Hello ClaudB - I thought you & others might enjoy this article.
The following article appeared in the Journal of Biolaw & Business, Vol. 1, Number 1.
It's pretty long, but for some reason, I found it an interesting read. There were many references(28), which I removed. If you'd like a copy drop me an email & I'll mail or fax it to you.
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10b-5 -The New Weapon for Issuers Against Manipulative Short Sellers
Peter M. Saparoff and William C. Miles, Jr.
The financial press recently has published a number of reports that raise concern about short sellers and their associates (typically "newsletter authors) manipulating the market for shares of newly-emerging public companies. This is allegedly done by issuing a negative article about a company with the intent of depressing its share price to the benefit of short sellers. It also has been reported that the authors of these newsletters may tip favored clients as to an upcoming negative article before it is published, and that said authors are compensated for these tips. It is further alleged that the negative information may be false - indeed, even manufactured, just to get something negative out in the market so that the scheme can be accomplished.
Naturally these tactics may cause a precipitous decline in the share price of the target corporation and thereby damage long-term shareholders and the corporation. Conversely this price drop may enable the short seller to reap substantial profits in a variety of trading markets.
THE NEED FOR AN EFFECTIVE REMEDY
One would think that an issuer would have a remedy under the federal securities laws against those who deliberately put out into the market (and even manufacture) false information - especially when said false information results in precipitous price drops, damage to reputation, impairment of business deals, and substantial loss of value to long-term shareholder holdings. Ideally, an issuer faced with this circumstance would enjoin the manipulation thereby protecting its market value, business deals, and reputation. For such an issuer; however, a remedy under the securities laws is not readily available. Because an issuer is rarely a purchaser or seller of its securities during the relevant time period, the "purchaser-seller" requirement developed in Blue Chip Stamps v. Manor Drug Stores has been a barrier to effective 1Ob-5 relief. And even prior to Blue Chip, some courts were reluctant to accord issuers that had not purchased or sold its securities standing to bring an action under lOb-5.
Perhaps the Federal Circuit Court for the District of Columbia, in Cowin v. Bresler, best articulated the post-Blue Chip rationale for holding a party seeking an injunction to the purchaser-seller requirement. The plaintiff in Cowin, a minority shareholder; sought an injunction pursuant to Rule 10b-5 to prevent the majority shareholders from "depress[ing] the value of the [his] stock and... eliminat[ing] the public market in that stock through dissemination and deceptive statements." The court held that the plaintiff did not have standing to seek an injunction under Rule 10b-5. The court observed: (1) that section 10(b) or the 1934 Act does not provide an express civil remedy; and (2) that the Supreme Court in Blue Chip created a single narrow exception when it permitted private suits for damages to proceed only if the plaintiffs purchased or sold securities during the relevant time period. After discussing the policy reasons for the purchaser-seller requirement and its legislative history, the Cowin court concluded that, "in cases of doubt, the institutional role or the Supreme Court weighs in favor of considering its rulings to be general rather than limited to the particular facts." Accordingly, because the Supreme Court did not expressly limit its holding to damage actions, all lower courts must consider the Court to have announced a general rule. Thus, the court held that the purchaser-seller requirement applies to legal as well as equitable causes of action.
Spurned by the securities laws, issuers have considered other claims to combat the manipulation or their share prices, such as defamation and intentional interference with contractual relations. These causes of action. though, are difficult to sustain in this context primarily because they were not designed to prevent the manipulation of the securities markets. Defamation claims, for example, run up against First Amendment defenses and difficult issues regarding the nature of the allegedly defamatory statement, i.e., whether it is fact or opinion. In addition, defamation claims expose the issuer to extremely broad discovery. Likewise, an Interference with contractual relations claim is difficult to assert in this circumstance because it is limited to those situations where the defendant interfered with a particular contract or expectation of a contract. Even if the issuer can allege Interference with an existing or pending contract, it likely will have difficulty proving the necessary causation to establish a claim.
