares issued pursuant to the increase incapital stock. However, issuance of previously authorized but



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Securities Regulations Cases 2010-2011Atty. Francis Limunissued shares does not fall within that exemption but underparagraph (b) of the same provision which states that the SEC maydetermine other transactions that are exempt if it finds thatregistration is not required for the protection of public interestbecause of a small amount or limited character of public offering.Therefore, Nestle should apply for exemption underparagraph (b) of section 6 and pay the required fee.

-To this, Nestle further contended that it couldnt be made to paytwice for the same transaction, as it already paid P50, 000 for theapproval of the increase of its capital stock.

Issue: W/N the issuance of previously authorized shares is thesame as shares issued pursuant to an increase in capital stock sothat both transactions are to be considered exempt fromregistration requirements

Held: No. The court ruled that they are not the same because tomake the issuance of previously authorized but unissued shares anexempt transaction would be to deprive the SEC of its statutory

mandate of protecting the investing public. Unlike the increase ofcapital stock, the issuance of previously authorized but unissuedshares does not require SEC approval. If the transaction wereexempt, then the SEC would not have a chance inform theinvesting public about the true financial condition and prospects ofthe corporation.

Note: The issuance of previously authorized but unissued sharesrequires only the approval of the board and stockholders, the SEChas no chance to verify if such transaction is fraudulent or not.Nestles position that such transaction is automatically exemptwould be to deprive the SEC of an opportunity to protect the public

every time there is an issuance of previously authorized butunissued shares.

REGISTRATION OF LISTED COMPANIES:

DISCLOSURE REQUIREMENTS:

BASIC INC. v. LEVINSON, 485 U.S. 224 (1988)

Facts: Prior to December 20, 1978, Basic Incorporated was apublicly traded company primarily engaged in the business ofmanufacturing chemical refractories for the steel industry. As earlyas 1965 or 1966, Combustion Engineering, Inc., a companyproducing mostly alumina-based refractories, expressed someinterest in acquiring Basic, but was deterred from pursuing thisinclination seriously because of antitrust concerns it then

entertained.

Beginning in September 1976, Combustion representatives hadmeetings and telephone conversations with Basic officers anddirectors, including petitioners here, concerning the possibility of amerger. During 1977 and 1978, Basic made three publicstatements denying that it was engaged in merger negotiations. On December 18, 1978, Basic askedthe New York Stock Exchangeto suspend trading in its shares and issued a release stating that ithad been "approached" by another company concerning a merger.On December 19, Basic's board endorsed Combustion's offer of $46per share for its common stock, and on the following day publicly

announced its approval of Combustion's tender offer for alloutstanding shares.

Respondents are former Basic shareholders who sold their stockafter Basic's first public statement of October 21, 1977, and beforethe suspension of trading in December 1978. Respondents broughta class action against Basic and its directors, asserting that thedefendants issued three false or misleading public statements andthereby were in violation of 10(b) of the 1934 Act and of Rule 10b-5. Respondents alleged that they were injured by selling Basicshares at artificially depressed prices in a market affected bypetitioners' misleading statements and in reliance thereon.

Issue: W/N Basic Inc.s statement is misleading and material inviolation of Secion 10(b) of the 1934 Act and Rule 10b-5.

Held: Yes. The 1934 Act was designed to protect investors againstmaniputation of stock prices. Underlying the adoption of extensivedisclosure requirements was a legislative philosophy: Therecannot be honest markets without honest publicity. Manipulationand dishonest practices of the market place thrive upon mysteryand secrecy.



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Materiality issueThe Court also explicitly has defined a standard of materialityunder the securities laws, concluding in the proxy-solicitationcontext that "[a]n omitted fact is material if there is a substantiallikelihood that a reasonable shareholder would consider itimportant in deciding how to vote The application of this materiality

standard to preliminary merger discussions is not self-evident.Where the impact of the corporate development on the target'sfortune is certain and clear, the definition admits straightforwardapplication. Where, on the other hand, the event is contingent orspeculative in nature, it is difficult to ascertain whether the"reasonable investor" would have considered the omittedinformation significant at the time. Merger negotiations, because ofthe ever-present possibility that the contemplated transaction willnot be effectuated, fall into the latter category.

Hence, it was argued to adopt a agreement-in-principle approachwherein information concerning any negotiations not yet at the

agreement-in-principle stage could be withheld or evenmisrepresented without violation of the Rule 10b-5 under the 3rationales:

1. An investor not to be overwhelmed by excessively detailed andtrivial information and focuses on the substantial risk thatpreliminary merger may collapse: because such discussions areinherently tentative, disclosure of their existence itself couldmislead investors and foster false optimism

1. The importance of secrecy during the early stages of mergerdiscussions. To avoid bidding war and silence pending settlementof the price and structure of a deal is beneficial to most investors,most of the time.

2. For the comfort of the corporate managers. A bright line rule iseasier to follow than a standard that requires the exercise ofjudgment in the light of all the circumstances.

However, the foregoing justifications were not held validjustifications for artificially excluding from the definition ofmateriality information concerning merger discussions, whichwould otherwise be considered significant to the trading decision ofa reasonable investor, merely because the agreement principle as

to price and structure has not yet been reached b y the parties ortheir representative.

Another failed argument on materiality refers to the fact thatinformation concerning an ongoing acquisition discussionsbecomes material by virtue of the statement denying itsexistence. This fails to recognize that, in order to prevail on a Rule

10b-5 claim, a plaintiff must show that the statements weremisleading as to the material fact. It is not enough that a statementis false or incomplete, if the misrepresented fact is otherwiseinsignificant.

It was opined further that probability/magnitude approach may beapplied in the speific context of preliminary negotiations. Whethermerger discussions in any particular case are material thereforedepends on the facts. Generally, in order to assess the probabilitythat the event will occur, a factfinder will need to look to indicia ofinterest in the transaction at the highest corporate levels. Withoutattempting to catalog all such possible factors, we note by way of

example that board resolutions, instructions to investment bankers,and actual negotiations between principals or their intermediariesmay serve as indicia of interest. To assess the magnitude of thetransaction to the issuer of the securities allegedly manipulated, afactfinder will need to consider such facts as the size of the twocorporate entities and of the potential premiums over marketvalue. No particular event or factor short of closing the transactionneed be either necessary or sufficient by itself to render mergerdiscussions material.

Reliance and fraud-on-market theoryWe turn to the question of reliance and the fraud-on-the-market

theory. Succinctly put: "The fraud on the market theory is basedon the hypothesis that, in an open and developed securitiesmarket, the price of a company's stock is determined by theavailable material information regarding the company and itsbusiness. . . . Misleading statements will therefore defraudpurchasers of stock even if the purchasers do not directly rely onthe misstatements. . . . The causal connection between thedefendants' fraud and the plaintiffs' purchase of stock in such acase is no less significant than in a case of direct reliance onmisrepresentations."



