We Can Help You Defend Against Charges Related to Short Selling
Professional investors who engage in short selling have been categorized as market manipulators for years. Even scholars who study the great stock market crash of 1929 attribute the markets fall to short selling.1
These critics claim that by organizing their money and attacking the downside of the market, professional short-selling investors are engaging in a form of “organized crime.”
Our lawyers are working to discredit these stigmas by defending investors who have been charged with crimes related to short selling.
Our securities litigation team has represented public and private companies, corporate officers, directors, employees, broker-dealers and investment advisers who have been charged with crimes related to securities fraud, conspiracy, and market manipulation and we can help you too.
If you have been charged with any of the crimes listed below or you have been notified that you are under investigation for securities fraud, do not hesitate to call us for a consultation.
What is “Short Selling?”
Shorting a stock is the opposite of buying a stock. When you buy a stock, you want the price to go up. In contrast, when you short a stock, you expect the price will go down. Basically, you’re betting against a stock or company.
Most short selling is done by hedge funds and “institutional investors” who use short selling as a cushion against the potential of falling stock prices and the impact on their current long-term investment.
“Activist investors”, on the other hand, seek to expose which companies stock prices which are too high and then take advantage of the falling stock prices in the short-term.
How Does it Work?
At the start of the process, short sellers do not own shares of a stock.
Short sellers typically begin the process by borrowing shares of a stock from another investor. Most of the time, short sellers borrow other investors stock from brokerage houses, without the investor’s knowledge or permission.
This is perfectly legal.
This borrowed stock is then immediately sold and shown as a negative share balance in the traders’ margin account.
To close the short position, the trader must buy back the security.
If the price of the stock goes down, the short seller will buy the stock back at a lower price, collecting the difference between the higher price he sold it at, and the lower price he later purchased it at.
If the price goes up, the short seller will be forced to buy the stock at a higher price than he originally borrowed it for, resulting in a loss.
The dangers of being short a stock are that the losses could potentially be infinite.
So, while it is true that short sellers make money when the price of the security goes down, they also stand to lose a lot more than they could make.
Regardless of the potential risk to their investments and the risk it poses to the target company, short selling is still considered both ethical and legal.
So what’s the problem?
Short selling itself is not the problem.
Critics claim that the problem is short sellers’ ability to “manipulate the market” by overrunning it with short selling trades in an attempt to push select stocks into an unwarranted downward trend.
Regulators want to prevent these short sellers from having such a dramatic effect on a company’s valuation.
They feel that short sellers could force a stock price even further below what the fundamental merits of the company suggest its price should be.
This fear of short selling has led regulators to threaten these investors with increased jail time and trade restrictions just for betting a stock will drop.
Statutes Used to Enforce Liability on Short Sellers for Market Manipulation
A federal securities fraud offense includes violation of the following statutes:
- The Securities Act of 1933;
- The Securities Exchange Act of 1934;
- The Trust Indenture Act of 1939;
- The Investment Company Act of 1940;
- The Investment Advisers Act of 1940;
- The Foreign Corrupt Practices Act of 1977; or
- 2010 Dodd-Frank Wall Street Reform Consumer Protection Act.
The Securities Act of 1933 deals with the rules and regulations of initial public offerings. The Securities Exchange Act of 1934 deals with the rules and regulations of trading securities on the open market after their initial public offering.
Profit for Short Sellers Does Not Mean a Loss for Everyone Else
Short selling can help the market and investors.
Most investment analysts agree that short sellers improve market efficiency.
How can Short Selling Improve Market Efficiency?
Market participants and financial regulators agree that short selling is a good thing.
Short sellers keep companies honest by exposing which companies stock prices are too high and aiding other investors in the market in “price discovery.”
“Price discovery” involves finding where the supply and the demand of the stock meet in order to determine an appropriate price for the security.
When excessive optimism causes the price of a security to become overvalued, investors are generally unwilling to purchase it at that price
This is where the short sellers come in…
Short sellers identify these overpriced stocks and expose their weaknesses, causing the market to take notice, and the price of the security to drop.
In these cases, short sellers are simply profiting from the price of the security returning to its true value and the investors who were unwilling to purchase the stock at its previously inflated price, are now granted the opportunity to purchase the stock at a lower price.
Therefore, short sellers have been known to strengthen the market by exposing which companies’ stock prices are too high.
In their search for overvalued firm’s, short sellers can discover accounting inconsistencies or other questionable practices before the rest of the investors in the market do.
