15 U.S.C. § 77k — Civil liabilities on account of false registration statement

submitted 93 years ago by ch. 38 to r/title-15-COMMERCE-AND-TRADE · 1,738 words · no verdicts yet

in plain englishAI-generated · not legal advice

A registration statement with a false or misleading fact lets buyers sue the people responsible for it. Signers, directors, experts named in it, and underwriters can all be sued. Courts limit how much money underwriters must pay.

(a) Who can sue, and who can be sued If any part of a registration statement was untrue or left out a needed fact when it took effect, anyone who bought the security may sue — unless the buyer already knew about the problem at the time of purchase. The buyer can sue, at law or in equity, in any competent court: (1) everyone who signed the registration statement; (2) everyone who was a director (or performed a similar function) or a partner in the issuer when that part of the statement was filed; (3) everyone who, with their consent, is named in the statement as being or about to become a director, similar officer, or partner; (4) any accountant, engineer, appraiser, or other expert who, with their consent, is named as having prepared or certified any part of the statement, or any report or valuation used in it — but only as to the part that purports to be theirs; and (5) every underwriter of the security. If the buyer purchased after the issuer made a 12-month earnings statement available (covering a period starting after the registration statement took effect), the buyer must prove they relied on the false statement, or relied on the registration statement without knowing about the omission — though this reliance does not have to be proven by showing the buyer actually read the statement. (b) Defenses that clear a person of liability No one except the issuer is liable under (a) if they prove one of the following: (1) before the relevant part of the registration statement took effect, they had resigned (or taken the legal steps available to resign) from, or ceased or refused to act in, every role the statement described them as holding or agreeing to hold, and had told the SEC and the issuer in writing that they had done so and would not be responsible for that part of the statement; or (2) if that part became effective without their knowledge, that as soon as they learned of it they promptly did what (1) describes and also gave reasonable public notice that the statement had become effective without their knowledge; or (3) that they had, after reasonable investigation, reasonable grounds to believe, and did believe, the statements were true and nothing required was left out — with different standards depending on the part of the statement: (A) for parts not based on an expert's or a public official's work, reasonable investigation and reasonable belief that it was accurate; (B) for parts based on their own work as an expert, either reasonable investigation and belief that it was accurate, or that the part didn't fairly represent their actual statement or report; (C) for parts based on someone else's expert work, no reasonable ground to believe it was false or unfair to the expert's actual statement; and (D) for parts based on an official person's statement or a public document, no reasonable ground to believe it was false or unfair. (c) Reasonableness standard In deciding what counts as "reasonable investigation" and "reasonable ground for belief" under (b)(3), the law applies the standard of a prudent person managing their own property. (d) Effective date for later underwriters If someone becomes an underwriter after the relevant part of the registration statement already took effect, then for purposes of the (b)(3) defense, that part is treated as having become effective for them at the moment they became an underwriter. (e) How much can be recovered A buyer can recover the difference between what they paid (capped at the public offering price) and, whichever produces the smallest recovery: (1) the security's value when the suit was filed, (2) the price it sold for in the market before suit was filed, or (3) the price it sold for after suit was filed but before judgment, if using that price produces smaller damages than option (1). If the defendant proves that some or all of the loss came from something other than the false statement or omission, that portion is not recoverable. No underwriter has to pay more than the total public offering price of the securities they personally underwrote and sold, unless that underwriter secretly received some extra benefit from the issuer that other underwriters didn't share proportionally. In any suit under this subchapter, the court may require a bond to cover the suit's costs, including reasonable attorney's fees, and may assess those costs against the losing side if it finds the claim or defense was without merit. (f) Joint and several liability; outside directors (1) Except as described in (2), everyone liable under this section is jointly and severally liable, and anyone who pays a judgment can seek contribution from others who would also have been liable — unless the person who paid was guilty of fraudulent misrepresentation and the other person was not. (2)(A) An outside director's liability under subsection (e) is instead determined under section 78u–4(f). (B) "Outside director" has the meaning given by SEC rule or regulation. (g) Overall cap No matter what, the total amount recoverable under this section cannot exceed the price at which the security was offered to the public.

the actual law source: uscode.house.gov ↗public domain

(a) Persons possessing cause of action; persons liable

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of 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 performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;

(3)

every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner;

(4)

every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has with his consent been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report, or valuation, which purports to have been prepared or certified by him;

(5)

every underwriter with respect to such security.

If such person acquired the security after the issuer has made generally available to its security holders an earning statement covering a period of at least twelve months beginning after the effective date of the registration statement, then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such omission, but such reliance may be established without proof of the reading of the registration statement by such person.