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This case required resolution of several common questions of lawand fact concerning the falsity or misleading nature of the threepublic statements made by Basic, the presence or absence ofscienter, and the materiality of the misrepresentations, if any.Requiring proof of individualized reliance from each member of theproposed plaintiff class effectively would have prevented

respondents from proceeding with a class action, since individualissues then would have overwhelmed the common ones. TheDistrict Court found that the presumption of reliance created by thefraud-on-the-market theory provided "a practical resolution to theproblem of balancing the substantive requirement of proof ofreliance in securities cases against the procedural requisites of[Federal Rule of Civil Procedure] 23." The District Court thusconcluded that with reference to each public statement and itsimpact upon the open market for Basic shares, common questionspredominated over individual questions, as required by FederalRules of Civil Procedure 23(a)(2) and (b)(3).We agree that reliance is an element of a Rule 10b-5 cause of

action.. Reliance provides the requisite causal connection betweena defendant's misrepresentation and a plaintiff's injury. There is,however, more than one way to demonstrate the causalconnection. Indeed, we previously have dispensed with arequirement of positive proof of reliance, where a duty to disclosematerial information had been breached, concluding that thenecessary nexus between the plaintiffs' injury and the defendant'swrongful conduct had been established. Similarly, we did notrequire proof that material omissions or misstatements in a proxystatement decisively affected voting, because the proxy solicitationitself, rather than the defect in the solicitation materials, served asan essential link in the transaction.

The modern securities markets, literally involving millions of shareschanging hands daily, differ from the face-to-face transactionscontemplated by early fraud cases, and our understanding of Rule10b-5's reliance requirement must encompass these differences. "In face-to-face transactions, the inquiry into an investor's relianceupon information is into the subjective pricing of that informationby that investor. With the presence of a market, the market isinterposed between seller and buyer and, ideally, transmitsinformation to the investor in the processed form of a market price.

Thus the market is performing a substantial part of the valuationprocess performed by the investor in a face-to-face transaction.The market is acting as the unpaid agent of the investor, informinghim that given all the information available to it, the value of thestock is worth the market price."

Presumptions typically serve to assist courts in managing

circumstances in which direct proof, for one reason or another, isrendered difficult. The courts below accepted a presumption,created by the fraud-on-the-market theory and subject to rebuttalby petitioners, that persons who had traded Basic shares had doneso in reliance on the integrity of the price set by the market, butbecause of petitioners' material misrepresentations that price hadbeen fraudulently depressed. Requiring a plaintiff to show aspeculative state of facts, i. e., how he would have acted if omittedmaterial information had been disclosed, , or if themisrepresentation had not been made, would place anunnecessarily unrealistic evidentiary burden on the Rule 10b-5plaintiff who has traded on an impersonal market.

The presumption is also supported by common sense andprobability. Recent empirical studies have tended to confirmCongress' premise that the market price of shares traded on well-developed markets reflects all publicly available information, and,hence, any material misrepresentations. It has been noted that "itis hard to imagine thatthere ever is a buyer or seller who does notrely on market integrity. Who would knowingly roll the dice in acrooked crap game?" Indeed, nearly every court that hasconsidered the proposition has concluded that where materiallymisleading statements have been disseminated into an impersonal,well-developed market for securities, the reliance of individualplaintiffs on the integrity of the market price may be presumed.

Commentators generally have applauded the adoption of onevariation or another of the fraud-on-the-market theory. An investorwho buys or sells stock at the price set by the market does so inreliance on the integrity of that price. Because most publiclyavailable information is reflected in market price, an investor'sreliance on any public material misrepresentations, therefore, maybe presumed for purposes of a Rule 10b-5 action.

The Court of Appeals found that petitioners "made public, materialmisrepresentations and [respondents] sold Basic stock in an



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Securities Regulations Cases 2010-2011Atty. Francis Limimpersonal, efficient market. Thus the class, as defined by thedistrict court, has established the threshold facts for proving theirloss." The court acknowledged that petitioners may rebut proof ofthe elements giving rise to the presumption, or show that themisrepresentation in fact did not lead to a distortion of price or thatan individual plaintiff traded or would have traded despite hisknowing the statement was false. Any showing that severs the link

between the alleged misrepresentation and either the pricereceived (or paid) by the plaintiff, or his decision to trade at a fairmarket price, will be sufficient to rebut the presumption of reliance.For example, if petitioners could show that the "market makers"were privy to the truth about the merger discussions here withCombustion, and thus that the market price would not have beenaffected by their misrepresentation, the causal connection could bebroken: the basis for finding that the fraud had been transmittedthrough market price would be gone. Similarly, if, despitepetitioners' allegedly fraudulent attemptto manipulate marketprice, news of the merger discussions credibly entered the marketand dissipated the effects of the misstatements, those who traded

Basic shares after the corrective statements would have no director indirect connection with the fraud.Petitioners also could rebutthe presumption of reliance as to plaintiffs who would havedivested themselves of their Basic shares without relying on theintegrity of the market. For example, a plaintiff who believed thatBasic's statements were false and that Basic was indeed engagedin merger discussions, and who consequently believed that Basicstock was artificially underpriced, but sold his shares neverthelessbecause of other unrelated concerns, e. g., potential antitrustproblems, or political pressures to divest from shares of certainbusinesses, could not be said to have relied on the integrity of aprice he knew had been manipulated.

Wachovia v National Student Marketing Corporation (1979)

Facts: Wachovia bought approximately five million dollars' worthof NSMC stock. Two months later, the market price of NSMC stockdeclined more than sixty percent, and NSMC announced that itexpected to report a loss for the previous fiscal quarter.

The Securities and Exchange Commission (SEC) began a two-yearinvestigation of NSMC. SEC then filed an enforcement and

injunction action against NSMC. The Commission charged that theprice of NSMC stock had been artificially inflated in violation of thesecurities laws. The defendants were charged with participating ina conspiracy to defraud investors by artificially inflating the price ofNSMC stock and thereby violating various sections of 1933 and1934 Acts. Specifically, appellants contended thatmisrepresentations about NSMC's financial condition had been

included in oral statements, in press releases, in reports filed withthe SEC, and in other published reports not filed with theCommission.

Two days before the complaint was filed, appellants had enteredinto a letter agreement with White & Case and Epley, whichprovided that the statute of limitations would be tolled as to themfor two years from the date of the letter.

The defendants moved to dismiss the complaint on two grounds:1. that the action was time-barred under the two-yearstatute of limitations of the District of Columbia's blue sky law

2. And that the sections of the securities acts onwhich the claims were based did not provide for or allow a privateright of action.

ISSUES:1. Which limitations period to apply: the three year general

fraud provision or the two year blue sky law provision. (w/n the suitshould be dismissed on statute of limitations grounds. NO)

Federal courts once favored invocation of the 3 year general fraudlimitations period. But during the last decade, the law has movedtoward application of the blue sky law limitations period. In

Forrestal Village, Inc. v. Graham (D.C. Cir. 1977), we decided thatthe two-year blue sky law provision, rather than the three-yeargeneral fraud limitations guideline, " 'best effectuates the federalpolicy involved.' The court below applied Forrestal VillageretroactivelyAppellants relied on the law from December, 1969, when theybought NSMC stock, until January, 1973, when they filed suit.During that period, this circuit favored application of the generalfraud limitations period. In fact, courts in this circuit reaffirmed thethree-year fraud period as late as 1975. Thus, prior to, and during,



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Securities Regulations Cases 2010-2011Atty. Francis Limthe running of the limitations period, federal courts, including thiscircuit, overwhelmingly adopted the general fraud limitationsperiod. It was the law at this point in time on which appellantsrelied. Thus points toward prospective applicability of ForrestalVillage.

