Securities Fraud Provisions Apply to Settlement Agreements

In settling disputes with shareholders or former employees, businesses often repurchase the stock in the company owned by the settling shareholders or former employees.  When entering into these settlements, business lawyers need to remind themselves that these settlements are subject to the securities fraud provisions in state securities laws, and that the settlement transaction may result in future litigation if there is a significant increase in the value of the company shortly after these shares have been repurchased.

In Oregon, the key statute is ORS 59.115 which imposes liability for selling stock by means of an untrue statement or omission of material fact.  The key case is Towery v. Lucas, 128 Or App 555, 876 P2d 814 (1994), holding that the antifraud provisions apply to settlement agreements to the same extent as any other transaction that involves the sale of securities.

While Washington's securities antifraud states are different from those in Oregon, Washington courts also recognize that in certain circumstances a misrepresentation or omission in settlement negotiations can be actionable under its statutes.  In Guarino v. Interactive Objects, Inc., 122 Wash App 95, 86 P3d 1175 (2004), the dispute involved a claim to severance benefits by former officers of the company.  The company repurchased stock owned by the former officers as part of the settlement of the severance benefits claim without disclosing that the company had signed a letter of intent to merge with another company.  When that merger occurred, the value of the company's stock increased dramatically.  The appellate court found the failure to disclose the possible merger to be actionable under Washington's securities laws.