Legal Theories of Liability Under Federal Law

Plaintiffs have and will continue to assert a variety of legal theories in cases filed in federal district courts and in SRO arbitrations including: (1) violations of Section 10(b) and Rule 10b-5 promulgated under the 1934 Act; (2) violation of Section 15(c)(1)(A) of the 1934 Act; (3) violation of Section 9 of the 1934 Act; (4) control person liability against senior management of brokerage firms under Section 20 of the 1934 Act. 

Plaintiff lawyers and regulators such as the SEC may utilize control person liability under Section 20 of the 1934 Act to pursue senior officers of the investment banks as the SEC did successfully against John Gutfreund, Thomas Strauss and John Meriwether of Salomon Brothers, Inc., over false bidding submitted by a Salomon employee in connection with the auction of U.S. Treasury securities in the 1980's.39 A number of circuit courts have even held that a plaintiff need not prove that the defendant actually or culpably participated in the primary violation.40 Other claims under state agency liability law such as respondea superior may also be maintained by the plaintiffs’ bar. The New York Times recently reported that the NASD had censured and fined Hornblower & Weeks, Inc., as part of an inquiry into research practices. The NASD fined the firm and suspended it from publishing research for six months because the firm and its president, John Rooney, had recommended buying shares of based on “misleading and exaggerated statements.”41

 Legal Theories Under Applicable State Law 

The typical state law claims will include the following: (1) violations of state investor protection statutes and anti-fraud provisions; (2) breach of fiduciary duty; (3) common law negligence; (4) breach of contract; (5) violation of state consumer protection statutes; and (6) statutory and common law fraud. 

 Legal Theories Under Applicable NASD Business Conduct Rules

In NASD arbitration cases and other claims and regulatory actions, the following claims may also be asserted under the NASD Business Conduct Rules: Rule 2110-Standards of Commercial Honor and Principles of Trade; Rule 2120-Use of Manipulative, Deceptive and other Fraudulent Devices; Rule 2310-Recommendations to a Customer (Suitability); and Rule 2310-2 Fair Dealing with Customers.42 

39   See In The Matter of John H. Gutfreund, Thomas W. Strauss, and John W. Meriwether, Respondents Administrative Proceeding File No. 3-7930, 1992 WL 362753 (S.E.C. Release No. 31554).

40   See Hollinger v. Titan Capital Corp., 914 I.2d 1504 (9th Cir. 1990) ; Metge v. Baehler, 762 F.2d 621, 631 (8th Cir. 1985) ; G.A. Thompson & Co. v. Partridge, 636 F.2d 945, 958 (5th Cir. 1981) ; First Interstate Bank of Denver, N.A. v. Pring, 969 F.2d 891, 897 (10th Cir. 1992) ; Harrision v. Dean Witter Reynolds, Inc., 974 F.2d 873, 881 (7th Cir. 1992). However, decisions of other circuits may be construed to require a showing of a defendant’s actual participation in the primary violation as part of plaintiff’s prima facie case under Section 20(a). See e.g., Sharp v. Coopers & Lybrand, 649 F.2d 175, 185 (3rd Cir. 1981), cert. den. 455 U.S. 938, 102 S.Ct. 1427, 71 L.Ed.2d 648 (1982) ; Carpenter v. Harris, Upham & Co., 594 F.2d 388, 394 (4th Cir.) , cert. den. 444 U.S. 868, 100 S.Ct. 143, 62 L.Ed.2d 93 (1979) ; Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973) (en banc).

41   See Patrick McGeehan, For financial firms, proposed new rules on analysts are the least of their problems, N.Y. Times, May 8, 2002, at 2.

42   See NASD Manual - Conduct Rules.