Short selling can, therefore, provide a defense to financial fraud by exposing which companies have fraudulently inflated their performance history.
Short sellers are not impeding the market or preventing any one individual from achieving financial success. They are actually providing liquidity to the market and preventing the price of a security from exceeding its actual value.
When Does Short Selling Become “Market Manipulation?”
Proving a short sale was part of a larger scheme to manipulate the market is not easy.
As we discussed, even aggressive, high-volume short selling can be a legitimate trading strategy with important benefits.
Generally, claims of fraud involve showing five basic elements:
- A false statement of material fact;
- Knowledge that the statement is untrue;
- Intent to deceive the alleged victim;
- Justifiable reliance by the alleged victim on the statement which was made;
- Injury to the alleged victim as a result of the statement.
In claims of fraud that involve securities, one more element is needed.
To learn the “6 Elements Needed to Prove a Claim of Securities Fraud” click the link, or copy the URL below:
What are “Misrepresentations” and “Omissions?”
Claims of fraudulent misrepresentations can arise after virtually any public statement made by an executive officer, or corporate insider.
- A misrepresentation is an “active lie” – Know what the truth is and they blatantly tell you something else.
- An omission is a “passive lie” – The inability to release certain information. (Example: Notice of a lawsuit that would jeopardize your companies bottom line).
Misrepresentations and Omissions Must Be “Material.”
Charges related to material misrepresentations typically involve corporate officers making misrepresentations in public filings, like their prospectus.
No matter whether you are being charged with a misrepresentation or an omission, the information must be material in nature in order to invoke criminal liability. (ie., Something that changes how people see the company or the stock.)
Therefore, a material misrepresentation is the act of intentionally concealing or fabricating a fact that, if known by other market participants, could have caused those market participants to alter their trade decisions.
If your misrepresentation or omission is likely to induce a “reasonable” person to consent to a trade they otherwise would not have, or prevent them from making a trade they otherwise would have made, it may be considered “material.”
In order to defend against accusations that you made a false representation or omission, you must show that the information was immaterial.
Misrepresentations and Omissions During Initial Public Offerings
Section 12 of the Securities Exchange Act of 1934 refers to seller liability and states that when it comes to the dissemination of false or misleading advertising materials related to initial public offerings, anyone in the chain of dissemination is liable. This section has the ability to add multiple layers of liability to each party involved.
Everybody who was involved in the filing of false or misleading documentation, or the dissemination of material, nonpublic information, can be liable.
This is can include:
- The issuer of the security (corporation);
- Dealers; and
- anyone connected with those registration materials.
Even lawyers can be found liable in these cases because they drafted the perspectives and advised the company on how to proceed.
Anyone that so much as looked at the information can be found complicit.
Cases involving material misrepresentations and omissions can also be complicated because the statutes provide a cause of action to anyone who purchased the stock during the period the misrep or omission was released.
Who Investigates Cases of Short Selling and Market Manipulation?
Financial markets in the U.S. are regulated by numerous government bodies.
As an adjunct to the SEC’s civil enforcement authority, the SEC works closely with law enforcement agencies in the U.S. and around the world to bring criminal cases when appropriate.
When it comes to investigation and prosecution of civil and criminal charges related to securities fraud, the following agencies have the most influence:
- The Securities and Exchange Commission (“SEC”): Securities markets in the United States are generally regulated by the Securities and Exchange Commission (“SEC”). The SEC is a civil agency which has developed statutory authority to bring cases which involve securities violations. The SEC generally brings cases in federal district court to obtain things like injunctive relief, disgorgement of profits gained or losses avoided plus interest, and civil penalties of up to three times the amount of profits gained or losses avoided. The SEC may also bring administrative proceedings to bar individuals from the securities industry by suspending or revoking their registrations, barring them from sitting on the board of a publicly traded company or barring them from association with the securities industry in general. These administrative proceedings are heard by administrative law judges (“ALJs”) who then issue a decision based on findings of fact and legal conclusions.2 This initial decision is merely a recommendation and the Commission at the SEC ultimately has the decision to affirm, reverse, or remand the case for additional hearings.
