[§§711-715] companies and issuers of debt securities must comply with a set of requirements under the regulation, including placing legennd on the offering documents and compliance with a "restriicte period" of 40 days, during which no offers or sales to United States persons are permitted. 3) Category 3—all other offerings [§711] The final category applies to all other offerings. The requiremeent in this category are the most onerous, including a restriicte period of 40 days for debt offerings and one year for equity offerings, stop-transfer procedures for equity offerings, and certifications from buyers that they are not buying for the account of a United States person. (d) Resale safe harbor [§712] The resale safe harbor is available to persons other than the issuer or a distributor of the securities. Affiliates and persons acting on behalf of the issuer or a distributor likewise cannot use the resale safe harbor, but affiliates who are such solely because they are officers or directors of the issuer may use the safe harbor as long as no compensation other than a normal broker's commission is paid in connection with the transaction. In most cases, only the two general regulation S requiremeent (see above) must be met in the case of resales. (e) Exemption only from registration requirement [§713] While regulation S exempts certain transactions from the registratiio requirements of SA section 5, the other provisions of the 1933 and 1934 Acts still apply. Thus, for example, while the amount of disclosure required under regulation S is small, the issuer remains potentially liable for violating the antifraud or other liability provisiion of the Acts. G. Liabilities Under the 1933 Act Introduction [§714] The liability provisions of the 1933 Act are organized around the two basic objectives of the Act: providing full disclosure of material information to potential investors in newly issued securities and generally preventing fraud and/or misrepresentation in the interstate sale of securities. a. Conduct resulting in liability [§715] Accordingly, the kinds of conduct that may result in liability under the 1933 Act may be sorted broadly into two categories: SECURITIES REGULATION I 165 [§§724-729] 1) Distinguish—injunctions [§724] There are some important differences between cease-and-desist orders and injunctions, including the following: a) The cease-and-desist order is issued administratively, i.e., by the S.E.C. itself, while an injunction is issued by a fed eral district judge; b) Violation of a cease-and-desist order may result in a civil monetary penalty under 1933 Act section 20(d), while vio lation of an injunction may lead to a contempt proceed ing; and c) The S.E.C. can obtain a cease-and-desist order without the need to show that future violations of the securities laws are likely, while an injunction requires such a showing. 2) Types of orders [§725] There are two kinds of cease-and-desist orders: temporary and permanent. a) Temporary orders [§726] Temporary cease-and-desist orders may be issued against broker-dealers, investment advisers, investment companiies and certain other regulated entities. [SA §8A(c)(2)] I/Note The temporary cease-and-desist order may be issued ex parte—i.e., without notice to the respondent or a hearing—if the S.E.C. deems it appropriate. b) Permanent order [§727] Permanent cease-and-desist orders may be issued against anyone violating the 1933 Act. Notice must be given to the respondent, who is also entitled to a hearing before an administrative law judge. 3) Order for an accounting and disgorgement [§728] In connection with a proceeding for a permanent cease-anddessis order, the S.E.C. may also order the respondent to furnish an accounting and to disgorge any monies received in violation of the 1933 Act, including reasonable interest. [SA §8A(e)] (b) Injunctive relief [§729] Section 20(a) of the 1933 Act authorizes the S.E.C. to conduct investiggation into possible violations of the Act. Section 20(b) gives the S.E.C. the power to seek injunctive relief from the federal courts SECURITIES REGULATION | 167 [§§733-738] REMEDIES UNDER THE 1933 ACT—A SUMMARY gilbert Damages equal to the amount lost by plaintiff. Rescission. Cease-and-desist orders (temporary or permanent) issued by the S.E.C. requiring the defendant to stop violating the 1933 Act and, if the order is permanent, to disgorge any monies received in violation of the Act. Injunctions issued by a federal court prohibiting future violations of the 1933 Act; the injunction may include award of a civil monetary penalty. Criminal sanctions issued by a federal court for willful violation of the 1933 Act. c. Comparison of 1933 Act anti-fraud provisions with common law fraud remedies (1) Elements of common law action [§733] At common law, a defrauded purchaser of securities had to prove the same elements to recover as any other defrauded purchaser of goods: (a) Material fact [§734] The plaintiff had to show that the defendant seller of the securities misstated, or failed to state, a material fact that the seller was undde a duty to disclose. (b) Reliance [§735] In addition, the plaintiff had to show that she relied on the misrepresenttation (c) Privity [§736] The