Legal Malpractice Forum
| Publication year | 1980 |
| Pages | 516 |
| Citation | Vol. 9 No. 3 Pg. 516 |
1980, March, Pg. 516. Legal Malpractice Forum
The field of securities regulation holds greater potential for attorney liability than virtually any other area in the practice of law. The securities laws and regulations and their interpretation are continually changing; concepts of the attorney's responsibilities to his client and the public are shifting markedly; the number of potential plaintiffs having standing to seek damages usually is much larger than in non-securities transactions; and quite often the amount of potential damages can be astronomical.
Recognizing the inherent dangers in this field of practice, many attorneys attempt to avoid any contact with the law of securities regulation. More often than not, those attempts fail. It simply is not possible for any attorney with a business practice to avoid dealing with securities regulation problems.
Volumes have been written on the topic of attorneys' responsibilities and liabilities in securities matters. This column is intended only to be a brief discussion of the main areas of potential civil liability, the trend toward the expansion of liabilities and methods that an attorney may use to moderate his exposure. This column will address only the general problems attendant to disclosure requirements and securities registration, not problems such as broker-dealer licensing and regulation, commodities trading, investment company regulation and trust indenture matters.
The two primary federal statutes regulating securities transactions are the Securities Act of 1933 (the "Securities Act")(fn1) and the Securities Exchange Act of 1934 (the "Exchange Act").(fn2) Virtually every state also has adopted its own "Blue Sky" laws---many, such as Colorado's,(fn3) based upon the Uniform Securities Act. The thrust of these statutes, as is relevant to the discussion herein, is to require registration of certain securities transactions and complete and accurate disclosure of material facts in connection with all securities transactions.
It is important to remember that, while there may be an exemption from the registration requirements in connection with a particular securities transaction, there never is an exemption from the disclosure requirements.
The basic concept relating to disclosure is the concept of "materiality." When disclosure is required, all material facts must be stated and they must be stated accurately.(fn4) Unfortunately, the concept of "materiality" is largely subjective, and standards expressed by courts have not been particularly helpful. The U.S. Supreme Court has stated the standard as being any fact which assumes (or, if omitted, which would have assumed) "actual significance in the deliberations of the reasonable shareholder."(fn5)
When applied to real-life situations, it can be quite difficult to distinguish material from nonmaterial facts. For example, in Escott v. Barchris,(fn6) the trial court concluded that the understatement of sales by 6.6 percent, earnings per share by 13 percent and contingent liabilities by 7 percent in a speculative growth-oriented company with large known contingent liabilities was not material. However, the court concluded that the overstatement of current assets and understatement of current liabilities, resulting in a statement of current ratio of 1.9 to 1 instead of 1.6 to 1 was material. Obviously, the determination of "materiality" can involve close calls of judgment.
An attorney may be called upon to render specific opinions in connection with the registration of securities under the Securities Act. In addition, an attorney may "expertize" a portion of the registration statement (for example, a portion of a prospectus which discusses tax consequences). Section 11 (a)(4) of the Securities Act grants to any purchaser of a security covered by a registration statement the right to sue any person who expertizes a materially false portion of the registration statement. To defend against liability, the "expert" has the burden of proving that he had, after reasonable investigation, reasonable grounds to believe and did believe that the statements were true or that there was no material omission.(fn7) This is the so-called "due diligence" defense.
While attorneys are not among the experts specifically mentioned in § 11(a)(4), their potential liability under that provision is clear.(fn8) However, no case has yet held that an attorney "expertizes" an entire prospectus or registration statement merely because he writes or reviews it. Although "experts" are not specifically liable under the Colorado statute, it is not unlikely that an attorney could be held liable as an aider and abetter if he facilitated the fraud of his issuer client.(fn9)
If it can be established that an attorney (whether or not in a transaction requiring registration) aided or abetted in the sale or purchase of securities, knowing the falseness and materiality of facts stated or omitted during the offer or sale, and if the attorney acted...
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