Securities Regulation

Abstract

During the survey period, the Texas courts dealt with several cases concerning the scope of the Texas Securities Act and Texas Stock Fraud Act. For the Texas Securities Act they affirmed that a sale of an asset with a management contract is a security, refused to craft a due diligence defense to aider and abetting liability since the action already has a scienter requirement instead, found lenders liable for aiding and abetting when they were told the purpose of the loan prior to the lending, and found no control person liability for a broker who knew nothing of the offending transaction by its agent who used another brokerage for the offending transaction. For the Texas Stock Fraud Act, they found vicarious liability for co-owners who were aware of the misrepresentations but did not correct them. For the Texas Deceptive Trade Act, they did not find debenture investors as third party beneficiaries of a service contract to provide a fairness opinion for a merger when there was no indication that the contract was to benefit the debenture investors.

The 78th Texas Legislature reduced the cost of operating the Texas State Securities Board by removing the requirement for surety bonds for state officers and employees and by funding the Board through filing fees capped at $100. It also authorized the Texas State Securities Board to assist requesting securities regulators in other jurisdictions investigating securities violations, making it a crime to serve as an investment advisor without being registered, and authorized the Attorney General to seek equitable relief for defrauded investors.

The Securities and Exchange Commission prepared rules under the Sarbanes Oxley Act, which directed the Securities and Exchange Commission to prepare rules for public companies requiring reconciliation between disclosed financial information and Generally Accepted Accounting Principles, for disclosing off balance sheet transactions, for establishing adequate internal controls for financial reporting, and for fraudulently influencing auditors. Also under the Sarbanes Oxley Act, the Securities and Exchange Commission prepared rules requiring public companies to adopt a code of ethics for its principal officers, have one financial expert on its audit committee, requiring certification of the financial statements by the officers, rapid disclosure of material changes, electronic filing for beneficial ownership of directors, officers and principal shareholders, dealing with blackout periods for certain insider trading, prohibiting auditors from both auditing and providing non-auditing services to the same public company, auditor retention of audit records, and standards of professional conduct of lawyers representing issuers.

The Texas Courts dealt with several cases concerning securities fraud. For the Texas Securities Act they twice refused to adopt a reliance requirement such as a due diligence requirement for investors for securities fraud. For the Texas Stock Fraud Act they refused recovery for an investor with no evidence of the various elements, determined that a warranty disclaimer does not bar tort claims for fraudulent inducement or fraud from arising from misrepresentations in the stock purchase agreement, and refused to extend the Act to corporate malfeasance to gain punitive damages absent allegations concerning entry into a contract or inducement. For the federal Securities Act the courts for a criminal action refused to interpret the representation "invest" to include payments to earlier investors. For the Private Securities Litigation Reform Act, they found a failure to plead the required strong inference of scienter for generalized, positive statements about the company's strengths, management, and prospects; for delaying disclosure of write-offs determined by the legal department, rather than the officers; and for only insider trading.

Keywords: George Lee Flint, Jr., Aiding and Abetting, Control Person Liability, Third Party Actual Awareness Liability, This Party Beneficiary Liability, Primary Liability for Some Secondary Parties, Texas Securities Act (TSA), 78th Texas Legislature, Sterling Trust Co. v. Adderly, Goldstein v. Mortenson, Bar