When can financial institutions be liable for federal securities fraud in connection with securities issued by others: T
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Gregory A. Markel is Chairman of the litigation department at Cadwalader, Wickersham & Taft LLP and Gregory G. Ballard is a partner in the litigation department. Their practices focus on complex corporate governance, securities and transactional litigations, arbitrations and disputes, internal corporate investigations and SEC and other regulatory investigations.
ABSTRACT KEYWORDS: deception, financial institution, market manipulation, misrepresentation, omission, scheme liability, Section 10(b), securities fraud
In recent years, securities fraud plaintiffs in the United States have turned increasingly to a theory of ‘scheme’ liability under Section 10(b) of the Securities Exchange Act in efforts to recover damages from deep-pocketed banks, accounting firms, attorneys and other so-called ‘secondary’ actors in the securities markets who have not directly misrepresented or omitted material facts in communications with securities purchasers. The theory of scheme liability has been hotly debated, and several District Courts as well as Circuit Courts have reached different conclusions about the validity and scope of the theory. This paper examines recent jurisprudence in this area, focusing on how courts have addressed such claims when levelled against financial institutions.
International Journal of Disclosure and Governance (2007) 4, 106–120. doi:10.1057/palgrave.jdg.2050052 INTRODUCTION
Given the multi-billion dollar settlements of securities cases by financial institutions and resulting sky-rocketing costs of insurance in recent years, financial institutions and insurance companies have a strong need to understand their potential exposure to securities fraud claims. Unfortunately, the law in this area is quite unsettled. Class action plaintiffs and their lawyers, with some help from the US Securities and Exchange Commission (the ‘SEC’), have aggressively promoted theories of liability for secondary actors under Section 10(b) of the Securities Exchange Act of 1934 (the ‘Exchange Act’ or the ‘1934 Act’)1 and Rule 10b-5.2 One of the principal focuses of these efforts has been to expand the range of activities that can be deemed ‘fraudulent’ under the securities laws in order for plaintiffs to bring fraud claims against deep pocket financial institutions (where the financial institutions are not issuers of the securities in question).3 These claims have met with mixed results: Some courts have embraced broad theories of ‘scheme’ liability reaching actions of secondary actors such as banks, attorneys, and accountants, while other courts have rejected these same theories. At present, federal
106 International Journal of Disclosure and Governance Vol. 4, 2, 106–120 www.palgrave-journals.com/jdg
© 2007 Palgrave Macmillan Ltd. 1741-3591 $30.00
Markel and Ballard
circuit courts are in disagreement, as are district court judges (some disagreeing even within the same district). As a consequence, the law in this area is uncertain, which is remarkable given that the statute in question has been in place since 1934. It also p
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