Further, the doctrine of equitable tolling permits, with respect to

fraud, the tolling of the limitations period until the plaintiffdiscovers, or should have discovered through the exercise of duediligence, the fraudulent activity. The district court decided againstinvocation of the equitable tolling principle. It ruled that appellants"should have known of the fraud within the two-year statute oflimitations, running immediately after the sale." Here, the only hintof fraud available to appellants before February, 1970, was thepublication of the Barron's article, which appeared on December22, 1969. This article criticized NSMC's practices of deferring costs.This article, taken alone, was insufficient to alert appellants tofraudulent activity committed by the accountant-defendants. Wefind that the court committed error in declining to toll the

limitations period until February, 1970. The statute of limitationscannot run until the events that implicated the accountantsoccurred, and all but one of them occurred, or became discernible,in February, 1970. Given our holding above that the three-yearstatute of limitations applies to this case, appellants filed this suitagainst the auditor-defendants within the limitations period.

We reverse the holding of the court below that it is the two-year statute of limitations for the District of Columbia'sblue sky law that applies here and the holding that thedoctrine 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 forgeneral fraud claims.

2. W/N an implied right of action is available to Wachoviaunder section 10(b) of the 1934 Act3 and the corresponding SECRule 10b-54as well as under section 17(a) of the 1933 Act,5 (YES)A private right of action not only compensates the investors whoare the beneficiaries of section 10(b) in general, but also affords abroad deterrent force against the fraud that the statute condemns.A private remedy is a necessary supplement to administrative

enforcement because the Commission cannot do the job alone.Section 10(b) continues to lend itself to private remedies, and thatneither the spirit nor the letter of any Supreme Court opinionsuggests otherwise.

3 It shall be unlawful for any person, directly or indirectly, by theuse of any means or instrumentality of interstate commerce or ofthe mails, or of any facility of any national securities exchange orcontrivance in contravention of such rules and regulations as theCommission may prescribe as necessary or appropriate in thepublic interest or for the protection of investors.

4 It shall be unlawful for any person, directly or indirectly, by theuse of any means or instrumentality of interstate commerce, or ofthe mails or of any facility of any national securities exchange,

(a) To employ any device, scheme or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit tostate a material fact necessary in order to make the statementsmade, in the light of the circumstances under which they weremade, not misleading, or

(c) To engage in any act, practice or course of business whichoperates or would operate as a fraud or deceit upon any person, inconnection with the purchase or sale of any security.

5 It shall be unlawful for any person in the offer or sale of anysecurities by the use of any means or instruments of transportationor communication in interstate commerce or by the use of themails, directly or indirectly

(1) to employ any device, scheme, or artifice to defraud, or



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Cross-appellants argue that the entire 1934 Act, of which section10(b) is a part, is inapplicable to this case because the Act wasintended to regulate securities only after distribution. It is the 1933Act, say cross-appellants, which was meant to cover newly issuedsecurities. Such a rigidly compartmentalized analysis misses theclear intention of Congress and the overall purposes of the

statutory scheme. Section 10(b) by its very terms applies to "anysecurity," whether or not registered on a national exchange. TheCourt declared that Congress wanted securities legislation aimed atprotecting against fraud to be construed "not technically andrestrictively, but flexibly to effectuate its remedial purposes." Thebroad scope of section 10(b) has been widely recognized, and thesection has been applied to newly issued securities and to thosesold in private placements. It is meant to bar deceptive devices andcontrivances in the purchase or sale of securities whetherconducted in the original markets or face to face." It is nowherewritten that each pronouncement of Congress must be mutuallyexclusive of every other pronouncement. The 1933 and 1934 Acts

are meant to be interrelated and interdependent components of ageneral scheme, and the two should be read together. There is noconflict between them, and their overlap in no way diminishes theplain meaning of section 10(b).

Cross-appellants' final contention is that section 10(b) may not giverise to an implied remedy because other specific sections of the1933 and 1934 Acts provide pertinent express remedies.. However,they are at the ready to show that the express remedies are notreally available to Wachovia. Section 11 of the 1933 Act,6 for

(2) to obtain money or property by means of any untrue statementof a material fact or any omission to state a material fact necessaryin order to make the statements made, in the light of thecircumstances under which they were made, not misleading, or

(3) to engage in any transaction, practice, or course of businesswhich operates or would operate as a fraud or deceit upon thepurchaser.6 In case any part of the registration statement, when such partbecame effective, contained an untrue statement of a material fact

example, imposes civil liability for filing a false registrationstatement. Under that provision, a defendant may be held liableeven for negligent misstatements. This remedy is unavailable toWachovia on both counts: no registration statement was filed, andthe suit was brought well beyond the time allowed under section11. If no remedies may be implied under 10(b), investors defraudedin a purchase of unregistered securities are left less protected than

investors suffering losses as the result of typographical errors in aregistration statement.

or omitted to state a material fact required to be stated therein ornecessary to make the statements therein not misleading, anyperson acquiring such security (unless it is proved that at the timeof such acquisition he knew of such untruth or omission) may,either at law or in equity, in any court of competent jurisdiction, sue

(1) every person who signed the registration statement;

(2) every person who was a director of (or person performingsimilar functions) or partner in the issuer at the time of the filing ofthe part of the registration statement with respect to which hisliability is asserted;

(3) every person who, with his consent, is named in the registrationstatement as being or about to become a director, personperforming similar functions, or partner;

(4) every accountant, engineer, or appraiser, or any person whoseprofession gives authority to a statement made by him, who haswith his consent been named as having prepared or certified any

part of the registration statement, or as having prepared orcertified any report or valuation which is used in connection withthe registration statement, with respect to the statement in suchregistration statement, report, or valuation, which purports to havebeen prepared or certified by him;

(5) every underwriter with respect to such security.

If such person acquired the security after the issuer has madegenerally available to its security holders an earning statement



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Securities Regulations Cases 2010-2011Atty. Francis LimIn this case, relief was not available to Wachovia under any of theaforementioned provisions. The scope of section 11 of the 1933 Actis restricted to false registration statements, and the transactionhere, because it did not involve a public offering, was not subject tothe registration requirement. Cross-appellants may not be suedunder section 12(2) of the 1933 Act, which limits potentialdefendants to sellers. Finally, plaintiffs have not claimed reliance

on any documents filed with the SEC and thus may not bring suitunder section 18 of the 1934 Act. Moreover, they have allegedmaterially false statements which were never contained in a fileddocument and which are thus exempt from section 18 liability.Appellants should, therefore, be able to maintain a cause of actionunder section 10(b), the only true relief available to them. We holdthat appellants may pursue their claims under that section,regardless of whether an alternative remedy is available to themunder some other section of the 1933 or 1934 Act.

We hold further that appellants may rely on a remedyimplicit under section 10(b) of the 1934 Act, irrespective of

the possibility of overlap between that implied cause ofaction and express remedies provided by other sections ofthe securities laws.

Financial Industrial Fund Inc v. McDonnell DouglasCorporation (1973)

covering a period of at least twelve months beginning after theeffective date of the registration statement, then the right of

recovery under this subsection shall be conditioned on proof thatsuch person acquired the security relying upon such untruestatement in the registration statement or relying upon theregistration statement and not knowing of such omission, but suchreliance may be established without proof of the reading of theregistration statement by such person.

Section 11(a), 15 U.S.C. 77k(a) (1976).

