Law Commons^™

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

The Fifth Circuit’s determination of a passive investor’s equity interest in a limited liability company as “securities” brings this class of investors under the protection of the Texas Securities Act (“TSA”). The TSA recognizes vicarious liability theories of aiding and abetting liability and control person liability, which hold secondary parties accountable for their actions. During the Survey period, several cases found secondary parties with positions of control or who met the elements of common law fraud culpable. In Fernea v. Merrill Lynch Pierce Fenner & Smith, Inc., the court found that a business could be liable for an employee’s actions …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

Securities law opinions under Texas law during this period can be divided into two groups. The first group deals with various fraudulent schemes targeted by the Board. The "free lunch" scam, aimed at senior investors, surfaced in Head v. State where the scammer lost the appeal because the evidence clearly confirmed his failure to inform investors. In Navarro v. Grant Thornton, LLP investors failed in their aiding and abetting lawsuit against the accountants because, absent contact between the accountants and investors, the accountants had no duty to whistleblow to regulators or investors.

The second group involves incompetent lawyers. In S&D …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

Securities law opinions during this period fall into two categories. The first deals with incompetent lawyers. In Miller, a state court reinstated a cease and desist order against an issuer whose lawyer failed to object to a witness's testimony when a co-defendant's counsel did. In In re Next Financial Group, the Texas Supreme Court granted mandamus and ordered arbitration for the termination of a broker when the arbitration agreement permitted only an exception for statutory discrimination, not a common law exception to the employment-at-will doctrine.

The second group of cases involve Fifth Circuit opinions discussing securities fraud actions under the …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

Texas federal courts have continued to narrow the application of Texas securities laws. The Fifth Circuit applied the federal class action preemption test of Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) after consolidation in federal court, but permitted unconsolidated state actions to continue unpreempted. The Fifth Circuit also determined that the stringent federal pleading rules apply to state law actions filed in federal court. The Southern District of Texas narrowed aider and abetter liability in the secondary market by imposing a privity requirement for the primary perpetrator under the Texas Securities Act (“TSA”) and requiring a duty to disclose …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

Many courts rendered opinions during the Survey period affecting the reach of the Texas Securities Act (“TSA”). The Texas Supreme Court acknowledged the TSA’s reach over dealers selling from Texas to non-residents of the state, as well as over registration of securities sold. In contrast, the Fifth Circuit continued Congress’s campaign to limit regulation of interest rate swaps to federal regulatory bodies by defining “security” in the TSA to exclude interest rate swaps. In Kastner v. Jenkens & Gilchrist, P.C., a Texas appellate court determined that lawyers are not subject to liability for aiding and abetting when they merely prepare …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

With respect to easing registration requirements, the State Securities Board (“Board”) had the opportunity to lead both state and federal securities regulatory bodies through rule changes for finders--those who assist issuers in finding purchasers. The Board also issued no-action letters for nonregistration of securities issued in connection with various reorganizations involving a Massachusetts business trust, a demutualization of an insurance company, and an exchange of private shares for public American Depository Receipts.

Other than considering the availability of the in pari delicto defense for litigation-funding agreements, the courts generally avoided the interesting issues. Such issues include whether a seller’s fraud …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

The definitions, especially those relating to the issues of what constitutes a security, who may recover, and the territorial reach, determine the scope of the securities acts. The Fifth Circuit issued one decision concerning standing to sue under section 11 of the Securities Act of 1933.

The State Securities Board amended its form for public information charges and billing detail to reflect current fees for public information established by the Texas Building and Procedures Commission. The Board adopted new rules reorganizing the exemption for sales to financial institutions and certain institutional investors under the Texas Securities Act (“TSA”) and reconsidered …

Erisa: Fumbling The Limitations Period, George Lee Flint Jr

Faculty Articles

The Supreme Court designed the LMRA rule, adopted in 1966, based on legislative history suggesting that the LMRA lacked a need for uniformity in litigating employee benefit plan matters. Congress changed this conclusion when it adopted ERISA in 1974. Thus, Congress preempted state law insofar as it relates to employee benefit plans. The Supreme Court has specifically stated that this need for uniformity extends to ERISA causes of action and awards under them. The Supreme Court spelled out a three-step process to determine whether to use a uniform federal statute of limitations: (1) whether the federal cause of action demands …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

The definition of securities is constantly evolving, and court cases help define this concept. Other cases help illuminate standing to sue. Two courts considered the application of the Texas Securities Acts in multi-state situations.

