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Legal Memorandum: Securities Fraud Claim

Issue: Does transfer of stock automatically transfer a securities fraud claim?

Area of Law: Corporate & Securities
Keywords: Securities fraud claim; Transfer of stock
Jurisdiction: Federal
Cited Cases: 772 F.2d 1486; 757 F. Supp. 1365; 132 F. Supp. 2d 92; 977 F.2d 946
Cited Statutes: None
Date: 08/01/2010

As a general rule, courts have held that a securities fraud claim is not automatically assigned or transferred when a security is sold or otherwise transferred to a third party.  See Smith v. Ayres, 977 F.2d 946, 950 (5th Cir. 1992); In re Nucorp Energy Sec. Litig., 772 F.2d 1486, 1490 (9th Cir. 1985); Combs v. Case, 2007 U.S. Dist. LEXIS 95604 (D. Hawai’i Sept. 20, 2007); Farey-Jones v. Buckingham, 132 F. Supp. 2d 92 (E.D.N.Y. 2001); Amerifirst Bank v. Bomar, 757 F. Supp. 1365 (S.D. Fla. 1991).

In Nucorp, the Ninth Circuit addressed claims under the Trust Indenture Act, which provides a cause of action for persons who purchase securities issued under an indenture if the purchaser relies on misleading statements or omissions and suffers actual damages.  The particular claims at issue were brought by a group of investors who had not purchased in reliance on the claimed misrepresentations, but instead purchased from the original purchasers who had so relied.  The issue was whether the direct purchasers’ rights were transferred along with the securities.  The court noted that a cause of action arising from reliance on misrepresentation is personal to those persons who relied upon it, and does not follow the security to remote purchasers who had no basis for reliance.  Id. at 1490.   The court found “no more reason to provide a remedy to these subsequent purchasers than […]

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