plaintiff also had to show that there was privity of contract betwwee her and the defendant (i.e., that plaintiff had purchased the security from the specific seller being sued). (d) Causation [§737] Also, the plaintiff had to show that the defendant's misrepresentatiio was the actual and the proximate cause of the plaintiff's loss. (e) Scienter [§738] Finally, the defendant had to have had actual knowledge of the misrepreseentatio or omission; i.e., the defendant's misrepresentation must have been intentional. SECURITIES REGULATION I 169 [§§744-751] (v) A majority of the members of the board of directors of the issuuer [SA §6(a)] (b) Every director of the issuer [§744] Every person who was a director of the issuer at the time the registraatio statement became effective can also be held liable, even if the director did not sign the registration statement. (c) Every person named as "about to become" a director [§745] In addition, every person who is named in the registration statemeen (with his consent) as about to become a director of the issuer may be held liable. (d) Every "expert" who certifies preparation of registration statement [§746] All "experts" who consent to being named as having prepared or certified part of the registration statement may be held liable under section 11. For example, accountants are "experts" as to the certifiie financial statements included in the registration statement. (e) Every underwriter involved in the distribution [§747] Underwriters may also be held liable under section 11. (f) Control persons [§748] Finally, persons who "control" any person who is liable under sectiio 11 may be held jointly and severally liable with the liable persons, unless the controlling person had no knowledge of nor reasonable grounds to believe in the existence of the facts on which the liability of the controlled person is alleged to rest. [See SA §15] (2) Elements of plaintiff's cause of action (a) Material misstatements or omissions [§749] To recover damages under section 11, the plaintiff must prove that there has been a misstatement of, or a failure to state, a "material" fact. [SeeS 1) Definition of "material" [§750] Material facts here are those matters to which there is a substanntia likelihood that a reasonable investor would attach importtanc in deciding whether to purchase the registered security. [SA Rule 405] Other tests for "materiality" are discussed infrra SS929-932. 2) Judicial expansion of definition [§751] The rule 405 definition has been elaborated on by the courts, SECURITIES REGULATION I 171 [§§755-757] in the offering registered by the defective registration statement (a procedure called "tracing" the securities). [See e.g., Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967)] In the wake of Gustafson v. Alloyd Co., 513 U.S. 561 (1995) (discussed infra, §805), however, a conflict in the decisions has arisen, with some courts holding that only underwriters and purchasers in the initial offering have standiin under section 11. [See, e.g., Gould v. Harris, 929 F. Supp. 353 (C.D. Cal. 1996)] Other courts have continued to follow the traditioona view that as long as secondary purchasers can trace the securittie to the registration statement, they have section 11 standing. [See, e.g., Schwartz v. Celestial Seasonings, Inc., 178 F.R.D. 545 (D. Colo. 1998)] 1) Privity of contract not required [§755] Under either view, privity of contract with the defendant is not required under section 11; that is, a purchaser with standing may sue any person described by the statute as a potential defenddant (d) Causation and damages [§756] The plaintiff need not prove that her loss (i.e., decline in value of the securities) was caused by the misrepresentation. (Note: This was an element of the plaintiff's cause of action at common law.) 1) Reduction of damages [§757] However, the defendant may be able to reduce the damages by proving that all or some portion of the damages resulted from some cause other than the misrepresentation or omission of material fact in the registration statement. [SA §ll(e)] fffi Example: A court has taken into account a general decline in stock market prices after the date plaintiff purchased the issuer's stock, and allowed the defendant issuer a discount in damages equal to the percentage decline in the Standard and Poor's index of stock market prices. [Feit v. Leasco Data Processing Equipment Corp., supra, §751] /JS Example: Another court sustained a loss causation defeens when the defendant's misstatement was "barely materiial, and the price of the security actually increased somewhha upon public disclosure of the misstatement. [Akerman v. Oryx Communications, Inc., 810 F.2d 336 (2d Cir. 1987)] (3) Defenses SECURITIES REGULATION I 173 [§§761-762] that they must at least have performed up to the standards of their profession (e.g., accountants must make an investigation of the facts that would confoor to the standards of their profession and must state the issuer's financial results according to the generally accepted accounting principles set forth by the S.E.C.). [See Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968)] 21 Note, however, that while compliance with professioona standards (e.g., by an