- Department of Justice (“DOJ”): The DOJ is a criminal agency. Since the SEC does not have criminal authority, they often refer matters to federal prosecutors at the DOJ. These two agencies bring separate charges and engage in parallel investigations. This means that the DOJ may bring actions in addition to the SEC action. It is expressly permitted by statute. The Commission may transmit whatever evidence is available concerning illegal acts or practices to the Attorney General who may, in his discretion, institute the necessary criminal proceedings. The guidelines by which matters are escalated are largely considered confidential to the SEC. Experts opine that intentional conduct can spur a matter towards criminal enforcement. In short, you could face both civil and criminal penalties for short selling.3 Although it may seem unfair to be penalized twice for the same act, the SEC is entitled to refer matters to state and federal prosecutors at the DOJ for criminal prosecution. If you find yourself to be a defendant in both civil and criminal proceedings, you must respond separately to each jurisdiction.
- Financial Industry Regulatory Authority (FINRA): All investment advisers should be registered with FINRA. All members of FINRA are bound to a rule which demands that you must at with “commercial honor,” and acknowledge the equitable rules and principles of fair trade. FINRA is in charge of disciplining investment advisers who are found to have violated statutes related to short selling and market manipulation. FINRA has their own set of rules and discipline offenders through arbitrations.
- Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”): The CFTC and the NFA are both regulatory bodies of the derivatives market. The NFA administers background checks and licensing exams to all employees which engage in futures trading.
- Self-regulatory organizations (“SRO”): Self-regulatory organizations (“SRO”) also take on much of the responsibility for detection, investigation, and reporting. Brokerage firms and investment companies join these organizations to ensure problems are identified and the interests of the companies and their brokers are equally represented.
Being investigated, charged, and prosecuted for the same actions by both civil and criminal authorities does not violate principles of double jeopardy—which would normally forbid being charged twice for the same crime.
General Anti Fraud Statutes Related to Securities
- Market Manipulation
- 7 U.S.C. § 13(a)(2): Manipulating the price of a stock or commodity is a felony. In order to convict you of this charge, prosecutors need to prove you intended to manipulate the price of a stock or commodity–either through illegal trade practices or false or misleading statements. This can involve requests for extensive document production, a long and drawn out investigation and trial, civil fines like restitution, and criminal penalties. Criminal penalties for market manipulation under this section can include fines of up to $1,000,000, imprisonment for up to 10 years, or both.
- Fraud on the Market
- 18 U.S.C. § 1348: “Fraud on the market” involves knowingly executing a fraudulent “scheme” on the market or in connection with a security. Even attempting to execute a scheme that would defraud other market participants can subject you to liability under this section. Depending on your role in the “scheme,” your liability can vary, but you can expect fines of up to $1,000,000, imprisonment for up to 10 years, or both.
- The General Anti-Fraud Provision of the Securities Exchange Act of 1934
- 17 CFR 240.10b-5 (Rule 10b-5): Rule 10b-5 is by far one of the most important and most cited rules regulating securities. The Rule is a general antifraud provision which outlaws the employment of manipulative and deceptive practices. Basically, Rule 10b-5 makes it illegal to issue materially misleading statements or omissions or engage in manipulative and deceptive practices, in connection with the sale or purchase of any security.
Investment Advisers Who Engage in Short Selling
- The Prohibitions and Obligations of the Investment Advisers Act of 1941
- 17 CFR 275.206 (Rule 206): Rule 206 prohibits investment advisors from making false or misleading statements in connection with a security and highlights the fiduciary duties of investment advisers. Under Rule 206, investment advisers have an affirmative obligation of “utmost good faith and full and fair disclosure of all material facts to their clients.4 This includes the duty to avoid misleading them.
- Advertising Restrictions for Investment Advisers
- 17 CFR 275.206(4)(1): Rule 206(4)(1) prohibits investment advisers from using advertisements that contain false or misleading statements of material fact. Under this section, an “advertisement” is considered to be any written or oral notice addressed to more than one person or any publication that offers investment advice. This rule also forbid the use of testimonials, past recommendations, charts and analytics reports without the proper disclosures.
- Prohibited Transactions by Investment Advisers
- 15 U.S.C. § 80b-6 (Rule 80b): Rule 80b specifically targets investment advisers and prohibits them from engaging in any fraudulent, deceptive or manipulative scheme to defraud any client or prospective client.5 It also prevents investment advisers from knowingly selling or purchasing securities on behalf of a client without first obtaining their consent. This section does not apply to broker-dealers who are not acting as investment advisers.6
- Manipulative and Deceptive Devices
- 15 U.S.C. § 78j(a)-(c): Rule 78j prohibits any and all deception in the buying and selling of securities and prohibits anyone from effecting, facilitating, or accepting a short sale with the use of deceptive or manipulative practices.