FACTS: Financial, a mutual fund or management investmentcompany, bought 80,000 shares of the common stock of Douglasafter research and a news report that United Airlines hadpurchased another $220 million of aircraft jets from Douglas.Douglas is a company engaged in the manufacture of aircraft, andof various vehicles and systems for the space program. The nextday, Douglas announced to the press that earnings for the last six

months period were 12 cents per share. Financial knew that thefigure was far below the prevailing estimates. Financial sold the80,000 shares at a price substantially lower than the purchaseprice and filed an action for damages. Douglas was ordered to pay$712,500.00.

Record shows that the company was experiencing delays indeliveries by its suppliers causing delay in production and deliveryof airplanes, in addition to labor problems. Existing debentureswere converted to common stocks and new debentures wereissued. In view of the losses of several millions of dollars, asubstantial inventory write down was required further reducing the

six months earnings from 49 to 12 cents. The public announcementwas made and the market price of Douglas stock declined $2.75per share to $76.00. By the time plaintiff had sold its shares ofDouglas, the stock closed at $64.50 per share.

Financial claims that the special earnings statement should havebeen issued some days earlier prior to its purchase and claimsdamages for the failure to disclose relevant information.

ISSUES:1. W/N the timing of the special statement on earnings was not

proper? NO

2. W/N the silence of defendant at the dates of the stockpurchases by Financial gave rise to a cause of action? NO

HELD: The silence or the timing is a matter which requires theexamination of how the decisions were arrived at by corporatefinancial specialists and corporate management. The decision ofthe officers or directors, and the corporate decision of the companyto issue an earnings statement on other than the customary datefor such statements, and the timing of such statement was amatter of discretion. The serious losses and the large resultant



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Securities Regulations Cases 2010-2011Atty. Francis Limannouncing the SASOL II contract was due to a good faith effort tocomply with the terms of the "embargo" contract. The district courtalso concluded that there was no valid claim under the New YorkStock Exchange Listing Agreement and Company Manual due tothe lack of evidence that Fluor intended to defraud investors.The third claim, relating to Fluor's alleged misstatement andomission of material facts, was declared meritless because there

was no showing that State Teachers or any other stockholder reliedon Fluor's statements to the security analyst at Merrill Lynch andtheir failure to tell the reporter that the SASOL II contract mightexplain the recent activity in Fluor stock did not exhibit an attemptto defraud investors.

The final two claims disposed of by the district court were that Fluortipped material inside information regarding the SASOL II contractto Manufacturers and that Manufacturers thereafter traded in Fluorstock without disclosing this information. The district court foundfor defendants because it found that the proof presented did notindicate that Manufacturers received any inside information; rather,

the evidence showed that Manufacturers learned only that Fluormight be awarded the SASOL II contract, a fact known to otherinvestors.

ISSUES:

(1) whether Fluor may have breached a duty to discloseinformation regarding the SASOL II contract or to halt trading in theFluor stock;(2) whether State Teachers has a right of action for violation of theNew York Stock Exchange Listing Agreement and Company Manualbased on Fluor's failure to notify the Exchange of the SASOL II

contract despite rumors in the marketplace;(3) whether Fluor may have made statements whichmisrepresented or omitted material facts.(4) whether Fluor may have tipped inside information of the signingof the SASOL II contract to Manufacturers who in turn traded withknowledge of this inside information.

HELD:

(1) NO. Under all the circumstances, and particularly in light of itsagreement with SASOL to make no announcement until March 10,Fluor was under no obligation to disclose the contract. There is noevidence that the rumors affecting the volume and price of Fluorstock can be attributed to Fluor. Fluor responded to inquiries fromanalysts between March 4 and March 6 without comment on theveracity of the rumors and without making any material

misrepresentation. Moreover, even if the facts here give rise to aduty to disclose, there is no showing of any intent to defraudinvestors or any conduct which was reckless in any degree. Fluor'sactions between March 3 and March 6 were made in a good faitheffort to comply with the publicity embargo.

(2) NO. New York Stock Exchange's Company Manual states that acorporation should be prepared to make an immediateannouncement of important corporate developments if unusualmarket activity occurs prior to its announcement. However, alegislative intent to permit a claim for violation of the Exchange'sCompany Manual rules regarding disclosure of corporate news

cannot be inferred. At this point, a violation of the rules of theexchange do not give rise to a private right or cause of action.

(3) NO. There was not enough evidence to prove any of theseclaims.

(4) YES. This claim alleges that on February 24 Fluorrepresentatives told Winterfeldt, a security analyst atManufacturers, that the SASOL agreement with Fluor was imminentand, further, that on March 4 and March 5 Winterfeldt met with twoinvestment groups at Manufacturers who thereafter purchasedlarge amounts of Fluor stock.

The plaintiffs have presented sufficient evidence to raise an issueof fact over the non-public nature of the information givenWinterfeldt. The fact that Fluor was under consideration for theSASOL project was not public information. This testimonycontravenes the conclusion that SASOL's consideration of Fluor forthe project could be easily gleaned from publicly availableinformation.



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Securities Regulations Cases 2010-2011Atty. Francis LimTipping liability requires that the tipped information be materialand that the tipper-defendant act with scienter (intent to commitwrong). Central to the issue of materiality is "whether the tippedinformation, if divulged to the public, would have been likely toaffect the decision of potential buyers and sellers." Here, it is likelythat even the fact that Fluor was bidding on a billion dollar projectlike SASOL would be significant information for the reasonable

investor. Fluor's practice of not announcing the projects on which ithas bid underscores the importance of such information.

In order to establish liability of Manufacturers, there would have tobe evidence shown in order to pove intent of wrongdoing.Therefore, summary judgment was improper in this case. Affirmedin part; reversed in part; remanded for further proceedingsconsistent with this opinion.

Mitchell v. Texas Gulf Sulphur Company

Facts: Texas Gulf Sulphur (TGS) is a company engaged in

extensive mineral exploration. It detected a promising anomaly ona plot of land known as Kidd 55 segment. It made several drillingoperations and encountered substantial copper mineralization. TGSsought to suppress the nature and extent of its discovery. On April12, an official TGS statement was published saying that they couldnot responsibly conclude that a commercial ore body existed andthat no calculations as to the size or grade of ore could be madewithout further drilling. On April 13, a reporter from a Canadianmining journal, The Northern Miner, visited the Kidd-55 mining site.The article detailing that visit was published April 16 and indicatedthat this must be recorded as one of the most impressive drillholes completed in modern times.

Reynolds, Mitchell and the Stouts who were stockholders of TGSsold their TGS stock after hearing of the April 12 release butbefore becoming aware of the April 16 release. Reynolds, Mitchelland the Stouts instituted an action to recover damages from TGSfor violations of Sec. 10 (b) of the Securities Exchange Act of 1934and Rule 10b-5 promulgated thereunder.

Issue: W/N TGS should be held liable for violation of Rule 10b-5.

Ruling: YES. The court found the April 12 release "inaccurate,misleading and deceptive with respect to material matters." Rule10b-5 is plain, concise and unambiguous. It provides as follows: Itshall be unlawful for any person, directly or indirectly, by the use ofany means or instrumentality of interstate commerce, or of themails or of any facility of any national securities exchange (1) Toemploy any device, scheme, or artifice to defraud, (2) To make

any untrue statement of a material fact or to omit to state amaterial fact necessary in order to make the statementsmade, in the light of the circumstances under which theywere made, not misleading, or (3) To engage in any act,practice, or course of business which operates or would operate asa fraud or deceit upon any person, in connection with the purchaseor sale of any security.