accountant) establishes a reasonable investigation, it does not automatically shield the professional from liability. For example, an accountant who conducts an investigation in accorddanc with GAAP (generally accepted accounting principles) and GAAS (generally accepted auditing standards) would still be liable under section 11 if she consciously chose not to disclose a known materiia fact on a registration statement. [Monroe v. Hughes, 31 F.3d 772 (9th Cir. 1994)] 2) Statements made by nonexperts [§761] "Nonexperts" who make statements that appear in the registraatio statement are held to the same standard of "due diligennce as experts. Thus, nonexperts must actually believe that the statements made were true and their belief must be reasonabblei.e., based on a reasonable investigation of the facts. a) Test for reasonable investigation by nonexperts [§762] Under section 11, the test for defining the scope of a "reasonable investigation" is what a prudent person would do in the management of her own affairs. [See SA §ll(c)] I/Note As a practical matter, however, there is no single standard. The court looks at each individual defendaan and, based on the person's position with the issuuer responsibilities relative to the issuer and the registration statement, and background, skills, traininng and access to information, the court determines what the person should have done to fulfill the obligattio of a "reasonable investigation." 21 Comment In other words, the test is really what kind of investigaatio a prudent person in the defendanfs position, SECURITIES REGULATION I 175 [§§766-769] 3/Drafting attorney as expert [§766] It is also conceivable that an attorney might be requeeste to certify (as an expert) some portion of the registration statement. In this case, the attorney would be held to the due diligence standard of an expert (supra, §760). EXAM TIP gilbert Don't let professional pride sway you on your exam. Remember that an accountant is considered an "expert" under rule 11—and so is held to the expert's standard of due diligence. An attorney who drafts the registration statement is not considered an expeert The difference lies in their jobs: The accountant certifies that financial statements were prepared in a certain way while the drafting attorney makes no such certification. 3) Nonexperts reviewing statements by other nonexperts [§767] A nonexpert not involved in the actual drafting of the registratiio statement (such as a member of the issuer's board of directtors may also be potentially liable under the 1933 Act for statements made in the registration statement by other nonexpeerts To avoid such liability, the nonexpert must show that she exercised due diligence appropriate to her position in revieewin the statements made by other nonexperts. a) Standard of diligence required [§768] The standard of diligence required for nonexpert revieweer is the same as for nonexperts concerning their own representations in the registration statement (see supra, §761). b) Application II Underwriters [§769] Underwriters qualify as nonexperts and so must make a reasonable investigation of the nonexpert portions of the registration statement. They cannot simply rely on assurances of accuracy from the issuer's managemeent attorneys, etc. [See Escott v. BarChris Construuctio Corp., supra, §763] a/Note that normally the "lead underwriter" (usualll the underwriting firm that first established contact with the issuer, and which structures and manages the underwriting for all of the other underwrritin firms) will conduct an investigation of the issuer for all members of the underwriting SECURITIES REGULATION I 177 [§§772-774] a/It appears from the cases that outside directors will probably be expected to attend directors' meetings during the time registration is underwwa and will also be held responsible for readiin directors' meeting minutes, reading the drafts of the registration statement before filing and, in a general way, questioning company management, accountants, and legal counsel. [See Weinberger v. Jackson, 1990 WL 260676 (N.D. Cal. 1990)] But if this investigation turns up apparent misstatements, the directors must personally check into these matters and require company counsel to check into them. | Escott v. BarChris Construction Corp., supra—holding liabbl two directors who failed to read the registraatio statement and one who gave it only a cursory review] b/Note again that what is actually expected of any specific director will depend in part on his background and familiarity with the registratiio process. For example, a lawyer-director might be expected to make a more extensive investiigatio than a doctor-director. [See Escott v. BarChris Construction Corp., supra] 4) Nonexperts reviewing statements made by experts [§772] Nonexperts (such as outside directors) are held to a lower standaar of care when reviewing statements made by experts than when reviewing statements made by other nonexperts. a) Normally no investigation required [§773] Because nonexperts are entitled to rely on statements made by experts, in most cases no investigation need be made by the nonexpert. Rather, the reviewing nonexpert need only show that he did not believe the statements made by the expert to be false and that he had no reasonable ground to believe they were false. b) Burden generally met [§774] Nonexpert defendants usually will be able to meet this burden of proof. For example, in the BarChris case, most of the nonexperts were held not liable for misrepresentatiion made by the issuer's expert accountants. SECURITIES REGULATION | 179 [§§775-778] c) When investigation is required [§775] However, if facts suggest that the portions of the registratiio statement supplied by experts contain misstatements, the underwriters must make a reasonable investigation. [In re Software Toolworks, Inc., 50 F.3d 615 (9th Cir. 1994)] £!