limitations to apply in a section 1983 case, the Supreme Court has held that in the interests of national uniformity and predictability, all sec- tion 1983 claims shall be treated as tort claims for the recovery of personal injuries (Wilson v. Garcia, 471 U.S. 261, 105 S. Ct. 1938, 85 L. Ed. 2d 254 [1985]). If the state has various statutes of limitations for different i ntentional torts, the Supreme Court mandates that the state’sgeneral or residual PERSONAL INJURY statute of limitations should apply (Owens v. Okure, 488 U.S. 235, 109 S. Ct. 573, 102 L. Ed. 2d 594 [1989]). When a state does not specifically recognize a CAUSE OF ACTION brought under section 1983, courts look to analogous state laws to determine when the cause of action would accrue. In Wallace v. Kato, 549 U.S. 384, 127 S.Ct. 1091, 166 L.Ed.2d 973 (2007), an arrestee brought an action under section 1983, alleging that city police detectives had unlawfully arrested him. Illinois did not recognize unlawful arrest as a tort, so the Court looked to the state’s statute of limitations for FALSE IMPRISONMENT. After con- cluding that the claim’s limitations period would have expired under state law, the Court ruled that the arrestee’s claim had expired. The Supreme Court has also held that state tolling statutes, which provide a plaintiff with an additional period of time in which to bring a lawsuit equal to the period of time in which the plaintiff was legally disabled, apply to section 1983 cases (Board of Regents v. Tomanio, 446 U.S. 478, 100 S. Ct. 1790, 64 L. Ed. 2d 440 [1980]). Under section 1983, the statute of limitations does not begin to run until the CAUSE OF ACTION accrues. The cause of action accrues when “the plaintiff knows or has reason to know of the injury which is the basis of the action” (Cox v. Stanton, 529 F.2d 47 [4th Cir. 1975]). However, in EMPLOYMENT LAW cases, the Supreme Court has held that the cause of action accrues when the discriminatory act occurs (Delaware State College v. Ricks, 449 U.S. 250, 101 S. Ct. 498, 66 L. Ed. 2d 431 [1980]). Thus, if an employee is being terminated for reasons that violate section 1983, the statute of limitations begins on the day that the employee learns of the termination, not when the termination actually begins (Chardon v. Fernandez, 454 U.S. 6, 102 S. Ct. 28, 70 L. Ed. 2d 6 [1981]). The legal rules of RES JUDICATA (claim preclu- sion) and COLLATERAL ESTOPPEL (ISSUE PRECLUSION) apply to section 1983 claims. This means that federal courts must give state court judgments the same preclusive effect that the law of the state in which the judgment was rendered would give. Plaintiffs need to be careful to raise all potential federal claims in cases brought in state court because they will not be allowed to bring those claims later in federal court after the state court has rendered a decision on the issues before it. A plaintiff may waive his or her right to sue under section 1983, but such a waiver may be deemed unenforceable if “the interest in its enforcement is outweighed in the circumstances by a PUBLIC POLICY harmed by enforcement of the agreement” Town of Newton v. Rumery, 480 U.S. 386, 107 S. Ct. 1187, 94 L. Ed. 2d 405 [1987]. FURTHER READINGS “Federal Courts—Prisoner Litigation—Eleventh Circuit Holds That a §1983 Action for DNA Access Is Not the Equivalent of a Habeas Corpus Petition.” 2003. Harvard Law Review 116 (June). Hayman, Robert L. 2002. Ju risprudence. St. Paul, Minn.: West. Schwartz, Martin A., and John E. Kirklin. 2003. Section 1983 Litigation: Claims and Defenses. 4th ed. New York: Aspen Publishers. Schwartz, Martin A., and George C. Pratt. 2009. Section 1983 Litigation: Jury Instructions. 2d ed. Austin, Tex.: Wolters Kluwer. Young, Gary. 2003. “9th Sees No Regulatory Relief in §1983.” National Law Journal (July 21). CROSS REFERENCES Civil Rights; Remedy; Tort Law. SECURE To assure the payment of a debt or the performance of an obligation; to provide security. A debtor “secures” a creditor by giving him or her a lien, mortgage, or other security to be used in case the debtor fails to make payment. SECURED CREDITOR A category of favored creditor who holds some special legal assurance of payment of a debt owed to him or her, such as a type of mortgage or lien, as the result of a specific agreement to that effect. The secured creditor, as distinguished from an unse- cured creditor, holds an advantage known as a “security interest,” which it can assert in order to claim payment as needed. The collateral tends to be valued at an amount sufficient to cover the debt, should collection ultimately become necessary. The collateral tends to be valued at an amount sufficient to cover the debt, should col- lection ultimat ely become necessary. Collection GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 68 SECURE may occur by compelling a sale (e.g., at auction) or by keeping or taking repossession of the collateral in question, in the event of default of payment. In the event of bankruptcy, the secured creditor enjoys the prospect of being ahead of unsecured creditors in order of payment (in case there are any assets with which to pay the debts). In order for the security interest to be fully operational, it often must be “perfected,” or registered formally with a governmental entity, such as a financing statement filed publicly with the office of the secretary of state in the jurisdiction where the collateral is located. The effect of perfection is to put other potential creditors on notice as to the secured creditor ’s position with regard to the particular assets. In most states, security interests are governed by Article 9 of the Uniform Commercial Code. FURTHER READING Hagedorn, Robert B. 2007. Secured Transactions in a Nutshell. 