liability in securities offerings underwriter and accountant due diligence last updated 06 feb 12
TRANSCRIPT
Liability in Securities Offerings
Underwriter and accountant
due diligence
Last updated 06 Feb 12
Securities Class Action
Software Toolworks(Issuer)
Deloitte & Touche(auditor)
DirectorsOfficers
Investors• Plaintiffs• Defendants • Claims
– ’33 Act § 11
– ’34 Act Rule 10b-5
• Defenses
Montgomery SecuritiesPaineWebber
(lead underwriters)
Section 11 Liability(’33 Act)
Prospectus• Issuer – strict• Ds / Os / UWs – due
diligence defense (reasonable investigation + reasonable belief true)
• Auditor (expert) – no liability
Financials• Issuer – strict• Ds / Os / UWs – not
believe false• Auditor (expert) – due
diligence defense (reasonable investigation + reasonable belief true)
Rule 10b-5 (’34 Act)
Securities fraud• Material misrepresentation • Scienter (actual knowledge or reckless
disregard)
• Reliance• Causation• Damages
Securities Class Action• Underwriters (Montgomery
Securities and PaineWebber)– granted summary judgment on
Section11 and Rule 10b-5– what does this mean? – What do plaintiffs appeal?
• Accountant (Deloitte & Touche)– granted summary judgment on
Section 11 and 10b-5– What do plaintiffs appeal? – Why don’t plaintiffs appeal Section
11 judgment for defendants?Software Toolworks
(Issuer)
Deloitte & Touche(auditor)
DirectorsOfficers
Montgomery SecuritiesPaineWebber
(lead underwriters)
Investors
Underwriter defense …
Underwriter defense’33 Act § 11
•“after reas investigation, believed true”
OR(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Underwriter defense’33 Act § 11
•“after reas investigation, believed true”
OR(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Underwriter defense’33 Act § 11
•“after reas investigation, believed true”
OR(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Underwriter defense’33 Act § 11
•“after reas investigation, believed true”
OR(2) “no reason believe false”
’34 Act Rule 10b-5
No “actual knowledge” AND
No “recklessness (extreme departure ordinary care)”
Business – price reductions
• “Nintendo not subject to price reductions”• “customers do not have return rights”
Recognition of OEM revenue
• Korean manufacturer backdates contract• Law firm not give comfort letter on OEM contracts• Contracts were contingent
Contingent sales • Barron’s says slumping sales and bad accounting• SEC told that data not available• Late June sales were bogus
Auditor defense …
Auditor defense’33 Act § 11
(1)“after reas investigation, believed true”
Not appealed
’34 Act Rule 10b-5
(1) No “actual knowledge”(2) No “recklessness – no extreme
departure ordinary care”
Recognition of OEM revenue
• OEM agreements poorly documented• Management under “extraordinary pressure” • Deloitte only got oral assurances on some
contracts• No information on return policies
SEC letters • SEC told that June data not available• Sample OEM contract differed from actual
contracts
Auditor defense’33 Act § 11
(1)“after reas investigation, believed true”
Not appealed
’34 Act Rule 10b-5
(1) No “actual knowledge”(2) No “recklessness – no extreme
departure ordinary care”
Recognition of OEM revenue
• OEM agreements poorly documented• Management under “extraordinary pressure” • Deloitte only got oral assurances on some
contracts• No information on return policies
SEC letters • SEC told that June data not available• Sample OEM contract differed from actual
contracts
Auditor defense’33 Act § 11
(1)“after reas investigation, believed true”
Not appealed
’34 Act Rule 10b-5
(1) No “actual knowledge”(2) No “recklessness – no extreme
departure ordinary care”
Recognition of OEM revenue
• OEM agreements poorly documented• Management under “extraordinary pressure” • Deloitte only got oral assurances on some
contracts• No information on return policies
SEC letters • SEC told that June data not available• Sample OEM contract differed from actual
contracts
The end(mercifully)