± Example: In Software Toolworks, supra, the underwriiter discovered a memo raising doubt as to whether the issuer was properly recognizing revenue. The underwrriter confronted the issuer's accountants, who had approved the revenue recognition, demanded from the accountants reconfirmation in writing that the revenue recognition was appropriate, and contacted other accounntin firms to verify the revenue accounting used by the issuer. The court held that the underwriters' investigattio was reasonable. (4) Measure of damages [§776] Where the plaintiff proves that there was a material misrepresentation or omission in the registration statement and that the securities purchased are traceable to the registered offering, the plaintiff can recover any damages suffered as a result of a decline in value of the securities. [See SASll(e)] (a) If the stock is sold prior to filing suit [§777] If the stock is sold prior to the filing of a lawsuit, the plaintiff may recover the difference between the price she paid for the stock (but not exceeding the price at which the security was offered to the public) and the price at which it was sold prior to suit. /ggk Example: X bought stock in a registered offering for $10; she sold it for $6 prior to filing suit and it was selling at $5 at the time of the suit. X can recover only $4 per share (the difference between the price paid and the price at which she sold). (b) If the stock has not been sold prior to suit [§778] If the stock has not been sold prior to the suit, the purchaser may recover either: (i) The difference between the price she paid (not exceeding the offering price) and the value of the security at the time of the suit; or SECURITIES REGULATION I 181 [§§785-789] 11 (a) are jointly and severally liable, and every person who becomes liable to make any payment under section 11 may recover contribution from any person who, if had they been sued would have been liable, unless the person who has become liable was guilty of fraudulent misrepresentation and the person who has not become liable was not. [S«?SA$ll(f)] 1) Exception—outside directors [§785] In actions brought under SA section 11, outside directors of the issuer are liable: (i) Jointly and severally for knowing violations of section 11;and (ii) Proportionately to their respective degrees of fault for all other violations of section 11. [SA SH(f)(2); SEA §§21D(f)(5), (f)(10)(C)(ii)] c. Section 12(a)(l)—liability for offers or sales in violation of section 5 [§786] Section 12(a)(l) provides that any person who offers or sells a security in violattio of any of the provisions of section 5 of the 1933 Act shall be liable to the purchaser for: (i) the consideration paid (with interest) less the amount of any income received on the securities (i.e., a suit for rescission); or (ii) for damages if the purchaser no longer owns the security. (1) Liability for any violation of section 5 [§787] Liability under section 12(a)(l) is absolute for any violation of any provissio of section 5. Such violations include a sale of unregistered securitiies failure to deliver the required prospectus, making an illegal offer in the pre-filing period, etc. (See supra, §§110 et seq.} (a) Control persons [§788] Persons who "control" any person liable under section 12(a)(l) may be held jointly and severally liable with the controlled person, unless the controlling person had no knowledge of or reasonable grounds to believe in, the existence of the facts on which the liabiliit of the controlled person is alleged to rest. [SA §15] (b) Participant liability [§789] Section 12(a)(l) imposes liability on those who offer or sell a security in violation of section 5. But the 1933 Act nowhere says who may, for these purposes, be regarded as a statutory "seller" (or offerer). Clearly the person who passes title to the security is a seller, but may anyone else be regarded as a "seller" for purposes of section 12(a)(l)? Courts were in conflict over this question until 1988, SECURITIES REGULATION | 183 [§§796-799] /Jh Example: Issuer sold to A, who resold to B, who resold to C (a broker), who resold to the plaintiff. Since the plaintiff has privity only with C, C is the only person against whom the plaintiff can bring a section 12(a)(l) action. Consequently, if C were found not to have violated section 5 (even though A and B had committed violations), plaintiff could not sustain a section 12(a)(l) action. [Winter v. D.J. & M. Investment & Construction Corp., 185 F. Supp. 943 (S.D. Cal. I960)] 1) Note Remember, however, that persons who solicit the plaintiff's purchase, although they do not actually pass title to the securiity are nevertheless held to be "sellers." (See supra, §791.) (d) Statute of limitations [§796] As under section 11, the period of limitations is one year after the violation, but in no event more than three years after the security was bona fide offered to the public. As above, if a portion of the isssu is sold after three years from the first bona fide offer to the public, section 12(a)(l) is unavailable. 