Short Selling and Insider Trading
- Transactions on the Basis of “Material, Nonpublic Information”
- 17 CFR 240.14e-3 (Rule 14e): Rule 14e targets individuals who are in possession of material, nonpublic information related to the offer of a security. Any person who takes a “substantial step” to engage in a fraudulent or deceptive act through the use of such nonpublic information may be liable under this section. Furthermore, anyone who knows or has reason to know that such information is nonpublic because they received it from the offeror, issuer, or an officer, director, or employee of the company, may be liable under this section. If an individual is making investment decisions on behalf of another person, without knowledge of the nonpublic information, they are exempt from liability.7
- Regulation FD – Preventing “Selective Disclosure”
- 17 CFR 243.100-103: The “FD” in “Reg FD” stands for “fair disclosure” This statute targets insider trading and prohibits public companies from disclosing previously nonpublic, material information unless the information is distributed to the public first or simultaneously. The regulation was put into place to prevent large institutional investors from trading on market-moving information before other market participants were able to trade on that information. This is often referred to as “selective disclosure.”
- “Control-Person” Liability
- Section 20(a): Section 20(a) gives shareholders a civil right of action against corporate insiders who used material, nonpublic information to their own benefit, or the benefit of an associate. This section gives shareholders a right of action against corporate executives, even if they themselves did not have direct knowledge of the fraud. In order to prove a control-person liability case, prosecutors must prove that an employee committed the violation under direct orders from an employer who has the ability to exercise control over that person. This can be either direct control or control over the policy that the employee must follow. The purpose of this action is to be able to sue a supervisor if they fail to supervise a broker properly.
Short Selling During Initial Public Offerings
- Selling an Equity Security During a “Restricted Period”
- 17 CFR 242.105 – (Rule 105): Rule 105 prohibits firms from participating in public stock offerings after selling short those same stocks. Therefore, short selling a security during a “restricted period” like an initial public offering is illegal if you purchase the same security through the offering. This restricted period is generally five business days before the company goes public.
- IPO Registration Statements and Prospectus Claims
- Sections 11 and 12(a)(2): These sections give shareholders a private right of action against companies who allegedly provided false or misleading information during initial public offerings (“IPO”) or subsequent issuances of new classes of stock. Generally, these claims allege that public filings like the IPO registration statement or prospectus contained false information. In addition to the issuing company, investment banks that underwrote these offerings may also be implicated.
- Fraud in Financial Reporting
- Section 10(b) and 13(b): Section 10(b) and Section 13(b) of the Exchange Act also allow the SEC to bring actions based on the manipulation of information submitted in public filings and failure to maintain adequate internal accounting controls.
Liability of Corporate Executives and Directors
- Disclosing Ownership Interest
- Section 16(b): Section 16 makes it mandatory for all officers of a publicly traded stock to disclose and report ownership interests in the company that exceeds 10% of the company’s common stock. “Beneficial owners” can include individuals who do not directly own any equity interest in the company. Even family members sharing the same household as someone with over 10% equity interest in a company are considered beneficial owners. Officers and directors are considered beneficial owners no matter how large or small their beneficial ownership interest is.
- Filing of Disclosure Statements
- Section 13(d): Requirement that an investor obtaining 5% of a public company’s “float” (i.e., outstanding shares) submit a filing disclosing his intentions the SEC.
Penalties for Engaging in Market Manipulation Through Short Selling
Civil and criminal penalties for individuals and corporations can include:
- censure (public reprimand);
- disgorgement of any ill-gotten gains;
- derivative actions brought by shareholders;
- Injunctions to halt an initial public offering
- injunctions and forfeiture of your funds and assets; and/or
- injunctions and forfeiture of your company’s funds and assets;
Individuals charged with securities fraud may also face:
- the loss of their license to trade;
- bar from serving in an official capacity in a company (officer or director)
Avoiding litigation is not always possible, but if you have been charged or accused by the SEC and would like to remain compliant, avoid engaging in the practices listed below.
Common violations that may lead to SEC investigations include:
- Insider trading;
- Stealing customer funds;
- Selling unregistered securities;
- Manipulating the market prices of securities;
- Violating the duties and responsibilities of a broker-dealer;
- Misrepresentation or omission of “material” information about the stock.
Establishing a Defense
You can’t always blame short sellers for a downward trend in a stock.
