Section 18 of the Securities Exchange Act, while seldom used in the past, has been increasingly used by institutional investors in suits against banks and other entities. The advantages of Section 18 are as follows:
- Plaintiff need not allege scienter.
- Unlike Section 12(a)(2) of the Securities Act, plaintiffs need not allege privity. Section 18 attributes liability to "[a]ny person who shall make or cause to be made” a material misstatement.
- Although a plaintiff must allege “eyeball reliance” on the SEC filings covered by the statute, this is not a difficult task for an institutional investor. Indeed, the ways in which the specific statements are misleading or fail to state material facts can be persuasively enunciated by investment professionals who are, in effect, experts. The allegations can present defense counsel with unique arguments they had not anticipated and give the case momentum. Accordingly, the investor can present to the court a compelling case of how someone was misled by the disclosures, rather than a case based on anonymous reliance pursuant to the “fraud-on-the-market” doctrine.
- There is a right to a jury trial.
- There is some authority that investment advisors can sue on behalf of clients.
Section 18 does, of course, have some limitations. The security must be publicly traded. The document must be filed “pursuant to the Exchange Act or any rule or regulation thereunder on in any undertaking contained in a registration statement.” The price must be “affected” by the statement. The “damages” must be “caused” by the reliance. The limitations or repose period appears to be one and three years, respectively, as with the Section 13 of the Securities Act. Some courts have required plaintiffs to plead facts creating a strong inference of negligence.
In summary, Section 18 may be able to reach defendants that Section 12(a)(2) cannot and its “eyeball reliance” requirements may actually enhance the merits of an institutional plantiffs’ case.