4th ed. St. Paul, Minn.: West. SECURED TRANSACTIONS Secured transactions are business dealings that grant a creditor a right in property owned or held by a debtor to assure the payment of a debt or the performance of some obligation. A secured transaction is a transaction that is founded on a security agreement. A security agreement is a provision in a business transac- tion in which the obligor, or debtor, in the agreement gives to the creditor the right to own property owned or held by the debtor. This property, called collateral, is then held by either the debtor or the secured party to ensure against loss in the event the debtor cannot fulfill the obligations under the transaction. The purchase of a car through financing is an example of a secured transaction. The car dealership or some other lender pays for the vehicle in return for a promise from the buyer to repay the loan with interest. The buyer receives the vehicle, but the lender retains the title to the car as security against the risk that the buyer will be unable to make the loan payments. If the buyer defaults on the payments, the lender, called the secured party, may repossess the car to recover losses from the default. If the same transaction was unsecured, the buyer would receive the title to and possession of the car, and the lender would receive only the buyer’s promise to repay the loan. If the buyer defaulted on the payments, the lender could sue the buyer, but the simple remedy of taking the property would not be available. A security interest may be transferred, or assigned, to a THIRD PARTY. The party receiving the assignment becomes the secured party, and the original secured party no longer holds a claim to the collateral. The law of secured transactions varies little from state to state because all 50 states plus the District of Columbia and the U.S. Virgin Islands have adopted Article 9, the secured transactions portion of the UNIFORM COMMERCIAL CODE (UCC). The UCC is a set of model laws written by lawyers, professors, and other legal professionals in the American Law Institute. In 1999, the institute, in conjunction with the National Conference of Commissioners of Uniform State Laws (NCCUSL), drafted a revised Article 9, which was adopted uniformly on July 1, 2001. The revisions marked the first comprehensive overhaul of Article 9 since 1972. These revisions expand the scope of property and transactions governed by the UCC, clarify existing elements of the article, and provide guidelines for dealing with technological developments, including software financing and ELECTRONIC COMMERCE. Common Forms of Secured Transactions Secured transactions come in many forms, but three types are most common for consumers: pledges, CHATTEL mortgages, and conditional sales. A pledge is the delivery of goods to the secured party as security for a debt or the performance of an act. For example, assume that one person has borrowed $500 from another. Assume further that the debtor gives a piece of expensive jewelry to the creditor. If the jewelry is to be returned to the debtor after the debt is repaid, and if the creditor has the right to take full ownership of the jewelry if the debtor does not pay the debt, the arrangement is called a pledge. A CHATTEL MORTGAGE is like a pledge, but in a chattel mortgage transaction, the debtor is allowed to retain possession of the property that is put up as collateral. If the debtor fails to repay the debt, the creditor may take ownership of the property. A third type of secured transaction, the conditional sale, uses a purchase money security GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURED TRANSACTIONS 69 interest. A purchase money security interest arises when a creditor lends money to a borrower, who uses the money to purchase a particular item. To secure repayment of the loan, the creditor receives a LIEN on, or claim to, the purchased item. The lien gives the creditor a claim to the property that may be asserted if the borrower does not repay the loan. Common Forms of Collateral Any property accepted as security by a creditor can serve as collateral, but generally collateral falls into one of five categories: consumer goods, equipment, farm products, inventory, and prop- erty on paper. Consumer goods are items used primarily for personal, family, or household purposes. Equipment consists of items of value used in business or governmental operations. Farm products are items such as crops, livestock, or supplies used or produced in a farming operation. Under the revised Article 9, agricul- tural liens can also be considered collateral. Inventory consists of goods held for sale or lease or furnished under contracts of service, raw materials, works in process, materials used or consumed in a business, and goods held for sale or lease or furnished under contracts of service. Paper collateral consists of a writing that serves as evidence of a debtor’s rights in PERSONAL PROPERTY. Stocks and bonds are exam- ples of paper collateral. Another common form of paper collateral is CHATTEL PAPER . Chattel paper is a writing that indicates that the holder is owed money and has a security interest in valuable goods associated with the debt. For example, assume that a car dealership has sold a car on financing to a buyer and has retained the title as security. The dealership may then use the security agreement with the buyer as collateral for a loan of its own from the bank. The revised Article 9 also recognizes “electronic chattel paper.” This allows for the validity of so-called electronic signatures, which Article 9 refers to as “authenticated records.” The electronic screens in some retail stores that allow customers to sign with a special stylus are thus just as valid as a signature in ink on a paper document. Among the new areas governed by the revised Article 9 are commercial deposit accounts, promissory notes, and commercial tort claims. Healthcare insurance receivables are also covered, which allows doctors and hospitals to include claims against insurance companies for services to their patients as part of the collateral they offer to healthcare lenders. The Formalities To be valid, a secured transact ion must contain an express agreement between the