Liability under U.S. Securities Laws

Subject to certain exceptions, the Securities Act of 1933 prohibits any public offering without an effective registration statement. The act imposes liability for the sale of securities without an effective prospectus (liability under Section 12), for non-compliance with certain requirements of the act, and for material misstatements or omissions in the registration statement (liability under Section 11). This liability is imposed on the company, its officers and directors who signed the prospectus, the underwriters, the controlling shareholders, and the experts who assisted in preparing the registration statement with respect to the parts they helped to prepare (namely, the CPAs, in connection with the financial statements). Liability is imposed jointly and severally, for any damage up to the full price of the shares sold. The liability imposed on the company is strict, whereas other liable parties can invoke due diligence defense, whereby if they had, after reasonable investigation, valid ground to believe and did believe at the time such part of the registration statement became effective, that the statements herein were true, and that there was no omission to state a material fact required to be stated therein, or necessary to make the statements therein not misleading. Underwriters usually demand indemnification from the company for any liability imposed on them (except for information they themselves had provided), although the legal validity of such undertaking is yet to be clarified. In addition, according to Section 10b-5 of the Securities Exchange Act of 1934, liability is imposed after the offering on any person employing manipulative and deceptive devices in the purchase or sale of securities. This liability has been very much expanded in U.S. case law, and now enables civil and criminal liability to be imposed for any securities manipulation, also on anyone whose involvement in the matter is indirect (such as "helpers and tippers").

From the company's point of view, any publication of incorrect material information could be used as a basis for legal action. The liability is not only theoretical, since an immense number of class actions are filed every year in the United States, often following a considerable drop in the share price. More than 90% of the claims end in a settlement in which the company and the other defendants admit no liability. Companies have often complained that such class actions are frivolous and that they are settled only because of their nuisance value. It has further been claimed that considerable amounts of the money paid under the settlement agreements go into the pockets of the attorneys, who are often involved in the actual initiation of the action. On the other hand, the importance of class actions as a tool for maintaining a high level of disclosure in the U.S. market should not be slighted.

In an attempt to reduce the number of actions, an amendment was enacted in 1995 to the U.S. securities laws according to which any information included in forward-looking statements by the company cannot, subject to certain conditions, be used as a basis for legal action based on securities laws ("safe harbor"). It is still too soon to tell decisively whether the amendment has indeed affected the number of unfounded actions. Nowadays, almost every company includes in its announcements a clause to the effect that such announcement contains forward-looking statements, which could naturally turn out to be inaccurate.