About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

6 Law Notes Gen. Prac. 1 (1969-1970)

handle is hein.journals/lwntgen6 and id is 1 raw text is: Law Notes, October, 1969 Volume 6, Page 1 Globus v. Law Research: A Case Study by STEPHEN J. WEISS Arent, Fox, Kintner, Plotkin & Kahn I. Introduction Globus v. Law Research Service, Inc., 287 F. Supp. 188 (S.D.N.Y. 1968), appeal docketed, No. 32766-68, 2d Cir., Oct. 4, 1968,1 is the second of two landmark decisions under the Securities Act to be decided in 1968 by the District Court for the Southern District of New York. The first was Escott v. Bar Chris Construc- tion Corporation, 283 F. Supp. 643 (S.D.N.Y.) 1968),* a far-reaching decision which enunciated the strict standards of due diligence a defendant must prove in order to avoid liability for a materially false or mis- leading registration statement. The Bar Chris decision had a dramatic effect on corporations, the securities bar and the financial community, forcing them to review the procedures for preparing registration statements in light of Judge McLean's lengthy opinion evaluating materiality, fact by fact, and due diligence, person by person. The turmoil that followed Bar Chris was inten- sified by the Globus decision a few months later. Not as complex a decision as Bar Chris, Globus involved a simple factual situation where the materiality of the complained of omissions in the offering circular was never in doubt. Going beyond the frontiers recently es- tablished in Bar Chris, the Globus court allowed pu- nitive damages for a false offering circular and refused to enforce an underwriter's indemnification agreement against an issuer. II. The Globus Case and Section 17 of the Securities Act A. The Opinion Law Research Service, Inc. made a public offering of its stock in March 1965 pursuant to the Regulation A exemption from registration.2 The offering was made by means of an offering circular, a document similar in form, content and function to a prospectus. Law Research's business was operating a computer- ized law information retrieval program for the legal profession. In order to carry out its operations, Law Research entered into a five-year contract with the Sperry Rand Corporation under which Sperry Rand was obligated to provide computer time, programming EDITOR'S NOTE: The first part of this article, entitled Escott v. Bar Chris: A Case Study, appeared in the April 1969 issue of Law Notes. and certain other services to Law Research for a fee. The offering circular prominently referred to this con- tract which was obviously attractive to the public since the name Sperry Rand is widely known as a leader in the computer field. However, the offering cir- cular did not disclose that Sperry Rand had termi- nated the contract in January 1965 and was refusing to furnish Law Research with the vital services called for by the contract. Some time after the public offering, purchasers of the stock filed suit against Law Research, its president and the underwriter alleging that the failure to dis- close the above facts relating to the Sperry Rand con- tract violated the anti-fraud provisions of the Securi- ties Act and Securities Exchange Act and amounted to common law fraudA In addition to seeking compensa- tory damages, the complaint sought punitive damages against all of the defendants. It was shown at trial that Law Research's president knew all the material facts concerning the termination of the Sperry Rand contract but that he failed to in- clude these facts in the offering circular because he feared that if the facts were disclosed it might have been impossible to sell the company's stock to the public. There was ample evidence in the record that the underwriter also knew these material facts and was guilty of deliberate wrongdoing in distributing the offering circular without revealing the true state of the company's affairs. The jury awarded compensatory damages against all defendants on all counts involving violations of the federal securities laws and punitive damages against the president and the underwriter based on their viola- tion of Section 17(a) of the Securities Act.4 The de- fendants moved to dismiss the jury's award of punitive damages contending that such damages could not be awarded in a civil suit for violation of the federal se- curities laws. The court denied this motion. B. Implied Liabilities and Punitive Damages Section 17(a) makes it unlawful for any person to engage in fraudulent conduct in the offer or sale of any security. The Section contains no express provision creating civil liability. Yet the violation of that sec- tion, like a violation of §10(b) of the 1934 Exchange © 1969 American Bar Association General permission to republish but not for profit, all or part of this material is granted, provided that reference is made to this publica- tion, its date of issue, and that reprinting privileges were granted by permission of the American Bar Association Sections of General Practice and Young Lawyers. CORPORATE

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most