debtor and the secured party. The agreement must be in writing, must be signed by both parties, must describe the collateral, and must contain language indicating a grant of a security interes t to the creditor. Furthermore, something of value must be given by one party to the other party. This can be a binding commitment to extend credit, the satisfaction of an already existing claim, the delivery and acceptance of goods under a contract, or any other exchange of value sufficient to create a contract. Once these formalities have been completed, the security associated with the principal agreement is said to attach. Attachment simply means that the security side of the agreement is complete and lega lly enforceable. To completely secure a secured transaction, or perfect the security, the secured party should file a financing statement with the local public records office, SECRETARY OF STATE,orother appropriate government body. Perfecting the security makes the secured party’s claim official, puts the rest of the world on notice as to the creditor’s rights in the property, and gives the creditor the right to take advantage of special remedies in the event the debtor does not repay the loan. A financing statement is a document that fully describes the secured transaction. The 2000 amendments to Article 9 included a national financing statement form and designated the debtor’s location as the place to file against most tangible and intangible collateral. A state may require the secured party to file a financing statement in addition to a copy of the agreement. In most states financing statements are effective only for a limited duration, such as five years. A SECURED CREDITOR may extend the length of perfection by filing a continuation statement before the designated time period has expired. If a secured creditor fails to continue the perfection, the security is not lost, but other creditors may claim the property. The secured creditor may file another financing statement, but this would require another signature from the debtor. Amendments may be made to a financing statement. A secured party may file a statement GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 70 SECURED TRANSACTIONS of release on some of the collateral once the debtor has made payments equal in value to the value of the released collateral. If the amend- ment adds collateral, the security for the new collateral is effective from the date of the amendment and not the date of the filing of the original financing statement. One exception to the filing rule occurs when the secured party has possession of the collateral. In this situation the creditor’s security is complete once the parties have agreed to the primary transaction. Another exception is the purchase money security interest in consumer goods other than building fixtures and motor vehicles. The filing of a purchase money security interest for such consumer goods is optional. If a secured party to a conditional sale does not record or file the agreement, however, he may lose the security if the buyer sells the goods to a third party. Failure to perfect the security may have drastic consequences for the secured party who does not possess the collateral, although such failure does not automatically mean that the security will be lost. If, however, another party later stakes a claim to the collateral and files the proper papers, the secured party may lose his or her claim to the property because claims that have been properly recorded or filed have priority. Thus a secured party is wise to file a financing statement and other required docu- ments to perfect the security and protect against claims by other creditors of the debtor. Article 9 of the UCC is primarily concerned with protecting the secured party’s right to the collateral. Many sections of Article 9 delineate who has the first right to a debtor’s property if multiple claims arise. Precisely who has the first right to the debtor’s property depends on a number of factors, including whether the security was perfected, who the other claima nt is, and the time that the claims arose. If a security interest has not been perfected, the secured party’s claim to the collateral property may be subordinate to any number of creditors. A person who has a lien on the property takes before the secured party, as does a person who has received a court order for attachment of the property. If a person buys the collateral from the debtor while not knowing of the security interest, the secured party loses the property if the security was not perfected. This is true only if the buyer purchases the property in the ordinary course of business from a person who is in the business of selling goods of that particular kind. A pawnbroker, for example, is not such a seller because a pawnbroker will sell almost anything if the profit is worth the time and trouble. The identity of the buyer may influence the outcome of a dispute between a buyer of secured goods and the secured party. Generally, a merchant, or a buyer who purchases property for a business, is held to a higher standard than a person who buys an item for personal use. Merchants are more familiar with markets than are ordinary consumers, and they may be expected to know that a seller was insolvent and that the goods being sold were subject to claims from other parties. In any case, if any buyer knows that another party has a security interest in the property at the time the buyer made the purchase, the secured party retains the first claim to the property and may keep the property out of that buyer’s possession until the debt associated with the secured property is fully paid. If two parties have a security interest in the same property, the party who filed first takes first. If the competing security interests are both unperfected, the party who was first to attach the property as collateral has priority. Other creditors of a debtor may have the first claim on secured property. However, the federal