Where do Secondary Market Purchasers Stand After Gustafson?

by Joseph S. Allerhand and Benjamin M. Hain (corporate counsel), February 1999

Sixty-five years after the passage of the Securities Act of 1933, and nearly four years after the Supreme Court's decision in Gustafson v. Alloyd Co., a deceptively simple question remains unresolved: who has standing to sue under sections 11 and 12(a)(2) of the Securities Act? Specifically, is standing limited to investors who purchase securities in public offerings, or does standing extend also to investors who purchase securities in the secondary market but can 'trace' their securities to those registered and sold in the public offering?

With regard to standing under s. 12(a)(2). before Gustafson the courts were divided as to whether standing was limited to purchasers of securities in public offerings, or whether standing extended also to all purchasers in the secondary market, irrespective of whether the purchased securities were traceable to the public offering. There is currently no consensus among district courts as to the impact of Gustafson on s.ll's standing requirements. Although Gustafson dealt with a 5.12(a)(2) claim, several district courts have nonetheless applied Gustafson's holding and broad language to s. 11, and held that standing under s.l 1 extends only to purchasers in public offerings. Other district courts have taken the opposite position: they have refused to extend the holding in Gustafson to s. 11 claims, and have continued to grant standing to secondary-market purchasers of securities that are traceable to the public offering.

Reprinted with permission from Joseph S. Allerhand of Weil, Gotshal & Manges LLP. Originally published in the Febraury 1999 issue of Metropolitan Corporate Counsel.

Case Study 2 Company law

Case Study 3:

Litigation and arbitration: an employment law case

The facts of the case

The organisation you work for, a labour union, has asked you to review the following employment law case and the relevant documents in preparation for a meeting with the other party's lawyer.

Read this description of the facts of the case. What is the legal issue here?

The law firm of Redlin and Orbison has offices around the world. The firm regularly sends lawyers from its main office in New York to spend anywhere from a few months to a few years working in one of its offices abroad. Chiara Johnson, an experienced and ambitious intellectual property lawyer, spent two years in the Rome office. When Johnson returned to New York, she became unhappy with her prospects for advancement in the firm, particularly after younger male colleagues with no foreign working experience had made partner¹. Johnson claimed that senior management should have made it clear to her before her stay abroad that her two-year absence from the main office would put her at a disadvantage when new partners were being elected. Although Johnson, who has two small children (one of whom is disabled), was allowed to work part of the week at home, she alleges that her boss continually demanded that she spend more face-time at the firm - that is, work from home less often. According to Johnson, a male colleague was allowed to work from home because he had disabled children. Johnson further alleged that she had been paid less than her male counterparts. (Johnson earned $100,000 a year at the time, while two male colleagues in comparable positions earned $115,000.) Johnson contends that male associates were promoted more quickly than female ones. Johnson left the firm, filing a lawsuit against her former employer, seeking damages for psychiatric damage and loss of earnings, pension rights and career prospects.

In response to these allegations, a spokeswoman for Redlin and Orbison pointed out that 20 per cent of the firm's partners are women, more than the national average. Moreover, the firm maintained that it had made it clear from the beginning that the position Ms Johnson had taken was a non-partnership job, and that the firm's hiring and promotion policies are routinely communicated to prospective employees.

Task l: Speaking

Divide into two groups, with one group representing Johnson and one group representing Redlin and Orbison.

1 Prepare for negotiations with the other party. You should:

0 identify the legal issues of the case and determine arguments for your side;

O list the strengths and weaknesses of your side of the case;

0 list the strengths and weaknesses of the other side of the case;

C decide which parts of the relevant legal documents most strongly support your case

and can be used to argue against the other party's case; 0 make notes for the negotiation: What are your goals? What are you willing to give?

What are you not willing to give?

2 Pair up with a representative of the other party and attempt to negotiate a settlement.

3 Report the results of your negotiations to the class.

¹ To make partner means to become a partner in the firm

Task 2: Writing

Write a letter of advice to one of the parties (your choice), in which you outline the legal issues raised by the case, refer to relevant statutes or related cases and provide your opinion as to the likely outcome of the case.

Relevant legal documents