Exploring New Approaches to Unsettled Legal Questions

Tag: Irving R. Kaufman Memorial Securities Law Competition

Deterring Private Prosecution: Why Current Jurisprudence Does Not Permit a Direct Cause of Action Against Secondary Violators of Rule 10b-5

By Rudra Reddy*

In Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to “use or employ . . . any manipulative or deceptive device or contrivance” in violation of the Securities Exchange Commission’s (“SEC”) rules. The Supreme Court has recognized the right of private plaintiffs to bring claims against primary violators of § 10(b). However, only the SEC is permitted to bring claims against persons who provide “substantial assistance” to primary violators. This Contribution addresses the potential liability under Rules 10b-5(a) and (c) of a specific category of defendants who fall somewhere between primary and secondary violators—those who neither “make” nor distribute false or misleading statements themselves but ask an employee to distribute such statements to investors. Consistent with the plain text of § 10(b) and Rule 10b-5, Supreme Court precedent, and congressional intent, this Contribution argues that primary liability should not be extended to junior managers.

Greenwashing and Section 11: Why Current Securities Laws Are Ill-Equipped to Handle Environmental Claims

by Christopher Menendez*

Section 11 of the Securities Act of 1933 imposes liability on issuers of securities for statements that are found to be materially misleading, which are statements containing the type of information a reasonable investor would find significant when making an investment decision. In conjunction with the rising salience of climate issues and concern about “greenwashing,” there has been a push by some investors to bring section 11 claims based on the professed, but ultimately unsuccessful, commitments of companies to combat climate change. However, these claims are unlikely to be successful in combatting greenwashing, as sustainability issues are not normally the sort of information that courts presume investors consider material. This Contribution argues that section 11 is ill-suited to address climate-based misstatements and encourages the adoption of rules the Securities and Exchange Commission has recently proposed to more effectively cover climate disclosures.

Applicability of the PSLRA Automatic Discovery Stay in State Courts

by Catherine Willis*

The Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 77z-1(b)(1), provides that discovery should be automatically stayed in Securities Act actions at the motion to dismiss stage. Though Securities Act claims may be brought in either state or federal courts, courts are divided over whether the PSLRA discovery stay applies in both state and federal court or solely applies in federal court. This Contribution argues that the PSLRA discovery-stay provision should apply in any action under the Securities Act, regardless of venue.

Gatekeepers or Not Gatekeepers? A Simple, Coherent Approach to Assigning Underwriter Liability to Financial Advisors in Direct Listings

by Graham Ellis*

Section 11 of the Securities Act imposes liability for damage caused by untrue or misleading information in Resale Registration Statements on underwriters. The exact scope of the statutory definition of underwriter, particularly its category of “participants,” is subject to a circuit split. Thus, whether financial advisors in direct listings are liable is an open question. In this Contribution, Graham Ellis (’22) argues that the courts should not adopt a categorical rule of inclusion or exclusion related to financial advisor underwriter status, but instead, should formulate an ad hoc analysis that emphasizes Congress’s initial purpose of assigning liability to ‘gatekeepers’ in securities transactions. This test should inquire into whether the financial advisor to the transaction acted as a conduit between the issuing company and the investing public, and whether the financial advisor publicly vouched for the accuracy of the registration statement.

Determining the Scope of Primary Liability in Securities Fraud Litigation

by Charles Bloom*

For decades, the private right of action for securities fraud has been narrowed, both by Congress and in the courts. In this Contribution, Charles Bloom (’21) considers the extent to which the Supreme Court’s most recent decision in a securities fraud case reverses that trend. Ultimately, this Contribution will argue that the Court has permissibly expanded private liability for securities fraud, closing certain loopholes created by its earlier precedents.

Necessary or Sufficient? The Applicability of the Exchange Act to Domestic Securities Transactions Under Morrison v. National Australia Bank Ltd.

by William Bristow*

Do Section 10(b) the Exchange Act and SEC Rule 10b-5 apply to securities transactions entered into in the United States where the security is not sold on a national exchange and is valued based on the price of a different security not sold within the United States? In this Contribution, William Bristow (’21) discusses the implications of Morrison v. National Australia Bank Ltd., where the Supreme Court held that the Exchange Act does not apply extraterritorially and thus only applies to domestic securities transactions. This Contribution argues that Morrison’s “transactional test” establishes a sufficient condition for the application of the Exchange Act, not a necessary condition.

Just How Extra? The Case for Clear Guidelines to Apply Section 10(b) Extraterritorially

By Mathews R. de Carvalho*         

When does the use of the Exchange Act cross the line into forbidden extraterritoriality? In this contribution, Mathews R. de Carvalho (’19) examines recent federal court decisions which try to develop a body of law under which Section 10(b) might be applied to parties outside the United States without contravening the presumption against extraterritoriality. This Contribution argues that one approach taken by circuit courts – the irrevocable liability test – represents the most faithful application of the Supreme Court’s dictates in Morrison v. National Australia Bank Ltd.

Fitting Administrative Law Judges into Appointments Clause Jurisprudence (and Determining the Proper Forum to Do So)

by Jordan Gary*

Are Administrative Law Judges (ALJs) inferior officers of the United States under the Appointments Clause of the Constitution, rendering the Securities and Exchange Commission’s (SEC) procedure for appointing ALJs unconstitutional? Procedurally, how could a respondent in an SEC administrative action make such a challenge? Jordan Gary (’17) explores this question, as presented in the 2016 Kaufman Moot Court Competition at Fordham Law School. Supreme Court doctrine places a demanding burden on plaintiffs seeking to circumvent SEC administrative processes. Additionally, the SEC is neither bound by, nor required to defer to, initial ALJ determinations in reaching its ultimate determination within a proceeding. As a result, this Contribution argues that, as a matter of both law and policy, Article III district courts should not have subject-matter jurisdiction over constitutional claims challenging SEC administrative procedure, and that SEC ALJs do not constitute inferior officers under the Appointments Clause of the Constitution.

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