government has priority in some instances for collection of federal tax liens. Most states have artisan’s lien statutes, which give servicers of property the right to hold the property in their possession as security for payment of the service bill. If the bill remains unpaid, the servicer has priority even over a secured party who has perfected his or her interest. Once a servicer or repairperson is paid for his services, he must release the goods to either their owner or the party with the security interest in the goods. If the debtor to a secured party defaults, the secured party who has failed to perfect the security interest may lose first claim to the secured property to a receiver or an assignee for the benefit of creditors. A receiver is a party who is appointed by the BANKRUPTCY court to manage the finances of the debtor for the benefit of the debtor’s creditors. An assignee for the benefit of creditors is a person chosen by the debtor to manage all or substantially all of the debtor’s property and to distribute it to creditors. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURED TRANSACTIONS 71 A secured party who has perfected the security interest has priority over an assignee or a receiver, but even a secured party who has perfected may not receive all of the debt owed under a security agreement by a bankrupt debtor. Federal bankruptcy laws are designed to distribute the assets of an insolvent debtor in a fair and RATABLE manner among all of the debtor’s creditors. Satisfaction of the Secured Debt Once a secured debt is repaid in full, the secured party must, upon written request by the debtor, send a termination statement to the debtor and file a termination statement with all offices that hold the financing statement. A termination statement serves as evidence that the debt has been paid in full. If the debtor makes a written request for the termination statement, the creditor must send the statement within ten days of the date of the req uest. Even if the debtor does not so request, the secured party must send a termination statement to offices that hold the financing statement within 30 days of the satisfaction of the debt. Default If a debtor defaults on his obligations under a secured transaction, the secured party may foreclose on the security interest. FORECLOSURE can be accomplished in different ways. The secured party may calculate the amount of the debt owed and sue the debtor without taking possession of the property. Alternatively, unless the parties have agreed otherwise, the secured party may take possession of the collateral property and either keep it or sell it. In either case, if the value received by the secured party does not fully satisfy the debt, the secured party may sue the debtor for the deficiency. In most states a secured party may take possession of the collateral without judicial involvement if doing so can be accom plished without a BREACH OF THE PEACE. For example, the secured party may repossess a vehicle if it is parked outdoors. If, however, the agent of the secured party must break into a garage to repossess the vehicle, such action would be a breach of the peace because it would require breaking and entering, a criminal offense. If a consumer has defaulted on a secured transaction but has paid 60 percent or more on the debt, most states prohibit a secured party from taking the security and keeping the windfall. In such cases the secured party may either sue in court for the money outstanding or take the property and return part of the money. In other situations a secured party may be entitled to any excess value or income that results from the debtor’s default. The retention of collateral by a secured party after the debtor’s default is called STRICT FORECLOSURE . If a secured party decides to keep collateral in satisfaction of a debt, the secured party must send written notice to the debtor. In transactions involving collateral other than consumer goods, a secured party may be obliged to send notice of the strict foreclosure to any other parties who have security in the collateral property. If a party objects to the strict foreclosure, the secured party must sell or otherwise dispose of the collateral. If no other party objects to the strict foreclosure, the secured party may keep the collateral. A secured party who sells or leases collateral after a debtor defaults may charge the debtor for reasonable expenses incurred in the sale or lease. This charge can include attorneys’ fees and court costs. The money made from a sale of collateral rarely satisfies a debt because such sales do not bring favorable prices. If there is a surplus of money after the collateral is sold, all expenses are accounted for, and the sale or lease is applied to the debt, other parties holding a security interest in the collateral must be paid with the surplus money. Unless the parties have agreed otherwise, a debtor who is in possession of the collateral and who has defaulted on the obligations in a secured transaction has the right to redeem the collateral before the secured party takes action. To avoid foreclosure of the security interest by the secured party, the debtor may pay the unpaid balance of the debt secured by the collateral, as well as any reasonable expense s incurred by the secured party in taking, holding, and preparing the foreclosure. This does not mean the debtor must pay the entire amount of the debt; rather, the debtor must make those payments that are in default. Some security agreements have an ACCELERATION CLAUSE that makes all payments due immediately upon default, but a court may hold that such a clause should not be enforced if the debtor has brought the payments up to date before the secured party has acted on the delinquency. A secured party who violates default provisions GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 72 SECURED TRANSACTIONS may be liable to the debtor for losses resulting from that conduct. FURTHER READINGS Brook, James. 