Liability in Securities Offerings Underwriter and accountant due diligence Last updated 06 Feb 12

Securities Class Action Software Toolworks (Issuer) Deloitte & Touche (auditor) Directors Officers Investors Plaintiffs Defendants Claims –’33 Act § 11 –’34 Act Rule 10b-5 Defenses Montgomery Securities PaineWebber (lead underwriters)

Section 11 Liability (’33 Act) Prospectus Issuer – strict Ds / Os / UWs – due diligence defense (reasonable investigation + reasonable belief true) Auditor (expert) – no liability Financials Issuer – strict Ds / Os / UWs – not believe false Auditor (expert) – due diligence defense (reasonable investigation + reasonable belief true)

Rule 10b-5 (’34 Act) Securities fraud Material misrepresentation Scienter (actual knowledge or reckless disregard) Reliance Causation Damages

Securities Class Action Underwriters (Montgomery Securities and PaineWebber) –granted summary judgment on Section11 and Rule 10b-5 –what does this mean? –What do plaintiffs appeal? Accountant (Deloitte & Touche) –granted summary judgment on Section 11 and 10b-5 –What do plaintiffs appeal? –Why don’t plaintiffs appeal Section 11 judgment for defendants? Software Toolworks (Issuer) Deloitte & Touche (auditor) Directors Officers Montgomery Securities PaineWebber (lead underwriters) Investors

Underwriter defense …

Underwriter defense ’33 Act § 11 “after reas investigation, believed true” OR (2) “no reason believe false” ’34 Act Rule 10b-5 No “actual knowledge” AND No “recklessness (extreme departure ordinary care)” Business – price reductions “Nintendo not subject to price reductions” “customers do not have return rights” Recognition of OEM revenue Korean manufacturer backdates contract Law firm not give comfort letter on OEM contracts Contracts were contingent Contingent sales Barron’s says slumping sales and bad accounting SEC told that data not available Late June sales were bogus

Underwriter defense ’33 Act § 11 “after reas investigation, believed true” OR (2) “no reason believe false” ’34 Act Rule 10b-5 No “actual knowledge” AND No “recklessness (extreme departure ordinary care)” Business – price reductions “Nintendo not subject to price reductions” “customers do not have return rights” Recognition of OEM revenue Korean manufacturer backdates contract Law firm not give comfort letter on OEM contracts Contracts were contingent Contingent sales Barron’s says slumping sales and bad accounting SEC told that data not available Late June sales were bogus

Underwriter defense ’33 Act § 11 “after reas investigation, believed true” OR (2) “no reason believe false” ’34 Act Rule 10b-5 No “actual knowledge” AND No “recklessness (extreme departure ordinary care)” Business – price reductions “Nintendo not subject to price reductions” “customers do not have return rights” Recognition of OEM revenue Korean manufacturer backdates contract Law firm not give comfort letter on OEM contracts Contracts were contingent Contingent sales Barron’s says slumping sales and bad accounting SEC told that data not available Late June sales were bogus

Underwriter defense ’33 Act § 11 “after reas investigation, believed true” OR (2) “no reason believe false” ’34 Act Rule 10b-5 No “actual knowledge” AND No “recklessness (extreme departure ordinary care)” Business – price reductions “Nintendo not subject to price reductions” “customers do not have return rights” Recognition of OEM revenue Korean manufacturer backdates contract Law firm not give comfort letter on OEM contracts Contracts were contingent Contingent sales Barron’s says slumping sales and bad accounting SEC told that data not available Late June sales were bogus

Auditor defense …

Auditor defense ’33 Act § 11 (1)“after reas investigation, believed true” Not appealed ’34 Act Rule 10b-5 (1) No “actual knowledge” (2) No “recklessness – no extreme departure ordinary care” Recognition of OEM revenue OEM agreements poorly documented Management under “extraordinary pressure” Deloitte only got oral assurances on some contracts No information on return policies SEC letters SEC told that June data not available Sample OEM contract differed from actual contracts

Auditor defense ’33 Act § 11 (1)“after reas investigation, believed true” Not appealed ’34 Act Rule 10b-5 (1) No “actual knowledge” (2) No “recklessness – no extreme departure ordinary care” Recognition of OEM revenue OEM agreements poorly documented Management under “extraordinary pressure” Deloitte only got oral assurances on some contracts No information on return policies SEC letters SEC told that June data not available Sample OEM contract differed from actual contracts

Auditor defense ’33 Act § 11 (1)“after reas investigation, believed true” Not appealed ’34 Act Rule 10b-5 (1) No “actual knowledge” (2) No “recklessness – no extreme departure ordinary care” Recognition of OEM revenue OEM agreements poorly documented Management under “extraordinary pressure” Deloitte only got oral assurances on some contracts No information on return policies SEC letters SEC told that June data not available Sample OEM contract differed from actual contracts

The end (mercifully)