1) Note—laches may not be available [§797] One court has held that laches (an equitable counterpart to the statute of limitations that evaluates staleness of a claim in terms of the prejudice caused by a knowing delay in bringing a suit, rather than by the mere passage of time) is not a defense in a section 12(a)(l) action where the period of limitations has not yet run. [Straley v. Universal Uranium & Milling Corp., 289 F.2d 370 (9th Cir. 1961)] (e) No interstate commerce [§798] Section 12(a)(l) incorporates the requirements of section 5. Section 5 is specific as to how the means of interstate commerce must be used for there to be a violation. Hence, this may preclude as broad an interpretation of interstate commerce as this term is given elsewhher in the securities laws. [See United States v. Robertson, 181 F. Supp. 158 (S.D.N.Y. 1959)] d. Section 12(a)(2)—general civil liability under the Act [§799] The 1933 Act generally prohibits fraud in the interstate offer or sale of securitiies Section 12(a)(2) of the Act provides that any person: (i) Who offers for sale a security (whether or not exempted from the registraatio requirements of section 5, except for certain government and bank securities) by the use of any means of interstate commerce; SECURITIES REGULATION | 185 [§§804-805] (even though the transaction itself does not involve more than one state). [Lennerth v. Mendenhall, 234 F. Supp. 59 (N.D. Ohio 1964)] (c) Sale by means of a prospectus or oral communication [§804] Section 12(a)(2) also requires that the offer or sale of securities occcu by means of a "prospectus or oral communication" that incluude the misrepresentation or fails to disclose the material fact. Since section 12(a)(2) does not have a reliance requirement, individdua plaintiffs need not actually read the writing that contains the misrepresentation. [See Alton Box Board Co. v. Goldman, Sachs & Co., 560 F.2d 916 (8th Cir. 1977)] 1) Section 12(a)(2) applicable only to primary offerings [§805] The Supreme Court has held that section 12(a)(2) does not apppl to a private, secondary sale of a security. [Gustafson v. Alloyd Co., Inc., supra, §754] a) Facts of Gustafson Gustafson involved a closely held corporation that was sold to a partnership pursuant to a contract of sale. The contract contained what turned out to be misstatements regarding the corporation's financial condition. Although the contract itself provided for adjustments in the purchhas price if the company's condition was not as represennted the purchasers elected to rescind under section 12(a)(2) rather than demand a contractual rebate of part of the purchase price. b) The Court's analysis The Supreme Court characterized the issue as whether the contract for sale of the corporation was a "prospectuus within the meaning of section 12(a)(2). The Court reasoned that "prospectus" ought to mean in section 12(a)(2) the same thing it means in section 10. "Prospectuus in section 10, however, does not include contracts for sale of the type at issue. (Recall that section 10 is the basis for the disclosure requirements under the 1933 Act. Few, if any, documents drafted for a purpose other than 1933 Act registration will contain adequate disclosure under section 10. (See supra, §§110 et seq.)) Section 10 includes only statutory and preliminary prospectuses used in public offerings, and these, held the Court, are the only "prospectuses" that can give rise to liability under SA section 12(a)(2). SECURITIES REGULATION I 187 [§§809-816] that contains a material misstatement or omission. One court has suggested that this language requires a showing of "some causal relatioonshi between the misleading representation and the sale." [Alton Box Board Co. v. Goldman, Sachs & Co., supra] (3) Defenses [§809] To avoid liability under section 12(a)(2), a defendant may raise the followwin defenses: (a) Lack of knowledge [§810] The defendant may show that he did not know, and in the exercise of reasonable care could not have known, of the untrue statement. Note that this is basically a simple negligence standard. 