When TGS undertook to deny and clarify rumor and fact, they werebound to accurately depict the situation as they then knew it. Thefull magnitude may yet have been a mystery, but armed with thedata available on the 12th, TGS was in a position to unveil the then

known dimensions and drilling data of their discovery. Having failedto accurately portray what they knew, and commenting that theinformation was current when in fact it was sorely outdated; TGSmisrepresented the facts of the Kidd 55 discovery.

HERMAN MACLEAN v. E. HUDDLESTON456 U.S. 375, Argued Nov. 9, 1982, Decided Jan. 24, 1983

FACTS:

Texas International Speedway, Inc. ("TIS"), filed a registrationstatement and prospectus with the Securities and ExchangeCommission offering a total of $4,398,900 in securities to the

public. The proceeds of the sale were to be used to finance theconstruction of an automobile speedway. As purchasers, Huddleston and Bradley instituted a class action in

the United States District Court for the Southern District of Texason behalf of themselves and other purchasers of TIS securities.

The complaint alleged violations ofSection 10(b) of theSecurities Exchange Act of 1934 ("the 1934 Act") and SEC Rule10b-5 promulgated thereunder. Section 10 makes it unlawful for"any" person to use "any" manipulative or deceptive device orcontrivance in the purchase or sale of "any" security.



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Securities Regulations Cases 2010-2011Atty. Francis Lim Plaintiffs sued most of the participants in the offering, including the

accounting firm, Herman & MacLean, which had issued an opinionconcerning certain financial statements and a pro forma balancesheet that were contained in the registration statement andprospectus.

Plaintiffs claimed that the defendants had engaged in a fraudulentscheme to misrepresent or conceal material facts regarding the

financial condition of TIS, including the costs incurred in buildingthe speedway. Plaintiffs, as purchasers of the securities allege thatthey were defrauded by misrepresentations in a registrationstatement and prospectus for certain securities.

After a three-week trial, the District Judge submitted the case tothe jury on special interrogatories relating to liability. The judgeinstructed the jury that liability could be found only if thedefendants acted with scienter.

In the trial court, judgment was entered on the basis of a juryverdict in plaintiffs' favor.

ISSUES/HELD:

1. W/N purchasers of registered securities who allege theywere defrauded by misrepresentations in a registrationstatement may maintain an action under Section 10(b)notwithstanding the express remedy for misstatements andomissions in registration statements provided by Section 11of the Securities Act of 1933CA HELD:A cause of action may be maintained under 10(b) for fraudulentmisrepresentations and omissions even when, as in this case, thatconduct might also be actionable under 11 of the Securities Act of1933 (1933 Act), which expressly allows purchasers of a registered

security to sue certain enumerated parties who play a direct role ina registered offering when false or misleading information isincluded in a registration statement.

HIGHER COURT HELD:YES. Affirms CADOCTRINE:The availability of an express remedy under Section11 of the 1933 Act does not preclude defrauded purchasers ofregistered securities from maintaining an action under Section10(b) of the 1934 Act.

SEC. 11, 1933 ACT SEC. 10 (B), 1934 ACTAllows purchasers of a registeredsecurity to sue certainenumerated parties in aregistered offering when false ormisleading information is includedin a registration statement

Note: Section was designed toassure compliance with thedisclosure provisions of the Act byimposing a stringent standard ofliability on the parties who play adirect role in a registered offering.

Note: Purpose of the 1933 Act: toprovide greater protection topurchasers of registeredsecurities

"catchall" antifraud provision

Although limited in scope, Section11 places a relatively minimalburden on a plaintiff.

If a plaintiff purchased a securityissued pursuant to a registrationstatement, he need only show amaterial misstatement oromission to establish hisprimafacie case. Liability against theissuer of a security is virtuallyabsolute, even for innocent

misstatements

Requires a plaintiff to carry aheavier burden to establish acause of action.

Most significantly, he mustprove that the defendant actedwith scienter, i.e., with intentto deceive, manipulate, ordefraud.

Action must be brought by apurchaser of a registeredsecurity, must be based onmisstatements or omissions in aregistration statement, and canonly be brought against certainparties

Fr. Footnote:

Can be brought by a purchaseror seller of"anysecurity"against "anyperson" who hasused "anymanipulative ordeceptive device orcontrivance" in connection withthe purchase or sale of asecurity



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Securities Regulations Cases 2010-2011Atty. Francis LimA Section 11 action can bebrought only against the issuer,its directors or partners,underwriters, and accountantswho are named as havingprepared or certified theregistration statement.

Since Section 11 and Section 10(b) address different types ofwrongdoing, there is no reason to carve out an exception to Section10(b) for fraud occurring in a registration statement just becausethe same conduct may also be actionable under Section 11.

While some conduct actionable under Section 11 may also beactionable under Section 10(b), it is hardly a novel proposition thatthe Securities Exchange Act and the Securities Act prohibit some ofthe same conduct.

From Footnote: Certain individuals who play a part in preparing theregistration statement generally cannot be reached by a Section 11action. These include corporate officers other than those specified

in 15 U.S.C. 77k(a), lawyers not acting as "experts," andaccountants with respect to parts of a registration statement whichthey are not named as having prepared or certified. If, as Herman& MacLean argues purchasers in registered offerings were requiredto rely solely on Section 11, they would have no recourse againstsuch individuals even if the excluded parties engaged in fraudulentconduct while participating in the registration statement. Theexempted individuals would be immune from federal liability forfraudulent conduct even though Section 10(b) extends to "anyperson" who engages in fraud in connection with a purchase or saleof securities.

2. W/H persons seeking recovery under Section 10(b) mustprove their cause of action by clear and convincingevidence rather than by a preponderance of the evidence.

CA HELD: CLEAR AND CONVINCING EVIDENCE

HIGHER COURT HELD: PREPONDERANCE OF EVIDENCE

The Court of Appeals held that plaintiffs in a Section 10(b) suit mustestablish their case by clear and convincing evidence. The Court of

Appeals relied primarily on the traditional use of a higher burden ofproof in civil fraud actions at common law.

However, in a typical civil suit for money damages, plaintiffs mustprove their case by a preponderance of the evidence

Further, the antifraud provisions of the securities laws are notcoextensive with common law doctrines of fraud.

An important purpose of the federal securities statutes was torectify perceived deficiencies in the available common lawprotections by establishing higher standards of conduct in thesecurities industry.

Where Congress has not prescribed the appropriate standard ofproof and the Constitution does not dictate a particular standard,the higher court prescribed one, as it once did in another case Apreponderance-of-the-evidence standard allows both parties to"share the risk of error in roughly equal fashion." Any otherstandard expresses a preference for one side's interests.

Other Facts/Footnotes: TIS did not meet with success, and the corporation filed a petition

for bankruptcy. A pro forma balance sheet is one prepared on the basis of

assumptions as to future events. The judge stated that reckless behavior could satisfy the scienter

requirement. While this instruction reflects the prevailing view ofthe courts of appeals that have addressed the issue, we haveexplicitly left open the question whether recklessness satisfies thescienter requirement.

The Fifth Circuit's adoption of a clear-and-convincing-evidencestandard in a private action under Section 10(b) appears to be

unprecedented. Other courts have employed a preponderance-of-the-evidence standard in private actions under the securities laws. Sections 3 and 4 of the 1933 Act exclude a wide variety of

securities (such as those issued by the government and certainbanks) and transactions (such as private ones and certain smallofferings) from the registration requirement.