(b) Persons exempt from liability upon proof of issues

Notwithstanding the provisions of subsection (a) no person, other than the issuer, shall be liable as provided therein who shall sustain the burden of proof—

(1)

that before the effective date of the part of the registration statement with respect to which his liability is asserted (A) he had resigned from or had taken such steps as are permitted by law to resign from, or ceased or refused to act in, every office, capacity, or relationship in which he was described in the registration statement as acting or agreeing to act, and (B) he had advised the Commission and the issuer in writing that he had taken such action and that he would not be responsible for such part of the registration statement; or

(2)

that if such part of the registration statement became effective without his knowledge, upon becoming aware of such fact he forthwith acted and advised the Commission, in accordance with paragraph (1) of this subsection, and, in addition, gave reasonable public notice that such part of the registration statement had become effective without his knowledge; or

(3)

that (A) as regards any part of the registration statement not purporting to be made on the authority of an expert, and not purporting to be a copy of or extract from a report or valuation of an expert, and not purporting to be made on the authority of a public official document or statement, he had, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (B) as regards any part of the registration statement purporting to be made upon his authority as an expert or purporting to be a copy of or extract from a report or valuation of himself as an expert, (i) he had, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) such part of the registration statement did not fairly represent his statement as an expert or was not a fair copy of or extract from his report or valuation as an expert; and (C) as regards any part of the registration statement purporting to be made on the authority of an expert (other than himself) or purporting to be a copy of or extract from a report or valuation of an expert (other than himself), he had no reasonable ground to believe and did not believe, at the time such part of the registration statement became effective, that the statements therein were untrue or that there was an omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that such part of the registration statement did not fairly represent the statement of the expert or was not a fair copy of or extract from the report or valuation of the expert; and (D) as regards any part of the registration statement purporting to be a statement made by an official person or purporting to be a copy of or extract from a public official document, he had no reasonable ground to believe and did not believe, at the time such part of the registration statement became effective, that the statements therein were untrue, or that there was an omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that such part of the registration statement did not fairly represent the statement made by the official person or was not a fair copy of or extract from the public official document.

In determining, for the purpose of paragraph (3) of subsection (b) of this section, what constitutes reasonable investigation and reasonable ground for belief, the standard of reasonableness shall be that required of a prudent man in the management of his own property.

(d) Effective date of registration statement with regard to underwriters

If any person becomes an underwriter with respect to the security after the part of the registration statement with respect to which his liability is asserted has become effective, then for the purposes of paragraph (3) of subsection (b) of this section such part of the registration statement shall be considered as having become effective with respect to such person as of the time when he became an underwriter.

(e) Measure of damages; undertaking for payment of costs

The suit authorized under subsection (a) may be to recover such damages as shall represent the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and (1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and the value thereof as of the time such suit was brought: Provided, That if the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading, such portion of or all such damages shall not be recoverable. In no event shall any underwriter (unless such underwriter shall have knowingly received from the issuer for acting as an underwriter some benefit, directly or indirectly, in which all other underwriters similarly situated did not share in proportion to their respective interests in the underwriting) be liable in any suit or as a consequence of suits authorized under subsection (a) for damages in excess of the total price at which the securities underwritten by him and distributed to the public were offered to the public. In any suit under this or any other section of this subchapter the court may, in its discretion, require an undertaking for the payment of the costs of such suit, including reasonable attorney’s fees, and if judgment shall be rendered against a party litigant, upon the motion of the other party litigant, such costs may be assessed in favor of such party litigant (whether or not such undertaking has been required) if the court believes the suit or the defense to have been without merit, in an amount sufficient to reimburse him for the reasonable expenses incurred by him, in connection with such suit, such costs to be taxed in the manner usually provided for taxing of costs in the court in which the suit was heard.

(f) Joint and several liability; liability of outside director

(1)

Except as provided in paragraph (2), all or any one or more of the persons specified in subsection (a) shall be jointly and severally liable, and every person who becomes liable to make any payment under this section may recover contribution as in cases of contract from any person who, if sued separately, would have been liable to make the same payment, unless the person who has become liable was, and the other was not, guilty of fraudulent misrepresentation.

(2)

(A)

The liability of an outside director under subsection (e) shall be determined in accordance with section 78u–4(f) of this title.

(B)

For purposes of this paragraph, the term “outside director” shall have the meaning given such term by rule or regulation of the Commission.

(g) Offering price to public as maximum amount recoverable

In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public.

Source credit: (May 27, 1933, ch. 38, title I, § 11, 48 Stat. 82; June 6, 1934, ch. 404, title II, § 206, 48 Stat. 907; Pub. L. 104–67, title II, § 201(b), Dec. 22, 1995, 109 Stat. 762; Pub. L. 105–353, title III, § 301(a)(2), Nov. 3, 1998, 112 Stat. 3235.)

history & why it existsrecord from the source credit

1933Enacted · Act of May 27, 1933, ch. 38 · 48 Stat. 82
1934Amended · Act of June 6, 1934, ch. 404 · 48 Stat. 907
1995Amended · Pub. L. 104-67 · 109 Stat. 762
1998Amended · Pub. L. 105-353 · 112 Stat. 3235

A history note hasn’t been published yet. The record shows enactment by ch. 38 on 1933-05-27.

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