SDNY Holds 2005 SEC Rule Change Did Not Alter Directors’ Potential MBS Liability

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On December 10, the U.S. District Court for the Southern District of New York held that the SEC’s promulgation of Rule 430B in 2005—which, among other things, broadened the category of disclosures that can be made in prospectus supplements rather than post-effective amendments to registration statements—did not alter the “liability date” for Section 11 liability for individuals who sign registration statements in the context of the shelf registration process. Fed.Hous. Fin. Agency v. HSBC N. Am. Holdings Inc., No. 1:11-cv-06201 (S.D.N.Y. Dec. 10, 2013). The ruling comes in the consolidated federal cases brought by the FHFA alleging numerous institutions misled Fannie Mae and Freddie Mac in connection with the packaging, marketing, sale and issuance of certain RMBS. The FHFA suits also named numerous individuals as a “control person[s]” under Section 15 of the Securities Act of 1933, or as directors or signing officers under Section 11 of the Securities Act. In response to a motion filed by more than 90 directors who signed the original registration statements but not the subsequent prospectus supplements, the court explained that Rule 430B deems newly disclosed information to be included in the registration statement, and Section 11 creates liability for signers whenever “any part of the registration statement, when such part became effective, contained an untrue statement of material fact or [omission].” The court interpreted the rule to mean that a prospectus supplement containing information representing a fundamental change in the information provided in the registration statement creates Section 11 liability for directors based on that new information. The court held that, as such, where there is a fundamental change in the information provided to the marketplace through the filing of a prospectus supplement, the new trigger dates for Section 11 liability will apply to those persons.