1.2.1.4.2. Liabilities for False Communications
Section 12 of the Securities Act lays out the consequences of misleading customers or potential customers with respect to offering and selling a security. Untrue statements of a material fact or the omission of a material fact in a written prospectus or oral communication whose result is to mislead a customer are subject to civil prosecution in a court of law.
If a person is accused of offering or selling a security in a misleading fashion, she must show that she did not know and could not have known of the untruth or the omission in order not to be liable. If the accused person cannot provide a convincing argument that she did not know or couldn’t have known, she will be liable to anyone who purchased the security.
Section 12 also stipulates that any person who sells a security from a new issue before a registration statement is in effect or who offers to sell a security before the registration becomes effective is also liable in a court of law.
In either of these cases, the purchaser may sue for an amount not to exceed the security’s purchase price with interest less any income received from the purchase (such as dividends) or for damages if he no longer owns the security. If the person who sold the security can prove that any portion of the recoverable amount does not represent a depreciation of the security’s value resulting from the untruth or omission, then that portion shall not be recoverable. Again, the burden of proof is on the seller.
Example: Jon is an investment banker for Big Investment Bank. He has sold 100,000 shares of XYZ Pharmaceuticals Corporation in a recent IPO. It has just come out that XYZ did not include the poor results of a recent trial of a new drug in its prospectus. Jon did not know about the unsuccessful trials when he was offering the securities to investors. Now several investors have sued Jon’s firm because they have said that the prospectus left out this m