PROXY SOLICITATION:



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Securities Regulations Cases 2010-2011Atty. Francis LimVirginia Bankshares Inc., v. Sandberg

Facts: First American Bankshares, Inc. (FABI) began a freeze-outmerger in which First American Bank of Virginia (Bank) would bemerged into Virginia Bankshares, Inc., (VBI). The Bank approved aprice of $42 for the shares of minority stockholders who would losetheir interests in case of merger. The directors likewise solicited

proxies for voting and urged that the proposal be adopted as theyhad approved the plan for it would give the minority shareholdersto achieve a high value.

While most minority stochholders gave the proxies, Sandberg didnot and sued for damages alleging that soliciting proxies was donein violation of 14(a) and Rule 14a-9. Both the District Court andthe Court of Appeals ruled in her favor. Hence the case at bar.

Issue:(1) W/N a statement couched in conclusory terms explaining the

directors reasons for approving a corporate action can be

materially misleading(2) W/N causation of damages compensable under Rule 14 can beshown by a member of minority stockholders whose votes are notrequired to authorize the corporate action

Held:(1) YES. A fact is considered to be material if there is a substantial

likelihood that a reasonable shareholder would consider itimportant in deciding how to vote. Since directors usually haveknowledge and expertness exceeding that of a normal investor, ashareowner faced with a proxy request would naturally think itimportant to know the directors beliefs about the course they

recommend. Reasons for directors recommendation or statementsof belief are matters or corporate record subject to documentationto be supported or attacked by evidence. Conclusory terms in acommercial context are also understood to rest on factual basis.Provable facts either furnish good reasons to make the conclusoryjudgment or count against it.

In the case at bar, Sandberg presented evidence based on facts toshow that the directors statement was misleading about thestocks value and the directors belief. While the proxy statement

described the $42 price as above the book value and market priceof the share; the evidence showed the appreciated value of theBanks real estate holdings. Likewise, the market was dominated byFABI, which valued its share in excess of $60, a fact which wasnever disclosed. They also failed to disclose that if they did notsupport the proposal, they would have no expectation to keep theirseats as directors.

(2) NO. To allow shareholders whose votes are not required by law tobring an implied private right would be to expand the scope ofplaintiffs authorized to bring actions. In recognizing a private right,it is necessary to determine whether Congress really intended toprovide a private remedy. The breadth of right once recognized,should not, as a general matter, be allowed to grow beyond thescope congressionally intended.

(3) Sandberg argues that the proxy statement was the essential linkbetween the directors proposal and the merger as it was a meansto save the merger from being void for conflict of interest. Thecourt rejects this argument because VBI and FABI would have been

unwilling to proceed with the merger to avoid the minoritystockholders ill will. Likewise, even if it was misleading, the Virginiastatute states that a minority vote induced by such solicitationwould not suffice to render the merger invulnerable to later attackon the ground of conflict. The statute bars a shareholder to void atransaction tainted by a directors conflict if the minorityshareholders ratified the transaction following the disclosure ofmaterial facts of the transaction and the conflict. And even if thematerials facts and the conflict werent disclosed, the minorityvotes were inadequate to ratify the merger.

TSC Industries, Inc. v. Northway, Inc.

Facts:- National Industries Inc. purchased 34% of TSCs votingsecurities from TSCs founder, Charles Schmidt, andprincipal holder and his family

- Charles Schmidt and his son resigned from TSCs board ofdirectors, and 5 National nominees were placed on theboard, including Nationals president and executive vice-president, who became chairman of the board and chairmanof TSC;s executive committee, respectively



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Securities Regulations Cases 2010-2011Atty. Francis Lim- TSC board approved a proposal to liquidate and sell all of

TSCs assets to National by exchanging TSC common andpreferred stock for National preferred stock and warrants topurchase National common stock

- TSC and National then issued a joint proxy statement totheir shareholders recommending approval of the proposal.

- The proxy solicitation was successful, TSC was placed in

liquidation and dissolution, and the exchange of shares waseffected- Northway Inc., a TSC shareholder, brought this action for

damages, restitution, and other relief against TSC andNational, claiming that their joint proxy statement wasincomplete and materially misleading in violation of 14(a)and Rule 14a-97 in that it omitted material facts relating tothe degree of National's control over TSC:

1. It failed to disclose the positions in TSC held by National'spresident and executive vice-president and to file a reportwith SEC by National and TSC indicating that National "maybe deemed a parent' of TSC"

2. failed to disclose certain unfavorable information about theproposal contained in a letter from an investment bankingfirm whose earlier favorable opinion of the proposal wasreported in the proxy statement, and also recent substantialpurchases of National's common stock, suggestive ofmanipulation, by National and a mutual fund

Issue: W/N the joint proxy statement of TSC and National wasincomplete and materially misleading (W/N the joint proxystatement violates Rule 14a-9)

Held: No! None of the omissions claimed to have been in violation

of Rule 14a-9 were materially misleading1. These omissions were of questionable materiality and inappropriatefor summary judgment because other disclosures within the proxymaterials could have led shareholders to similar conclusions aboutthe degree of control National exercised over TSC. Furthermore,

7Rule 14a-9, promulgated under 14(a) of the Securities Exchange Act of1934, provides that no proxy solicitation shall be made "which . . . is falseor misleading with respect to any material fact, or which omits to state anymaterial fact necessary in order to make the statements therein not falseor misleading."

there was already a genuine issue of fact as to whether Nationalwas really in control of TSC at the time of the proxy solicitationanyway.

2. The two facts which National omitted with respect to the fairness ofthe transaction were the statements of an investment banking firminvolved in the deal and the purchase of Nationals stock by a

mutual fund. The investment bank rendered an opinion that thehigh redemption price of Nationals stock was a substantialpremium over the current market value of TSCs shares. The banklater revised its opinion when it discovered that the warrantsforNational stock were being offered at a lower price than expected.But since the bank still felt the transaction was fair and that TSCshareholders were still receiving a premium. This omission isimmaterial.

3. Northway accused National ofcollusionto manipulate marketprices by engaging in a series of transactions with Madison Fund,Inc., a mutual fund. One of Nationals directors also had a seat on

Madisons board, and in the period prior to Nationals acquisition ofTSC, Madisons purchases of Nationals common stock accountedfor 8.5% of all reported transactions for the companys securities.But Northway failed to demonstrate evidence of any unlawfulmanipulation at trial. National had no duty to disclose allinformation which might suggest market manipulation, but ratheronly to be honest in its disclosures.

Ratio:- General Standard of Materiality Test: an omitted fact is

material if there is a substantial likelihood that a reasonableshareholder would consider it important in deciding how to

vote- A substantial likelihood that, under all the circumstances,the omitted fact would have assumed actual significance inthe reasonable shareholder's deliberations

- Materiality is a mixed question of fact and law

TENDER OFFERS:Osmena v. SSS

http://en.wikipedia.org/wiki/Investment_bankinghttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Warrant_(finance)http://en.wikipedia.org/wiki/Warrant_(finance)http://en.wikipedia.org/wiki/Collusionhttp://en.wikipedia.org/wiki/Collusionhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Investment_bankinghttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Warrant_(finance)http://en.wikipedia.org/wiki/Collusionhttp://en.wikipedia.org/wiki/Securities


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Securities Regulations Cases 2010-2011Atty. Francis LimFacts: SSS owned 187,847,891 common shares with Equitable PCIBank. SSS wanted to liquefy its long-term investments because ofthe fact that the shares have substantially declined in value. BDOwanted to acquire the shares so it entered with SSS an agreementfor the sale and purchase of the said shares at P43.50 per share.