The State Securities Board amended its hearings rules to give the Director of Inspections and Compliance Division authorization to sign a notice of hearing in administrative cases. The Board initiated numerous enforcement actions against issuers who did not register their securities. It also issued a number of no-action letters dealing with issuers. In addition, the Board amended its rules for registration of dealers several times during …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

The ease of becoming judgment proof in Texas, with liberal exemptions from execution of judgment, makes secondary liability very important. Texas statutes provide for four such liability theories: aiding and abetting, control person liability, third party actual awareness liability, and third party beneficiary liability. In addition to these four liability theories, federal law adds primary liability for some secondary parties.

The 78th Texas Legislature made two changes geared toward reducing the cost to the State of Texas in operating the State Securities Board. The Board also made several rule changes to increase revenues and to make other non-substantive changes. Moreover, …

Texas Annual Survey: Securities Regulation, George Lee Flint Jr

Faculty Articles

The Texas Legislature passed Sunset Legislation that distinguished between securities dealers and investment advisors that allowed the Texas Securities Act (“TSA”) to comply with national trends in securities regulation. The court struggled with definitions of “control person” and “evidence of indebtedness.” However, the Sunset Legislation allowed the expanded Board to submit emergency cease and desist orders and to conduct surprise inspections of registered dealers and sellers of securities. Violation of a cease and desist order became a criminal offense.

The Sarbanes-Oxley Act increased the existing statute of limitations under the federal securities laws for private causes of action involving claims …

Erisa: A Co-Fiduciary Has No Right To Contribution And Indemnity, George Lee Flint Jr, Philip W. Moore Jr

Faculty Articles

Because retirement plans involve large amounts of money, large numbers of people, and fiduciaries with conflicts of interests, Congress designed ERISA to differ from traditional trust law to meet these specific needs and important policy concerns. Before ERISA, fiduciaries and employers often manipulated lack of oversight and conflict of interests to the detriment of the beneficiaries. ERISA raised the standards owed by fiduciaries and established a policing system that required professional fiduciaries to monitor non-professional fiduciaries, thereby forcing non-professional fiduciaries to leave the field or seek expert advice. These provisions created co-fiduciary liability by imputing the liability of the co-fiduciary …

Secured Transactions History: The Impact Of Textile Machinery On The Chattel Mortgage Acts Of The Northeast, George Lee Flint Jr

Faculty Articles

The northeastern states passed chattel mortgage statues in the 1830s to replace the rebuttable rule acknowledging third party rights to the collateral, which created litigation to enforce a nonpossessory secured transaction. The rebuttable rule presumed that debtor possession of the collateral was fraud, but also allowed the secured party to present rebuttal evidence of his good faith in the transaction. The rebuttable rule negatively affected the textile machinery industry, allowing third parties to collect over the original creditor. In an effort to maneuver around the rebuttable rule, machinery manufacturers turned to a host of legal remedies, but eventually decided on …

Erisa: Anti-Alienation Superiority In Bankruptcy, George Lee Flint Jr

Faculty Articles

Both ERISA and the Bankruptcy Code consider the issue of debtor-participant’s interest in certain pension trusts when an action has been undertaken against the bankrupt debtor participant’s estate. Many jurisdictions have offered conflicting views on the handling of the interest. These conflicts create litigious interpretation and choice of law problems and place plan administrators at risk for breach of fiduciary duty depending on jurisdictional interpretation. Paying-out a bankruptcy trustee’s turnover demand could affect the tax qualified status of the pension plan, thereby hurting all plan participants. ERISA’s preemption provision was drafted to create uniformity among the states in interpreting employee …

Sec And Frb Treatment Of Options: An Experiment In Market Regulation (Comment), George Lee Flint Jr

Faculty Articles

The Chicago Board Options Exchange (“CBOE”) provided the Securities and Exchange Commission (“SEC”) with an opportunity to exercise regulatory rules to protect the public and economy. The options market was an appropriate testing ground, as options presented complex and untested risks in the broader securities market. Before the CBOE attempted to add security and balance, options existed in an unorganized and underfinanced market. The market needed to expand. However, the SEC was faced with a few problems of its own making. Rule 9b-1 undermined the SEC’s regulatory intent by providing loopholes that would leave it powerless to intervene in any …

Election Inspectors Have Judicially Reviewable Discretionary Authority To Determine The Validity Of Proxies (Casenote), George Lee Flint Jr

Faculty Articles

The Salgo court held that an election inspector, in a corporate proxy vote, was empowered with discretion to determine the validity of votes through a review of the transfer books. This decision marked a change from the standard course of American cases, which previously confined the inspector’s ability to a strict ministerial duty. An inspector’s discretion to review votes was limited under this interpretation. By limiting his inquiry to the transfer books, Salgo allowed the inspector to determine the validity of votes, but not who could vote.

Although the court did not apply the broader view of granting the inspector …