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

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                                  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.


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