By virtue of the Share Purchase Agreement (SPA), the partiesmutually agreed to the purchase by the BDO Capital and the saleby SSS of all the latters EPCIB shares at the closing date at thespecified price of P43.50 per share or a total of P8,171,383,258.50.Under the said agreement the sale of shares should be through apublic bidding under the Swiss Challenge format, which is one ofthe bidders is given the option or preferential right to match thewinning bid. In this case result of the bidding is subject to the rightof BDO Capital to match the highest bid.

Petitioners assert, in gist, that a public bidding with a SwissChallenge component is contrary to COA Circular No. 89-296 andpublic policy which requires adherence to competitive public

bidding in a government-contract award to assure the best pricepossible for government assets. Accordingly, the petitioners urgethat the planned disposition of the Shares through a SwissChallenge method be scrapped. As argued, the Swiss Challengefeature tends to discourage would-be-bidders from undertaking theexpense and effort of bidding if the chance of winning is diminishedby the preferential right to match clause.

Pending consideration of the petition, supervening events andcorporate movements transpired that radically altered the factualcomplexion of the case. BDO made public its intent to merge withEPCIB. Under what BDO termed as Merger of Equals, EPCIB

shareholders would get 1.6 BDO shares for every EPCIB share. GSISpublicly announced receiving from an undisclosed entity an offer tobuy its stake in EPCIB 12% of the banks outstanding capital stock at P92.00 per share.

SM InvestmentsCorporation, an affiliate of BDO and BDOCapital, commenced through the facilities of the PSE and pursuantto R.A. No. 8799 a mandatory tender offer (Tender Offer) coveringthe purchase of the entire outstanding capital stock of EPCIBat P92.00 per share.

ISSUE: Did the tender offer made by BDO render the issue mootand academic

DECISION: YES, the case is now moot in view of the SM-BDOGroups Tender Offer at P92.00 @ unit share, for the subject EPCIBcommon shares, inclusive of the SSS shares subject of the petition.

For perspective, a tender offer is a publicly announced intentionby a person acting alone or in concert with other persons to acquireequity securities of a public company, i.e., one listed on anexchange, among others. The term is also defined as an offer bythe acquiring person to stockholders of a public company for themto tender their shares therein on the terms specified in the offerTender offer is in place to protect the interests of minoritystockholders of a target company against any scheme that dilutesthe share value of their investments. It affords such minorityshareholders the opportunity to withdraw or exit from the companyunder reasonable terms, a chance to sell their shares at the same

price as those of the majority stockholders.As a necessary consequence of the BDO-EPCIB merger which sawEPCIB being absorbed by the surviving BDO, have beentransferred to BDOand converted into BDO common sharesunder the exchange ratio set forth in the BDO-EPCIB Plan ofMerger. As thus converted, the subject Shares are no longer equitysecurity issuances of the now defunct EPCIB, but those of BDO-EPCI, which, needless to stress, is a totally separate and distinctentity from what used to be EPCIB. In net effect, therefore, the187.84 Million EPCIB common shares are now lost or inexistent.And in this regard, the Court takes judicial notice of thedisappearance of EPCIB stocks from the local bourse listing.

Instead, BDO-EPCI Stocks are presently listed and being traded inthe PSE.

As to render the fulfillment of any of the obligations that each mayhave agreed to undertake under either the Letter-Agreement, theSPA or the SwissChallenge package legally impossible. When theservice has become so difficult as to be manifestly beyond thecontemplation of the parties, total or partial release from aprestation and from the counter-prestation is allowed.



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Securities Regulations Cases 2010-2011Atty. Francis LimCemco Holdings inc. v. national life insurance company ofthe Philippines(PLS READ THE SRC ON MANDATORY TENDER OFFER)

FACTS: Union Cement Corporation (UCC) is a publicly listedcorporation and has two principal stockholders. The principalstockholders and their percentage of stock ownership are asfollows:

Union Cement Holdings corporation (UCHC) 60.51%Cemco holdings 17.03%

On the other hand, majority of UCHCs stocks (amounting to 51%)were owned by Bacnotan Consolidated Industries (BCI) and Atlascement corporation (ACC) in the following proportions:

BCI 21.31%ACC 29.69%

Cemco owned 9% of UCHC

In a disclosure letter dated july 2004, BCI and ACC informed thePhilippine Stock exchange that they were going to sell their sharesin UCHC to Cemco. This sale by the two corporations would meanthat Cemco would aquire 53% of UCC through direct and indirectownership. The computation is as follows (not important unlessyou want to know how the acquisition of BCI and ACC wouldamount to 53% control over UCC):

60% (control of cemco over in UCHC) = 9%(control of Cemco inUCHC) + 51%(control of cemco in UCHC acquired from BCI and

ACC)36% (indirect ownership of Cemco over UCC) = 60% (control ofcemco over UCHC) multiplied by 60% (Control of UCHC over UCC)53% (total control of cemco over UCC) = 36% (indirect control ofcemco over UCC) + 17% (direct control over UCC)

When PSE inquired with the SEC if such transaction (sale of the BCIand ACC shares to Cemco) would require a mandatory tenderoffer as required by section 19 of the SRC, the SEC answered inthe NEGATIVE.

Aggrieved by the sale , National life insurance company, a minoritystockholder, contends that the mandatory tender offer rule isrequired under the circumstances. Hence it filed a complaint withthe SEC which reversed it former opinion and ruled that amandatory tender offer is required.

CEMCO raises the following ISSUES:1. Jurisdiction of the SEC to require a mandatory tender offer2. W/N a mandatory tender offer is required for an indirect

acquisition of 36% of UCC through the purchase of UCHC shares3. W/N the reversal of the SEC can be applied retroactively

HELD:1. SEC has jurisdiction. It is the SECs duty to make sure that the SRC

is enforced. Pursuant to this, it may promulgate rules andregulations that are consistent with the SRC. Hence it may requireCemco to make a tender offer.

2. Under the SRC, when a person seeks to acquire at least 35% of alisted corporation or if less than 35%, the acquisition would amountto ownership of at least 51% of the corporation, he is required tomake a mandatory tender offer. The SEC ruled that this applieseven though ownership was acquired indirectly. In this case, Cemcoacquired 36% indirect ownership of UCC through the acquisition of60% of UCHC, a holding company of UCC.

3. The Ruling can apply retroactively. The answer of the SEC statingthat a mandatory tender offer was not required was merely anadvisory opinion since interested parties were not given a chanceto be heard. Because of this its ruling based on the complaint of

national life insurance company may apply retroactively.Notes:Tender offer a publicly announced intention by a person actingalone or in concert with other persons to acquire equity securitiesof a public company.Public corp listed company or corp with assets excedding 50million and with 200 or more stockholders, at least 200 of themholding not less than 100 shares of such company.