2002. Secured Transactions: Examples and Explanations. 2d ed. New York: Aspen Law & Business. Dalton, Elizabeth. 1986. “The Consequences of Commer- cially Unreasonable Dispositions of Collateral: Haggis Management, Inc. v. Turtle Management, Inc.” Utah Law Review. Epstein, David G., Steve H. Nickles, and Edwin E. Smith. 2003. Nine Questions: Secured Debt Deals in the 21st Century. St. Paul, Minn.: Thomson/West. Huffaker, John. 2000. “Good News and Bad News: Revisions to UCC Article 9.” Texas Banking (August). CROSS REFERENCES Attachment; Bankruptcy; Collateral; Consumer Credit; Express; Obligor; Security; Sales Law. SECURITIES Securities are evidence of a corporation’s debts or property. Securities are documents that merely repre- sent an interest or a right in something else; they are not consumed or used in the same way as traditional consumer goods. Government regula- tion of consumer goods attempts to protect consumers from dangerous articles, misleading advertising, or illegal pricing practices. Securities laws, by contrast, attempt to ensure that investors have an informed, accurate idea of the type of interest they are purchasing and its value. Types of securities include notes, stocks, treasury stocks, bonds, debentures, certificates of interest or participation in profit-sharing agreements, collateral-trust certificates, preorga- nization certificates or subscriptions, transferable shares, investment contracts, voting-trust certifi- cates, certificates of deposit for a security, and a fractional undivided interest in gas, oil, or other mineral rights. Under certain circumstances, interests in oil- and gas-drilling programs, interests in partnerships, REAL ESTATE CONDOMI- NIUMS AND COOPERATIVES , and farm animals and land also have been found to be securities. Certain types of notes, such as a note secured by a home mortgage or a note secured by accounts receivable or other business assets, are not securities. Both federal and state laws regulate securi- ties. Before 1929, companies could issue stock at will. Bogus corporations sold worthless stock; other companies issued and sold large amounts of stock without considering the effect of unlimited issues on shareholders’ interests, the value of the stock, and ultimately the U.S. economy. Federal securities law consists of a handful of laws passed between 1933 and 1940, as well as legislation enacted in 1970. The federal laws stem from Congress’s power to regulate interstate commerce. Therefore, the laws are generally limited to transactions involving transportation or communication using interstate commerce or the mail. Federal laws are generally administered by the SECURITIES AND EXCHANGE COMMISSION (SEC), established by the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78a et seq.). Securities regulation focuses mainly on the market for common stocks. The SARBANES-OXLEY ACT OF 2002 (Public Company Accounting Reform and Investor Protection Act), Pub. L. 107-204, 116 Stat. 745, makes securities FRAUD a serious federal crime and also increases the penalties for white-collar crimes. In addition, it created an oversight board for the accounting profession. Securities are traded on markets. Some, but not all, markets have a physical location. The essence of a securities market is its formal or informal communications systems whereby buyers and sellers make their interests known and execute transactions. These trading markets are susceptible to manipulative and deceptive practices, such as manipulation of prices or “insider trading,” that is, gaining an advantage on the basis of nonpublic information. To prevent such fraudulent practices, all securities laws contain general antifraud provisions. Exchange markets, of which the New York Stock Exchange is the largest, have traditionally operated in a rigid manner by careful delinea- tion of numbers and qualifications of members and the specific functions members may perform. Conversely, over-the-counter markets (OTC) are less structured and typically do not have a physical location. Based upon dollar volume, the bond market is the largest. Bonds are the debt instruments issued by federal, state, and local government, as well as corporations. The bond market attracts mainly professional and institutional investors, rather than the general public. In addition, many of these obligations are exempt from direct regulatory provisions of the federal securities laws and consequently usually receive little attention from SEC regulators. However, in the mid-1980s, a debacle occurred in the JUNK GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURITIES 73 BOND market, which included INSIDER TRADING charges. (Junk bonds are highly risky bonds with a high yield.) The scandal, which involved the investment firm of Drexel Burnham Lambert Inc. and trader Michael R. Milken, attracted much attention and a flurry of SEC enforce- ment activ ity. Securities Act of 1933 The first significant federal securities law was the Securities Act of 1933 (15 U.S.C.A. §§ 77a et seq.), passed in the wake of the great STOCK MARKET crash of 1929. This law is essentially a disclosure statute. Although the 1933 act applies by its terms to any sale by any person of any security, it contains a number of exemptions. The most importa nt exemption involves securi- ties sold in certain kinds of transactions, including transactions by someone other than an issuer, underwriter, or dealer. In essence, this provision effectively exempts almost all second- ary trading, which involves securities bought and sold after their original issue. Certain small offerings are also exempt. Although the objective of the 1933 act’s registration requirements is to enable a pro- spective purchaser to make a reasoned decision based on reliable information, this goal is not always accomplished. For example, an issuer may be relucta nt to divulge real weaknesses in an operation and so may try to obfuscate some of the problems while complying in theory with the law. In