A 10b-5 injunction action, on the other hand, is much more suited to the facts and circumstances faced by issuers seeking to address the problems caused by short sellers engaged in market manipulation. The concept of "manipulation" precisely fits what these short sellers and their associates are doing, and it is a term contained in the statute itself. In addition, courts generally relax the requirements of Fed. R. Civ. P.9(b) in manipulation cases because of the difficulties of gathering specific information in the pre-suit phase. Finally, the injunctive remedy is a common one in the 10b-5 context - at Ieast in the enforcement scenario, and thus courts should be comfortable judging the merits of such an action.
AN ISSUER SHOULD HAVE STANDING UNDER RULE 108-5 TO SEEK INJUNCTIVE RELIEF
The purchaser-seller requirement denies those plaintiffs that are neither purchasers nor sellers standing to pursue a 10b-5 action. To date, the Supreme Court has applied the requirement only in the context of 10b-5 claims for money damages. Although one post-Blue Chip Federal Appeals Court denied shareholders standing to pursue a 10b-5 injunction, it would be inappropriate to extend the purchaser-seller requirement to prevent an issuer from enjoining a manipulative short seller from disseminating false information about the issuer into the market place. In other words, an issuer should be able to bring an action for injunctive relief under Rule 10b-5 without alleging an affected purchase or sale.
A number or federal district courts since Blue Chip have permitted plaintiffs, and in some cases issuers, to seek injunctive relief despite the purchaser-seller requirement. One court recently observed that the "well-established" rule in the Second Circuit, as well as other Circuits, is that a plaintiff may seek injunctive relief pursuant to Section 10(b). See Langner v. Brown. In Langner, a minority shareholder sought, among other claims, injunctive relief for violations of 10(b) to stop the defendants, the corporation's board, from reporting false facts in its annual report. The defendants moved to dismiss the claim for lack of standing because the plaintiff had not purchased or sold the corporation's securities. The court allowed the plaintiff's claim, holding that "in seeking injunctive relief under a 10(b) claim, a plaintiff does not have to show damages in connection with the purchase or sale of any security." As to the burden on the plaintiff, the court determined that a plaintiff requesting injunctive relief under 10(b) need only demonstrate "that the continuation of past and present practices will in fact injure him."
In Langner, as in every post-Blue Chip decision allowing standing in this circumstance, however; the court relied on pre-Blue Chip precedent for its holding. Specifically the authority for many of these court's holdings can be traced back to a line of Second Circuit cases where the court held that "a plaintiff need not be a defrauded purchaser or seller in order to sue for injunctive relief under 10b-5." United States v. Newman. As the Second Circuit explained in Mutual Shares Corp. v. Genesco, Inc., injunctions to prevent 10b-5 violations not only "play an important role in enforcement" of the securities laws, but also "afford complete relief" against future 10b-5 violations. In fact, there are many practical advantages in permitting a corporation to commence an action seeking to enjoin manipulation of its stock. Indeed, the Second Circuit stated in GAF Corp. v. Milstein that a corporation's standing is appropriate where
it has suffered or will suffer direct injury because of the alleged fraud, or where it would be the most appropriate party to assert 10b-5 violations affecting all of its shareholders. The issuer, for example, may have standing to enjoin a manipulative scheme which had the effect of depressing the price of the issuer's stock immediately prior to a contemplated issue of securities, or it may have standing to enjoin a fraud whose purpose was to inflate the market value of the stock of a company with which the issuer was negotiating a merger. Moreover; there may be additional situations in which the standing of the issuer under 10b-5 will have to be appraised anew.