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Securities Regulations Cases 2010-2011Atty. Francis LimTENDER OFFER BECOMES MANDATORY WHEN the person or groupof persons acquires at least 35% of the public corp. in one singlepurchase or in a span of 12 months (creeping acquisition). It alsobecomes mandatory when the acquistion is less than 35% but theacquisition would result to ownership of at least 51% of the publiccorp.

Purpose of the mandatory tender offer the purpose is to protectminority stockholders. How are they protected? They are protectedby giving them a chance to dispose of their shares at prices thatare usually offered ONLY to majority stockholders.

For example: A is a public corp., B owns 60% of the shares of A, Cowns only 10%, D owns 30% ,E is a person desiring to takecontrol of A.

In this example, the logical move of E would be to make an offer toB to buy all his shares. In doing so, he can acquire 60% of Aimmediately. Because of this, B can sell his shares at any price he

desires because even if E were to buy the shares of C and D, hewould not be able to gain control of A. This places C and D at adisadvantage.This is why the law imposes a mandatory tender offer. Because ofthe SRC, if E desires to acquire at least 35% of A, he is mandated tooffer the purchase of shares to C and D at the same terms andconditions as those given to B. This way, the minority stockholders,C and D, will be given a chance to dispose of their shares.Piper vs. Chris Craft Industries

Facts: Chris Craft Industries, Inc. (Chris) attempted to securevoting control of Piper through cash and exchange tender offers for

Piper common stock. Chriss takeover attempt failed and BangorPunta Corp, with the support of Piper family, obtained control ofPiper. Chris brought suit under Section 14(e) of the SEC act of1934 and Rule 10b-6, alleging Bangor Punta achieved control of thetarget corporation as a result of violations of the federal securitieslaws by the Piper family, Bangor Punta and the underwriter FirstBoston Corp, who together successfully repelled Chriss takeoverattempt.

In 1968, Chris began making cash purchases of Piper commonstock and acquired 13% of Pipers outstanding shares. Chris thenmade a cash tender offer of 300k of Pipers share which waseventually declined by Piper. In order to obtain the additional 17%of Piper stock needed for control, Chris decided to make anexchange offer of Chriss securities for Piper Stock. Chris filed aregistration statement and preliminary prospectus with the SEC.Pending the approval, Chris made cash purchases on the openmarket until Chris was expressly warned by SEC officials that suchpurchases when made during the pendency of an exchange offer,violated SEC Rule 10-b6. Chris complied with the directive of SECand cancelled all outstanding orders for purchase of Pipers stock

While exchange offer of Chris was in registration, Piper entered intoagreement with Bangor Punta (Bangor) to exchange Pipers 31%stockholdings in Piper for Bangors securities. Pending effectivedate of the exchange, Bangor purchased 120k shares of Piper stock

in privately negotiated, off-exchange transactions from three largeinstitutional investors. All three purchases were made afer theSECs issuance of a release announcing proposed Rule 10b-13, aprovision, which would expressly prohibit a ender offeror frommaking purchases of the target companys stock during thependency of an exchange offer. Bangor officials, although aware ofthe release at the time of the three off-exchange purchases, madeno attempt to secure an exemption for the transactions from theSEC, as provided by Rule 10b-6(f). The SEC, however, took noaction concerning these purchases as it had with respect to Chrissopen market transactions.

After completion of the exchange offers and other purchases togain control over Piper, the final tally in the nine-month take overshowed that Bangor held over 50% and Chris held 42%.Beforeeither side had achieved control, the contest moved from themarketplace to the courts. Chris filed action for damages andinjunctive relief regarding the block purchases which is in violationof 10b-6.



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Securities Regulations Cases 2010-2011Atty. Francis LimIssue: W/N Chris, in his capacity as a tender offeror, have thestanding to sue for damages arising from an implied: cause ofactions under Section 14(e) of the Securities Act of 1934.

Held: NO. Section 14(e) makes unlawful any fraudulent, deceptiveor manipulative acts or practices, inc connection with any tenderoffer. Or any solicitation of security holders in opposition to or in

favor of any such offer. Rule 10b-6 also prohibits issuers whosestock is in the process of distribution from market tampering bypurchasing stock or stock rights until the distrubtion has beencompleted.

However, Chris has no standing to sue for damages on account ofthe asserted Rule 10b-6 violations by Piper/Bangor, since Chriscomplaint is not the price paid for the target companys shares wasinfluenced by the rule 10b-6 violations, but that the opportunity togain control of the target company was lost by virtue of the saidviolations. Thus, Chris complaint does not implicate the concerns ofRule 10b-6, which is aimed at maintaining an orderly market for thedistribution of securities from manipulative influences.

Note that the legislative history shows that the intent of Section14(e) was the protection of the investors who are confronted withtender offer. Congress intended to regulate takeover bidders, whohad previously operated covertly, in order to protect shareholdersof target companies; tender offerors, the classs regulated by thestatute, were not the intended beneficiaries of the legislation.

Chris, as one of the tender offerors, was not one of the class forwhose special benefit Section 14(e) was enacted

Rondeau v. Mosinee Paper Corporation

Facts: Petitioner Rondeau made large purchases of respondent'scommon stock. He had acquired 40,413 shares of respondent'sstock, which constituted more than 5% of those outstanding. Hewas therefore required to comply with the disclosure provisions of

the Williams Act, by filing a Schedule 13D with respondent and theSecurities and Exchange Commission within 10 days. That formwould have disclosed, among other things, the number of sharesbeneficially owned by petitioner, the source of the funds used topurchase them, and petitioner's purpose in making the purchases.

Three months after the statutory filing time, petitioner filed hisdisclosure schedule. Respondent initiated this suit in the UnitedStates District Court alleging that petitioner was engaged in ascheme to defraud respondent and its shareholders in violation ofthe securities laws. Respondent prayed for an injunction prohibitingpetitioner and his codefendants from voting or pledging their stockand from acquiring additional shares, requiring them to divestthemselves of stock which they already owned, and for damages.

Petitioner moved for summary judgment. He readily conceded thathe had violated the Williams Act, but contended that the violationwas due to a lack of familiarity with the securities laws and thatneither respondent nor its shareholders had been harmed. The

District Court granted petitioner's motion for summary judgment,having found no material issues of fact regarding petitioner's lackof willfulness in failing to make a timely filing and no basis in therecord for disputing petitioner's claim that he first considered thepossibility of obtaining control of respondent sometime after hediscovered his filing obligation. It concluded that respondent hadsuffered no cognizable harm from the late filing and that this wasnot an appropriate case in which to grant injunctive relief.

The Court of Appeals reversed, concluding that respondent washarmed by having been delayed in its efforts to respond topetitioner's potential to obtain control of the company but that, in

any event, respondent was not required to show irreparable harmas a prerequisite to obtaining permanent injunctive relief, since asthe securities' issuer, respondent was in the best position to assurethat 13(d)' filing requirements were being timely and fullycomplied with.

ISSUE: W/N a showing of irreparable harm is necessary for aprivate litigant to obtain injunctive relief in a suit under 13(d) ofthe Securities Exchange Act of 1934 as added by 2 of the WilliamsAct.



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Ratio: YES. A showing of irreparable harm, in accordance withtraditional principles of equity, is necessary before a private litigantcan obtain injunctive relief based upon 13(d) of the SecuritiesExchange Act.

The purpose of the Williams Act is to insure informed decisionmaking by shareholders, and not to "provide a weapon formanagement to discourage takeover bids or prevent largeaccumulation of stock...

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