The Fourth Circuit Review: Securities Law

Washington and Lee Law Review, Spring 1992 | Go to article overview

The Fourth Circuit Review: Securities Law


SECURITIES LAW

The Securities and Exchange Act of 1934 section 10(b), 15 U.S.C. sec 78j(b) (1934), requires disclosure of material information in the purchase and sale of securities. In order to state a claim for violations of section 10(b)and its corresponding Rule 10b-5, plaintiffs must allege that the defendant, in the course of a securities transaction, either knowingly made a false statement of material fact or knowingly omitted a material fact that made the transaction misleading, such that the plaintiff suffered a loss. However, the defendant's silence or omission of a material fact only violates section 10(b) if the defendant also has a duty to the plaintiff to disclose the misrepresentation.(55)

The Maryland Rules of Professional Conduct for attorneys impose a similar responsibility on lawyers. That is, an attorney may have an ethical duty either to withdraw from the representation or to disclose a misrepresentation made by one of the parties in a securities transaction.(56) However, the ethical duty the Rules of Professional Conduct impose does not correspond exactly with a legal duty to disclose under the federal securities laws.(57) Although a plaintiff cannot base a claim for a violation of federal securities laws solely on a defendant's violation of ethical standards, this situation obviously creates tension between ethical and legal considerations. The question of whether an attorney owes a duty to third parties, in a business transaction involving fraud by the attorney's client, makes the situation more problematic.

The Fourth Circuit, in Schatz v. Rosenberg, 943 F.2d 485 (4th Cir. 1991), cert. denied sub nom. Schatz v. Weinberg & Green, 112 S. Ct. 1475 (1992), considered whether an attorney who failed to disclose material information to a third party in a securities transaction had violated a legal or ethical duty to disclose. Ivan and Joann Schats, the plaintiffs, sold several businesses to Mark E. Rosenberg and MER Enterprises, a holding company Rosenberg had created for the purchases. The Schatzes sued Rosenberg, MER Enterprises, and Rosenberg's law firm, Weinberg & Green, alleging that the defendants had violated Federal securities laws.

The case against Weinberg & Green stems from Rosenberg's purchase of two companies owned by the Schatses. In December 1986, MER Enterprises (MER) bought an eighty percent interest in the two Schatz companies, paying for the purchase with $1.5 million in promissory notes. Rosenberg personally guaranteed the notes, The Schatses relied on a financial statement from March 1986, and an update letter delivered on the closing date. These documents, indicating Rosenberg's net worth to be more than $7 million, contained several misrepresentations. In fact, Rosenberg's largest business filed for bankruptcy in September 1987, and Rosenberg himself filed for personal bankruptcy soon afterward. Weinberg & Green represented Rosenberg throughout.

Rosenberg defaulted on his promissory notes, never paying the Schatses. In addition, the Schatzes lost $150,000 that they had loaned to the company formed by merging their companies (of which Rosenberg owned eighty percent) with another Rosenberg company. Rosenberg siphoned off much of the operating capital from the Schatz companies, used some of the cash reserves to pay Weinberg & Green's legal fees, and generally rendered the companies worthless by the time he filed for bankruptcy in 1987.

The Schatzes filed a seven-count complaint, including three counts against Weinberg & Green. The Schatzes alleged that the law firm violated section 10(b) of the Securities and Exchange Act (Count III); that the firm aided and abetted Rosenberg in his securities violations (Count IV); and that the firm was guilty of common law misrepresentation (Count VII). The Federal District Court referred the case to a magistrate judge, who recommended that all three counts against the law firm be dismissed.

The magistrate dismissed Count III, finding that the plaintiffs did not state a cause of action for violation of section 10(b). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Fourth Circuit Review: Securities Law
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.