1) Investigation requirement [§811] Whether an investigation is required depends on all the circumsttances but an underwriter probably has to make a reasonnabl investigation of an issuer. [Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980), cert, denied, 450 U.S. 1005 (1981)] According to the Sanders court, there is no substanntiv difference between the investigation required to establiis reasonable care under section 12(a)(2) and that required to prove due diligence for a nonexpert under section 11. [See also Ambrosino v. Rodman & Renshaw, Inc., 972 F.2d 776 (7th Cir. 1992)] 2) Standards [§812] And note that different standards have not been established with regard to statements made by experts and nonexperts (as they have under section 11; see supra, §§741 et seq.). (b) Waiver and estoppel [§813] The defendant may claim the defenses of waiver and estoppel if it can prove that the plaintiff has shown sufficient approval or acceptaanc of the defendant's misconduct. (c) Plaintiff's knowledge [§814] The defendant can also show that the plaintiff knew of the untrue statement. (d) Privity [§815] Under section 12(a)(2) (as in section 12(a)(l) above), there must be privity of contract between the plaintiff and the defendant. (e) Participant liability [§816] Like section 12(a)(l), section 12(a)(2) imposes liability on persons SECURITIES REGULATION | 189 [§§821-824] available to the S.E.C., which is not a party to securities transactions. The Act therefore contains a provision—section 17—generally prohibiting fraud in connection with any offer or sale of securities. The S.E.C.'s 1933 Act antifrrau enforcement is based on section 17, which makes it unlawful for any person in the offer or sale of securities by use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly: (i) To employ any device, scheme, or artifice to defraud [SA §17(a)(l)]; or (ii) To obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact [SA §17(a)(2)]; or (iii) To engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser [SA §17(a)(3)]. (1) Scope [§821] Note that section 17(a) is not limited to sales; it applies to offers as well. (2) Who is protected [§822] The Supreme Court has held that section 17(a)(l) prohibits fraud against brokers as well as against purchaser-investors. [United States v. Naftalin, 441 U.S. 768 (1979)] (a) Rationale The Court held that although section 17(a)(3) specifically mentions "purchaser," this term should not be read into sections 17(a)(l) or (2), which are more general and cover fraud on brokers. The thrust of Naftalin is that sections 17(a)(l) and (2) apply to persons generallly in addition to purchasers of securities. b. Implied civil liability [§823] There is a long-standing split in the federal circuit courts over whether section 17(a) of the 1933 Act includes an "implied" civil cause of action permitting private persons to sue under the section and thereby, perhaps, avoiding some of the more onerous requirements of other sections of the 1933 and 1934 Acts (e.g., 1933 Act section 12(a)(2), see supra, §§799 et seq.; 1934 Act sectiio 10(b) and rule 10b-5, see infra, §§895 et seq.} that create fraud remedies for private plaintiffs. The trend is clearly away from an implied remedy undde section 17(a). This is the better view, because an implied remedy would conflict with the express remedies contained in each act. [See Landry v. All American Assurance Co., 688 F.2d 381 (5th Cir. 1982)] c. Conduct standard (1) Causes of action for damages [§824] If a private cause of action is implied in section 17, the plaintiff would SECURITIES REGULATION I 191 [§§832-838] S.E.C. has done nothing to discourage this, even though some scholars believe that there is no reason to make a distinction between officers and directors on one hand, and underwriters, on the other. (1) Actual knowledge of misstatement [§832] One court, however, has held that at least where the underwriter has actuua knowledge of materially misleading statements or omissions contaiine in the prospectus, the underwriter cannot rely on an indemnification agreement to escape liability. Rather, public policy requires that such underwrriter be equally liable with the issuer to investors who have receiive the incorrect prospectus. [See Globus, Inc. v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969), cert, denied, 397 U.S. 913 (1970)] (2) Negligence [§833] It is still questionable what the result would be in a case where the underwwrite was only negligent with respect to the inclusion of inaccurate information in the prospectus. 6. Contribution [§834] A related question involves whether contribution is available in actions brought under sections of the 1933 Act that do not expressly provide for contribution (i.e., sections other than section 11; see supra, §784). The courts have been friendlier to the idea of contribution in these actions than they have been to claims for indemnificaation a. Distinguish indemnification [§835] While indemnification is the payment of all of a party's costs and expenses, contribution involves only the allocation of the damages among the defendannts b. S.E.C. policy [§836] So far, the S.E.C. has not attempted to discourage claims for contribution. (1) Rationale Contribution does not violate the policies underlying the 1933 Act; witnees section ll(f), which expressly provides for contribution in a section 11 case. In fact, contribution furthers the policies of the Act, insofar as contribution tends to ensure that all defendants will bear some of the burden of the violation. 7. Liability Insurance [§837] Another important issue in the area of liability is whether an issuer can purchase insurance to cover potential liabilities that could not be properly indemnified undde state law. a. Availability of insurance [§838] State law varies, but many states do allow such insurance, and commercial SECURITIES REGULATION I 193