Securities-Related Liability

Claims under the federal securities laws present the greatest exposure for directors and officers of publicly traded companies. If a material upward or downward movement in a company’s stock price is perceived to be caused by surprising disclosures, litigation will likely be filed alleging that the company and its responsible directors and officers improperly delayed disclosure of that information or otherwise misled the investing public.

Investors who traded in the company’s stock during the period the information was allegedly withheld or misrepresented may claim they were damaged to the extent the stock price when they traded was different from what the stock price would have been if proper disclosure of the information had been made.

Directors and officers cannot avoid securities litigation altogether. A sophisticated plaintiffs’ bar has become quite skilled at creating persuasive allegations of wrongdoing, and courts have broadly interpreted many aspects of the federal securities laws. However, a well-conceived, fully implemented securities litigation loss-prevention program can reduce the likelihood and severity of such litigation. Furthermore, such a program can significantly reduce the penalties imposed should the corporation be found guilty of criminal violations in federal court.

Assuring compliance with the securities laws does not only reduce liability exposure. Effective disclosure is good business. Credibility with shareholders, analysts and the financial community benefits a company in the long run. In addition, full compliance with the securities laws helps preserve a company’s hard-earned reputation for maintaining the highest legal and ethical standards. A fundamental goal of an effective securities litigation loss-prevention program is to make a company’s directors and officers who are involved in disclosure matters realize that improper disclosure can expose the company—and themselves—to potentially catastrophic liability. With that realization, the directors and officers likely will be more cautious, seek expert advice more readily and apply common sense in formulating cautious disclosure philosophies.

A number of specific practices can be followed to reduce this important liability exposure. Many of these practices are simply common sense, although some reflect the counterintuitive nature of certain aspects of the securities laws. With the predominance of the Internet, as well as changes in the capital markets and Securities and Exchange Commission (SEC) rules, best practices in this area are evolving rapidly.

Learn more about these best practices.

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