addition, complex financial infor- mation can be extremely difficult to explain in terms understandable to the average investor. Disclosure is accomplished by the registration of security offerings. In general, the law provides that no security may be offered or sold to the public unless it is registered with the SEC. Registration d oes not imply that the SEC approves of the issue but is intended to aid the public in making informed and educated deci- sions about purchasing a security. The law delineates the procedures for registration and specifies the type of information that must be disclosed. The registration statement has two parts: first, information that eventually forms the prospectus, and second, information, which does not need to be furnished to purchasers but is available for public inspection within SEC files. Full disclosure includes management’s aims and goals; the number of shares the company is selling; what the issuer intends to do with the money; the company’s tax status; contingent plans if problems arise; legal stand- ing, such as pending lawsuits; income and expenses; and inherent risks of the enterprise. A registration statement is automatically effective 20 days after filing, and the issuer may then sell the registered securities to the public. Nevertheless, if a statement on its face appears incomplete or inaccurate, the SEC may refuse to allow the statement to become effective. A misstatement or omission of a material fact may result in the registration’s suspension. Although the SEC rarely exercises these powers, it does not simply give cursory approval to registration statements. The agency frequently issues “letters of comment,” also known as “deficiency letters,” after reviewing registration documents. The SEC uses this method to require or suggest changes or request additiona l information. Most issuers are willing to cooperate because the SEC has the authority to permit a registra- tion statement to become effective less than 20 days after filing. The SEC will usually accelerate the 20-day waiting period for a cooperative issuer. For many years an issuer was entitled only to register securitie s that would be offered for sale immediately. Since 1982, under certain circumstances an issuer has been permitted to register securities for a quick sale at a date up to two years in the future. This process, known as shelf registration, enables companies that fre- quently offer debt securities to act quickly when interest rates are favorable. The 1933 act prohibits offers to sell or to buy before a registration is filed. The SEC takes a broad view of what constitutes an offer. For example, the SEC takes the position that excessive or unusual publicity by the issuer about a business or the prospect s of a particular industry may arouse such PUBLIC INTEREST that the publicity appears to be part of the selling effort. Offers but not sales are permitted, subject to certain restrictions, after a registration statement has been filed but before it is effective. Oral offers are not restricted. Written information may be disseminated to potential investors during the waiting period via a specially designed prelimi- nary prospectus. Offers and sales may be made to anyone after the registration statement becomes GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 74 SECURITIES effective. A copy of the final prospectus usually must be issued to the purchaser. The 1933 act provides for civil liability for damages arising from misstatements or omis- sions in the registration statement or for offers made in violation of the law. In addition, the law provides for civil liability for misstatements or omissions in any offer or sale of securities, whether or not the security is registered. Finally, the general antifraud provision in the law makes it unlawful to engage in fraudulent or deceitful practices in connection with any offer or sale of securities, whether or not they are registered. In general, any person who acquires an equity whose registration statement, at the time it became effective, contained an “untrue statement of a material fact or omitted to state a material fact” may sue to recover the difference between the price paid for the security (but not more than the PUBLIC OFFERING price) and the price for which it was disposed or (if it is still owned) its value at the time of the lawsuit. A purchaser must show only that the registration statement contained a material misstatement or omission and that he or she lost money. In many circumstances the purchaser need not show that he or she relied on the misstatement or omission or that a prospec- tus was even received. The SEC defines material as information an average prudent investor would reasonably need to know before purchas- ing the security. Securities Exchange Act of 1934 The Securities Exchange Act of 1934 addresses many areas of securities law. Issuers, subject to certain exemptions, must register with the SEC if they have a security traded on a national exchange. This requirement should not be confused with the registration of an offering under the 1933 act; the two laws are distinct. Securities registered under the 1933 act for a public offering may also have to be registered under the 1934 act. To provide the public with adequate infor- mation about companies with publicly traded stocks, issuers of securities registered under the 1934 act must file various reports with the SEC. Since 1964 this disclosure requirement has applied not only to companies with securities listed on national securities exchanges but also to companies with more than 500 shareholders and more than $5 million in assets. False or misleading statements in any documents required under the 1934 act may result in liability to persons who buy or sell securities in reliance on these statements. Under the 1934 act, the SEC may revoke or suspend the registration of a security if after notice and opportunity for hearing it determines that the issuer has violated the 1934 