Short sellers only make up a fraction of the trade volume in any given stock, and to think they are the sole purpose for a stocks downward trend is misguided.
Nevertheless, short sellers are often used as a scapegoat and targeted as being the catalyst for the devaluation of many stocks, when in reality, other economic forces and the failures of the company itself are what cause the stock to go down.
If we were to look at markets where short selling is banned, we would not find the perfect picture that proponents of short selling bans seem to envision.
While short sellers are often credited with making false or misleading statements in order to stimulate downward market trends, purchasers of company stocks for the long term are also known to make false or misleading statements.
While neither party is permitted to make such statements, the point is that this type of manipulative strategy is not unique to short sellers.
The only difference between a long and short position is valence: a plus or minus sign.8
The best defenses to charges related to short selling and market manipulation involve attacking the “6 Elements Needed to Prove A Claim of Securities Fraud.”
It is important to remember that the prosecution must prove each of these six elements “beyond a reasonable doubt.”
This is a heavy burden for prosecutors to bear and even the slightest doubt as to any one of the elements can lead to a not guilty verdict for those accused of securities fraud.
Each of the defenses listed below attacks these elements in some way.
Top 9 Defenses to Charges of Short Selling and Securities Fraud
- Your statement did not cause other investors harm. / No “causation.” Breaking the chain of “causation” is an important task for defense attorneys in cases which involve short selling and market manipulation. Proving the lack of “causation” can involve looking toward global events or other reasons the stock may have performed poorly. This type of defense will either prove your innocence or discredit the prosecution’s case.
- You exercised “due diligence.” If anyone that searched couldn’t find anything wrong, then you may be able to argue that you exercised the due diligence required in that particular situation. This can be proven through time sheets and can lend credit to different versions and perspectives. If you had no intent on the investor losing money and you gave your best advice, you should not be convicted of securities fraud.
- You did not make a false statement or omission. An affirmative defense to a charge related to a material misrepresentation would be that the statement was true, or that it was not misleading.
- If you did make a false statement or omission, it was not material. Another affirmative defense to charges related to false representations is that, even if you did make a false or misleading statement, that statement is not “material.” Whether or not a statement is material is essentially determined by whether a “reasonable investor” would have changed his or her opinion on a given security.
- The statements were opinions and opinions are usually not actionable. In Omnicare 9, the Supreme Court held that issuers and other participants in a public offering will not be liable for making untrue statements of fact for honestly -held opinions that turn out to be false. The Court also emphasized that an investor cannot state a claim by simply alleging that the issuer failed to reveal the basis for its opinion.10
- The alleged victim did not detrimentally rely on the statement. This is another link in the chain of “causation.” Proving that an investor who is harmed by your alleged fraud would have made the same decision regardless of whether they came into contact with your statement can prove that they did not, in fact, rely on your statement when making the decision to buy or sell the security.
- You did not intend to deceive. / You lacked the element of “scienter.” “Scienter” refers to your intent to deceive and without this crucial element, prosecutors will not be able to prove that you knowingly executed a fraud on the market. The element of intent is one of the toughest elements for prosecutors to prove. If you had no intent on the investor losing money and you gave your best advice, you should not be convicted of securities fraud. “
- The fraud was not carried out “in connection with” the buying or selling of a security. If your fraudulent scheme or statement was not connected with the security in any way, then you should not be convicted of securities fraud.
- The alleged victim did not suffer from an economic loss. Proving an actual economic loss is necessary for claims of securities fraud. While the individual investor who was harm need not be identified, there must be some quantifiable loss of money or potential earnings in order to bring a case of securities fraud.
Cases of Short Selling in the News
Hedge Fund Manager Accused of Making False Statements to Drive Down Stock Prices
On September 12, 2018, the SEC charged hedge fund advisor, Gregory Lemelson, and his investment advisory firm with allegedly profiting from a scheme to drive down the price of a San-Diego based pharmaceutical company.
According to the complaint, Lemelson took a short position in the pharmaceutical companies stock and then proceeded to released false information about the company.
The SEC claimed that Lemelson used written reports, interviews, and social media to release misrepresentations about the company “teetering on the brink of bankruptcy.”
He also allegedly misled investors by citing negative reviews of the pharmaceutical company without revealing that these negative reviews were made by a doctor who was, at the time, the largest investor in Lemelson’s hedge fund.
Lemelson was charged with violating the anti-fraud provision of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as Section 206(4) of the Investment Advisers Act of 1941 and Rule 206(4)-8.
