What is liability under Section 18 of the 1934 Act?

Section 18 of the 34 imposes liability on any person who shall make or cause to be made any false and misleading statement of material fact in any application, report, or document filed under the act. Section 18 is based upon a theory of fraud. Unlike under rule 10(b)(5), however, Section 18 applies only to the documents required to be filed under the 34 Act. This includes annual, quarterly, and special reports. A plaintiff must prove that:

• the defendant knowingly made a false statement,
• the plaintiff relied on the false or misleading statement, and
• the plaintiff suffered damages as a result of that reliance.

Unlike the sections 11 and 12 of the 1933 Act, the defendants good faith in making the written statement is a defense. Further, unlike sections 11 and 12, the Section 18 plaintiff must prove reliance by the plaintiff shareholder on that information.

Note: The statute of limitations for bringing a Section 18 action was extended under Sarbanes-Oxley Act to 5 years from the wrongful act, and within 2 years of discovery.