Capital Markets Legal Quarterly

September 2005 Issue

SEC Adopts Significant Securities Offering Reforms Affecting Investment Banks
In late June, the SEC adopted major reforms to its rules under the Securities Act of 1933 regarding the registration process, communications surrounding a registered public offering, and the liability of offering participants. The SEC also modified the rules under the Securities Exchange Act of 1934 in certain minor respects. The SEC published the new rules on July 19, 2005, and the rules will become effective on December 1, 2005. These rules are likely to result in changes to some customary underwriting practices and how they are reflected in underwriting agreements and possibly the agreement among underwriters

Proposed New Rules To Live By For Fairness Opinion Providers
In response to concerns regarding potential and perceived conflicts of interest regarding fairness opinions, the National Association of Securities Dealers, Inc. recently proposed new rules that require certain disclosures in fairness opinions delivered by NASD members and require that NASD member firms have procedures regarding the issuance of fairness opinions. The new rules are subject to final approval by the SEC following a public comment period.

When An Underwriter Becomes A Fiduciary To An Issuer
Underwriters, beware! First the WorldCom decision shook the underwriting world. Now the high court of New York, in EBC I, Inc. v. Goldman Sachs & Co., 2005 WL 1346859 (NY June 7, 2005), has given underwriters a new cause for concern in conducting public offerings. The court refused to dismiss, over a vigorous dissent, an issuer's claim for damages holding that an underwriter rendering advice to an issuer as to market conditions at the time of pricing a public offering may be deemed a fiduciary to the issuer. As a fiduciary, the underwriter would need to disclose to the issuer all material conflicts of interest involving its rendering of advice. As a consequence of the decision, underwriters should consider reexamining their underwriting agreements and disclosure practices.

Supreme Court Makes It More Difficult To Bring A Securities Fraud Claim
In today's fast-paced, ever-changing business world, many companies make statements that later turn out to be incorrect. Such comments could range from statements about earnings, to statements about whether an important piece of business will be won, to statements about whether the government will approve a new drug. When the market learns "the truth," because a company has to restate its earning or because it announces that a key piece of business was not obtained, companies often worry that they are prime targets for a securities fraud lawsuit.

But what about the case where the negative facts are revealed, and the market does not react negatively and a company's stock price does not decline? Until recently, some courts allowed plaintiffs to bring a claim for securities fraud in this situation, even though there was not a subsequent stock decline. The United States Supreme Court, however, recently put an end to such cases in its opinion in Dura Pharmaceuticals v. Broudo.