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Leaving Liability on the "Shelf"A Discussion of the Time Limitations for Bringing Claims against Officers and Directors for Alleged Fraudulent Statements in Shelf Registrations

September 27, 2010

By Paul Hastings Professional

Over the past several years, there has been an onslaught of litigation arising out of the bursting of the real estate bubble and subsequent financial crisis. As a result of the complexity of the financial instruments at issue and the number of parties involved, the subject matter involved requires clients to retain lawyers with sufficient background in economics to understand how to apply legal principles to these factual predicates. Securities litigators are thus provided the opportunity to search for new applications of existing law that may otherwise seem routine. One such opportunity for cutting-edge lawyering arose in the context of claims against a former CFO of Countrywide Financial Corporation (Countrywide) in the federal securities law class action brought against Countrywide and certain of its subsidiaries and former officers and directors.

In that case, a former CFO of Countrywide, who resigned in April 2005, was included as a defendant in the case because Countrywide had used a process called "shelf registration" to sell certain securities pursuant to registration statements and prospectus supplements. Prior to Countrywide, no court had considered the effect of amendments adopted by the Securities and Exchange Commission (SEC) in late 2007 on the three year "statute of repose" for claims under Section 11 of the Securities Act of 1933 (Securities Act) alleging false statements in connection with shelf-offerings. In this matter of first impression, the Court granted in part the motion to dismiss brought by the former CFO based on the statute of repose, and dismissed the claims brought against him under Section 11 with prejudice. The legal arguments and factual analysis illustrate how the law evolves along with the financial world it regulates.

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