If convicted, Lemelson faces monetary penalties, imprisonment, and may be forced to return any ill-gotten gains–with interest
Investment Advisory Firm Charged with Illegal Short Selling in Advance of Stock Offering – Violation of Rule 105
On October 31, 2017, an investment advisory firm, Millennium Management LLC, agreed to pay over $600,000 to settle charges that it improperly participated in public offerings despite having short positions on the same securities.
Millennium was ordered to pay disgorgement of about $300,000, plus interest and an additional $300,000 penalty, totaling over $600,000.
SEC Charges Six Firms for Short Selling in Advance of Stock Offerings
On October 14, 2015, the SEC charged six firms with violating Rule 105 which prohibits firms from participating in public stock offerings after placing short positions on those stocks.
The penalties for all six of the firms totaled more than $2.5 million in monetary sanctions and an order barring at least one of the firms from participating in public stock offerings for one year.
According to the SEC Division of Enforcement, there is a zero tolerance policy for these offenses.
Elon Musk Calls for Short-Selling to be Made Illegal
On September 29, 2018, the SEC announced that it had reached a settlement agreement with Elon Musk that will require him to step down as chairman of Tesla (NASDAQ: TSLA) and pay a $20 million fine. The agreement will allow him to remain CEO of the company. This settlement comes as a response to “false and misleading” statements made by Musk on his Twitter account in which he claimed to be taking Tesla private.
The SEC claimed that Musk had knowledge at the time he made this tweet that the proposed deal to take the company private was “uncertain and subject to numerous contingencies.”11
Tesla, in particular, has consistently had investors betting against it and Musks recent tweets and the subsequent drop in Tesla’s stock price have only lent credibility to these short positions.
Then, on October 4, 2018, Musk tweeted that what short sellers do “should be illegal.” These comments allegedly led the SEC to reconsider whether they wanted to go forward with the settlement agreement.
Another reason these remarks are significant is that it is these types of remarks that lead to short sellers being viewed as market manipulators with no purpose in the market when in fact, short sellers play a vital role in the market.
There are many reasons why investors take short positions on stocks like Tesla. These reasons, taking in total, are what cause short sellers to attack stocks.
Whether it is irrational tweets by a companies CEO or faulty accounting discovered by short sellers, all of the reasons must be considered.
Work With a Federal Securities Fraud Attorney You Can Trust
Our lawyers working to discredit the stigmas about short selling by defending investors who have been charged securities fraud.
Our securities litigation team has represented public and private companies, corporate officers, directors, employees, broker-dealers and investment advisers who have been charged with crimes related to short selling, securities fraud, conspiracy, and market manipulation.
We have gone to battle with the FBI, U.S. District Attorneys Offices, Manhattan District Attorney’s Offices, SEC, DOJ, and other federal agencies and we are willing to fight for you.
If you have been charged with any of the crimes listed above or you have been notified that you are under investigation, do not hesitate to call us for a consultation.
1 Section 17: Criminal Liability – allows for criminal liability for releasing false info in regard to a publicly traded security or an initial public offering.
2 S.E.C. v. Capital Gains Research Bureau, Inc. 375 U.S. 180 (1963).
3 15 U.S.C. § 80b-6(1)-(4).
4 15 U.S.C. § 80b-6(3).
5 17 CFR 240.14e-3(b)(2).
6 Omnicare, Inc. v. Laborers District Council Construction Pension Fund, 575 U.S. __ (2015) clarified the scope of liability for statements of opinion under Section 11 of the Securities Act of 1933. The Court explained what a “reasonable investor” might understand as to the basis for such an opinion: (a) the statement was made after consulting with a lawyer (must be a “meaningful legal Inquiry”); (b) the opinion is consistent with “advice from regulators or consistent industry practice;” (c) there is no contrary legal advice; and/or (d) there is no knowledge that the “Federal Government was taking the opposite view.” The Court also offered additional guidance in stating that reasonable investors: “understand that opinions sometimes rest on weighing competing facts. The Court considered the statement in light of “all its surrounding text, including hedges, disclaimers, and apparently conflicting information.” Courts will also take into account industry customs and practices. As an illustration, the Court stated that an issuer would be justified in not disclosing that a single junior attorney “expressed doubts about a practice’s legality when six of his more senior colleagues gave the stamp of approval.
7 Id. citing Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Court stated that a plaintiff “must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” To the Court, “that is no small task for an investor.”