The Collision Between the First Amendment and Securities Fraud

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Presented at the Law and Society Annual Conference, May 31, 2013

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The Collision Between the First Amendment and Securities Fraud

  1. 1. The Collision Between the First Amendmentand Securities FraudWendy Gerwick Couture65 ALA. L. REV. __ (forthcoming 2014).Law and Society Annual ConferencePanel -- Corporate Law: Securities LitigationMay 31, 2013A Work in Progress
  2. 2. Example:Research analystpublishes undulynegative researchabout a publiccompany
  3. 3. Example:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud
  4. 4. Example:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraudNew York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereview
  5. 5. Example:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraudNew York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewBreathingSpace
  6. 6. Example:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud§ 10(b) liability standard:• Scienter• Proven by apreponderance of theevidence• Subject to deferentialappellate reviewNew York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewBreathingSpace
  7. 7. New York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewExample:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud=BreathingSpace§ 10(b) liability standard:• Scienter• Proven by apreponderance of theevidence• Subject to deferentialappellate review
  8. 8. New York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewExample:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud==/BreathingSpace§ 10(b) liability standard:• Scienter• Proven by apreponderance of theevidence• Subject to deferentialappellate review
  9. 9. New York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewExample:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud==/BreathingSpace§ 10(b) liability standard:• Scienter• Proven by apreponderance of theevidence• Subject to deferentialappellate review=/
  10. 10. New York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewExample:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud==/CHILLINGEFFECTBreathingSpace§ 10(b) liability standard:• Scienter• Proven by apreponderance of theevidence• Subject to deferentialappellate review=/
  11. 11. Interest inCompensatingInjury toReputationNew York Times v. SullivanInterest inEncouraging Non-DefamatorySpeech
  12. 12. New York Times v. SullivanTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourageInterest inCompensatingInjury toReputationInterest inEncouraging Non-DefamatorySpeech
  13. 13. New York Times v. Sullivan• Society’sinterest in a“multitude oftongues,”especiallyabout publicfiguresTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourageInterest inCompensatingInjury toReputationInterest inEncouraging Non-DefamatorySpeech
  14. 14. New York Times v. Sullivan• Public figuresare more likelyto be able toengage in self-help• Public figuresare more likelyto haveassumed therisk ofdefamation bythrustingthemselvesinto thelimelightTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourageInterest inCompensatingInjury toReputationInterest inEncouraging Non-DefamatorySpeech• Society’sinterest in a“multitude oftongues,”especiallyabout publicfigures
  15. 15. • Society’sinterest in a“multitude oftongues,”especiallyabout publicfiguresReputationalInterest Gives WayNew York Times v. Sullivan• Public figuresare more likelyto be able toengage in self-help• Public figuresare more likelyto haveassumed therisk ofdefamation bythrustingthemselvesinto thelimelightTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourageInterest inCompensatingInjury toReputationInterest inEncouraging Non-DefamatorySpeech
  16. 16. New York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewExample:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud==/CHILLINGEFFECTBreathingSpace§ 10(b) liability standard:• Scienter• Proven by apreponderance of theevidence• Subject to deferentialappellate review=/
  17. 17. Public company = “public figure”Media v. non-media defendantsCommercial v. non-commercialspeech
  18. 18. “In connection with”purchase or sale ofsecuritiesResearch analystIssuerScope of Securities Fraud Liability
  19. 19. “In connection with”purchase or sale ofsecurities Non-commercialspeechResearch analystIssuerScope of Securities Fraud Liability
  20. 20. New York Times v. Sullivan standard for“public figure” defamation:• Actual malice• Proven by clear and convincingevidence• Subject to independent appellatereviewExample:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraud==/CHILLINGEFFECTBreathingSpace§ 10(b) liability standard:• Scienter• Proven by apreponderance of theevidence• Subject to deferentialappellate review
  21. 21. Securities Fraud ContextInterest inCompensatingInjured InvestorsInterest inEncouraging Non-CommercialSpeech AboutCompanies
  22. 22. Securities Fraud ContextInterest inCompensatingInjured InvestorsTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourageInterest inEncouraging Non-CommercialSpeech AboutCompanies
  23. 23. Securities Fraud ContextInterest inCompensatingInjured InvestorsTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourage• Society’sinterest inpromoting fairand honestmarkets via a“multitude oftongues”Interest inEncouraging Non-CommercialSpeech AboutCompanies
  24. 24. Securities Fraud ContextInterest inCompensatingInjured InvestorsTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourage• Society’sinterest inpromoting fairand honestmarkets via a“multitude oftongues”• Investors canprotectthemselvesfrom losses viahedging /diversificationInterest inEncouraging Non-CommercialSpeech AboutCompanies
  25. 25. Securities Fraud ContextInterest inCompensatingInjured InvestorsTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourage• Society’sinterest inpromoting fairand honestmarkets via a“multitude oftongues”• Investors canprotectthemselvesfrom losses viahedging /diversificationInterest in DeterringFraud to Promote Fairand Honest MarketsInterest inEncouraging Non-CommercialSpeech AboutCompanies
  26. 26. Securities Fraud ContextInterest inCompensatingInjured InvestorsTENSIONbecauseerroneousstatementsareinevitableand thusthere is a riskof chillingspeech thatwe want toencourage• Society’sinterest inpromoting fairand honestmarkets via a“multitude oftongues”• Investors canprotectthemselvesfrom losses viahedging /diversificationInterest in DeterringFraud to Promote Fairand Honest MarketsInterest inEncouraging Non-CommercialSpeech AboutCompaniesInterest inImposingLiability GivesWay
  27. 27. • Is “fraud” per se devoid of any FirstAmendment protection?SEC v. Pirate Investor LLC, 580 F.3d 233255 (4th Cir. 2009) (“Punishingfraud, whether it be common law fraudor securities fraud, simply does notviolate the First Amendment.”)
  28. 28. • Is “fraud” per se devoid of any FirstAmendment protection?Illinois v. Telemarketing Associates, Inc., 538 U.S. 600, 620-21 (2003) (“Of primeimportance, and in contrast to a prior restraint on solicitation, or a regulation thatimposes on fundraisers an uphill burden to prove their conduct lawful, in a properlytailored fraud action the State bears the full burden of proof. False statement alonedoes not subject a fundraiser to fraud liability. As restated in Illinois case law, toprove a defendant liable for fraud, the complainant must show that the defendantmade a false representation of a material fact knowing that the representation wasfalse; further, the complainant must demonstrate that the defendant made therepresentation with the intent to mislead the listener, and succeeded in doing so. . .. Heightening the complainants burden, these showings must be made by clearand convincing evidence. . . . As an additional safeguard responsive to FirstAmendment concerns, an appellate court could independently review the trialcourts findings.”).
  29. 29. Anticipated Conclusion:The New York Times v. Sullivan protections (“actualmalice” shown by clear and convincing evidence andsubject to independent review) should apply in securitiesfraud cases where (a) the subject of the communication isa “public figure;” and (b) the speech is non-commercial.
  30. 30. Example:Research analystpublishes undulynegative researchabout a publiccompanyCoveredcompanyInjuredinvestorDefamation Securities fraudAnticipated Conclusion:The New York Times v. Sullivan protections (“actualmalice” shown by clear and convincing evidence andsubject to independent review) should apply in securitiesfraud cases where (a) the subject of the communicationis a “public figure;” and (b) the speech is non-commercial.

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