act or any rules or regulations promulgated thereunder. Moreover, the 1934 act authorizes the SEC to suspend trading in any security for not more than ten days, or, with the approval of the president, to suspend trading in all securities for not more than 90 days, or to take other measures to address a major market disturbance. Proxy Solicitation The 1934 act also regulates PROXY solicitation, which is information that must be given to a corporation’s shareholders as a prerequisite to soliciting votes. Prior to every shareholder meeting, a registered company must provide each stockholder with a proxy statement containing certain specified material, along with a form of proxy on which the security holder may indicate approval or disapproval of each proposal expected to be presented at the meeting. For securities registered in the names of brokers, banks, or other nominees, a company must inquire into the beneficial ownership of the securities and furnish sufficient copies of the proxy statement for distribution to all the beneficial owners. Copies of the proxy statement and form of proxy must be filed with the SEC when they are first mailed to security holders. Under certain circumstances preliminary copies must be filed ten days before mailing. Although a proxy statement does not become effective in the same way as a statement registered under the 1933 act, the SEC may comment on and require changes in the proxy statement before mailing. Proxies for an annual meeting calling for election of directors must include a report containing financial statements covering the previous two fiscal years. Special rules apply when a contest for election or removal of directors is scheduled. A security holder owning at least $1,000, or 1 percent, of a corporation’s securities may present a proposal for action via the proxy statement. Upon a shareholder’s timely notice to the corporation, a statement of explanation is included with the proxy statement. Security holders will have an opportunity to vote on the proposal on the proxy form. The device is GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURITIES 75 unpopular with management, but shareholders have used this provision to change or challenge management compensation, the conduct of annual meetings, shareholder voting rights, and issues involving DISCRIMINATION and pollu- tion in company operations. A company that distributes a misleading proxy statement to its shareholders may incur liability to any person who purchases or sells its securities based on the misleading statement. The U.S. Supreme Court has held that an omitted fact is material if a “substantial likelihood” exists that a reasonable shareholder would consider the information important in deciding how to vote. Mere NEGLIGENCE is sufficient to permit recov ery; no evil motive or reckless disregard need be shown. Oftentimes, an appropriate remedy might be a PRELIMINARY INJUNCTION requiring circulation of corrected materials; it may not be feasible to rescind a tainted transaction after voting. Courts have, however, sometimes ordered a new election of directors, but such action must be in the best interests of all shareholders. Takeover Bids and Tender Offers Since the 1960s, increasing numbers of takeover bids and tender offers have resu lted in bitter contests between the aggressor and the target of the bid. A corporate or individual aggressor might attempt to acquire controlling stock in a publicly held corporation in a number of ways: by buying it outright for cash, by issuing its own securities in exchange, or by a combination of both methods. Stock may be acquired in private transactions, by purchases through brokers in the open market, or by making a public offer to shareholders to tender their shares either for a fixed cash price or for a package of securities from the corporation making the offer. Takeover bids that involve a public offer for securities of the aggressor company in exchange for shares of the targeted company require that the securities be registered under the 1933 act and that a prospectus be delivered to solicited shareholders. For many y ears, however, cash tender offers had no SEC filing requirements. The WILLIAMS ACT of 1968 (15 U.S.C.A. §§ 78l, 78m, 78n) amended many sections of the 1934 act to address prob lems with tender offers. Although most LITIGATION under the Williams Act is between contending parties, courts generally focus on whether the relief sought serves to protect public stockholders. Pursuant to the Williams Act, any person or group who takes ownership of more than 5 percent of any class of specific registered securities must file a statement within ten days with the issuer of the securities, as well as with the SEC. Required information includes the background of the person or group; the source of funds used and the purpose of the acquisi- tion; the number of share s owned; and any relevant contracts, arrangements, or under- standings. The issue of whether an acquisition has taken place, thereby triggering the filing requirement, has been the subject of litigation. Courts have disagreed on this issue when confronted with a group of shareholders who in the aggregate own more than 5 percent and who agree to act together for the purpose of affecting control of the company but who do not act to acquire any more shares. Restrictions also apply to persons making a TENDER OFFER that would result in ownership of more than 5 percent of a class of registered securities. Such a person must first file with the SEC and furnish to each offeree a statement similar to that required of a person who has obtained more than 5 percent of registered stock. A tender offer must be held open for 20 days; a change in the terms holds an offer open at least ten more days. In addition, the offer must be made to all holders of the class of securities sought, and a uniform price must be paid to all tendering shareholders. A share- holder may withdraw tendered shares at any time while the tender