Unfortunately, as stated above, this Second Circuit precedent predates Blue Chip and the only circuit court to face the issue since, although in the context of a shareholder suit, was the D.C Circuit in Cowin. The situation of an issuer is distinguishable from that of a shareholder when the goal is to stop manipulative short sellers. When the plaintiffs are minority shareholders, as in Cowin, the court must be concerned with vexatious or nuisance litigation that unnecessarily interferes with corporate operations. Where the plaintiff is an issuer; the action is essentially one by the entire group of shareholders against a third party. In that context, the risk of divisive litigation and corporate interference is minimized, and the resources of the corporation can be focused on preventing harm to the corporation by a third party. Moreover; issuers will be less likely to attempt the conversion of their equitable actions into de Facto damages actions by seeking the return of shares or the imposition of a constructive trust.
In addition, an issuer is in a far better position than a shareholder to bring injunctive action. Not only is it in a better position to know what is "false," but it also is more likely to have the financial resources to effectively pursue the action. Shareholders fearing injury by this manipulation will not have a damages claim and therefore may not have adequate incentives to pursue these suits. An issuer, however, has an incentive to pursue this action immediately to protect the market for its shares and its reputation and to ensure that manipulation does not threaten pending business deals.
Furthermore, while theoretically issuers could sue for damages if they were on the other side or the transaction at issue, this "remedy" is illusory and inferior to an injunction. First, there is the difficulty of identifying the actual person who benefited from the advance notice of the false information's dissemination. Additionally, injunctive relief to stop manipulation before it occurs or as it is occurring is a more effective remedy than seeking damages after the manipulation has occurred. One injunctive proceeding is likely to be far more efficient than dozens of subsequent damage suits.
ISSUER INJUNCTIVE STANDING WOULD NOT OPEN THE FLOODGATES TO SPURIOUS SUITS
There is no practical basis to apply the purchaser-seller requirement in the injunctive relief context. The Supreme Court in Blue chip limited its holding to actions seeking money damages. The Court's principal policy reasons for imposing a purchaser-seller requirement in suits for money damages were: (i) to safeguard issuers from vexatious "nuisance" or 'strike" suits for damages; (ii) to limit speculative damage claims; and (iii) to avoid reliance solely upon the uncorroborated oral testimony of plaintifis regarding their conduct, or what their conduct might have been. Affording issuers a 10b-5 remedy for injunctive relief will enable such issuers to take action to stop manipulative conduct without running afoul of the concerns underlying the decision in Blue chip. Issuers' claims for injunctive relief typically will raise none of the concerns that arise in the context of a shareholder's meritless claim for damages filed just to extort a settlement.
Injunctive relief cases have inherent limiting principles. They do not require courts to engage in difficult judgments about historical facts based solely on a plaintiff's testimony. Where the issuer seeks an injunction in a manipulation case, the issuer's proof at trial generally will consist of documentary evidence and the significant testimony likely will come from others, thus avoiding the difficulties of evaluating self-serving testimony. Permitting injunction suits to proceed poses none of the dangers which concerned the Blue Chip Court and would advance the goals of the federal securities laws.
CONCLUSION
The entire market is injured when the financial press is used to disseminate fraudulent information about a company. Although the issuer whose shares are being manipulated is in the best position to detect and to prevent this unlawful practice, the purchaser-seller requirement erects a potentially insurmountable barrier to such efforts. An examination of the case law and the rationale underlying the purchaser-seller requirement, however, reveals that the reliance on the requirement in this context is misplaced. At the very least, issuers should be able to enjoin the manipulation of the market for their shares without first having to establish that they traded their shares during the relevant time period.
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Peter M. Saparoff is a partner in the Boston office of Mintz, Levin.
Cohn, Ferris. Glovsky and Popeo, PC. Mr, Saparoff's practice is concentrated in securities litigation. He represents clients in numerous investigations and proceedings before the SEC, NASD. CFTC, state securities division, and the various stock exchanges, as well as clients as plaintiffs in securities cases. William C, Wiles, Jr., is a second-year associate at Mintz, Levin, where his practice focuses on securities litigation. Mr. Miles is a graduate of the Boston University School of Law and the University of Pennsylvania. |