offer remains open. Moreover, if the person making the offer seeks fewer than all outstanding shares and the response is oversubscribed, shares will be taken up on a PRO RATA basis. The 1934 act also requires every person who directly or indirectly owns more than 10 percent of a class of registered equity sec urities, and every officer and director of every company with a class of equity securities registered under that section, to file a report with the SEC at the time he acquires the status, and at the end of any month in which he acquires or disposes of these securities. This provision is designed to prevent short-swing profits, earned when an individual with inside information engages in short-term trading. Antifraud Provisions One impetus for enact- ment of the 1934 act was the damage caused by pools, w hich were a device used to run up the GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 76 SECURITIES prices of securities on an exchange. The pool would engage in a series of well-timed transac- tions, designed solely to manipulate the market price of a security. Once prices were high, the members of the pool unloaded their holdings just before the price dropped. The 1934 act contains specific provisions prohibiting a variety of manipulative activ ities with respect to exchange-listed securities. It also contains a catchall section giving the SEC the power to promulgate rules to prohibit any “manipulative or deceptive device or contrivance” with respect to any security. Although isolated instances of manipulation still exist, the provisions manage to prevent widespread problems. Section 10(b) of the 1934 act contains a broadly worded provision permitting the SEC to promulgate rules and regulations to protect the public and investors by prohibiting manipula- tive or deceptive devices or contrivances via the mails or other means of interstate commerce. The SEC has promulgated a rule, known as rule 10b-5, that has been invoked in countless SEC proceedings. The rule states: It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (1) to employ any device, scheme, or artifice to DEFRAUD, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of circumstances under which they were made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. In the 1960s and early 1970s, the courts broadly interpreted rule 10b-5. For example, the rule was applied to impose liability for negligent misrepresentations and for breach of FIDUCIARY duty by corporate management and to hold directors, lawyers, accountants, and underwri- ters liable for their failure to prevent wrongdo- ing by others. Beginning in 1975, the U.S. Supreme Court sharply curtailed this broad reading. Doubt exists as to the continued viability of the decisions in some of the prior cases. Nevertheless, although rule 10b-5 does not address civil liability for a violation, since 1946 courts have recognized an implied private RIGHT OF ACTION in rule 10b-5 cases, and the Supreme Court has acknowledged this implied right (Superintendent v. Bankers Life, 404 U.S. 6, 30 L. Ed. 2d 128, 92 S. Ct. 165 [1971]). Rule 10b-5 applies to any purchase or sale, by any person, of any security. There are no exemptions: it applies to registered or unregis- tered securities, publicly held or closely held companies, and any kind of entity that issues securities, including federal, state, and local government securities. Clauses 1 and 3 of rule 10b-5 use the terms fraud and deceit. Fraud or deceit must occur “in connection with” a purchase or sale but need not relate to the terms of the transaction. For example, in Superintendent v. Bankers Life, the U.S. Supreme Court found a violation of rule 10b-5 when a group obtained control of an insurance company then sold certain securities and misappropriated the proceeds for their own benefit. In another case a publicly held corporation made missta tements in a press release. Even though the company was not engaged at that time in buying or selling its own shares, a U.S. court of appeals ruled that the statements were made “in connect ion w ith” purchases and sales being made by shareholders on the open market. Insider Trading Rule 10b-5 protects against insider trading, which is a purchase or sale by a person or persons with access to information not available to those with whom they deal or to traders generally. Originally, the prohibition against insider trading dealt with purchases by corporations or their officers without disclosure of material, favorable corporate information. Beginning in the early 1960s, the SEC broad- ened the scope of the rule. The rule now operates as a general prohibition against any trading on inside information in anonymous stock exchange transactions, in addit ion to traditional face-to-face proceedings. For exam- ple, in In re Cady, Roberts & Co., 40 S.E.C. 907 (1961), a partner in a brokerage firm learned from the director of a corporation that it intended to cut its dividend. Before the news was generally disseminated, the broker placed orders to sell the stock of some of his customers. In another case officers and employ- ees of an oil company made large purchases of company stock after learning that exploratory drilling on some company property looked extremely promising (SEC v. Texas Gulf Sulphur, 401 F. 2d 833 [2d Cir. 1968]). In these GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURITIES 77 . transactions portion of the UNIFORM COMMERCIAL CODE (UCC). The UCC is a set of model laws written by lawyers, professors, and other legal professionals in the American Law Institute. In 199 9, the institute,. statement GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 70 SECURED TRANSACTIONS of release on some of the collateral once the debtor has made payments equal in value to the value of the released. the value of the stock, and ultimately the U.S. economy. Federal securities law consists of a handful of laws passed between 193 3 and 194 0, as well as legislation enacted in 197 0. The federal laws