11 & choi pritchardsecurities regulation Section 11 Damages

11

&choi pritchard securities regulation

Section 11Damages

22


Section 11 LiabilitySection 11(e)

Price Paid(but not greaterthan Offer Price)

-

1. Value atsuit filing

2. Resale Pif sold before

suit filing

3. Resale Pif after suit filing(no lower than

value at suit filing)

(Price - X), where X =

33


Section 11 LiabilitySection 11(e)

Provided, that if the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted, ... such portion of or all such damages shall not be recoverable.

44


Section 11 LiabilitySection 11(g)

In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public

55


Section 11 LiabilityDamages

§ 11(e) provides measure of damages

- §11(e) provides affirmative “negative (loss) causation” defense

§11(g) states that the amount of damages cannot exceed the public offering price

§11(f) defendants are jointly and severally liable

- certain defendants receive cap on damages

- §11(e) underwriters’ liability is capped at the total price underwritten and distributed

- §11(f)(2) outside directors are proportionately liable if they did not know of violation

66


Section 11 LiabilityInterPhone (Hypothetical 4)

InterPhone

IPO10 million shares

$20 / share

Registration Statement

omitted Elmo’s criminal conviction

overstated $10m in earnings

$10 / share

Bird

100 shares

77


Section 11 LiabilityInterPhone (Hypothetical 4, Scenario 1)

Bird chooses to hold onto her 100 InterPhone shares until the end of the lawsuit(at which point judgment is returned against InterPhone).

InterPhone100

shares

Bird gets $10 per share x 100 shares = $1,000

88



Two months after the IPO (and before filing of suit), Bird sells her shares at the then market price of $30 / share to Rosita. Rosita holds on to her shares until judgment.

InterPhone$20

per share

$30

per share

Bird gets $0 because she sold above her purchase price.

99



Two months after the IPO (and before filing of suit), Bird sells her shares at the then market price of $15 / share to Rosita. Rosita holds on to her shares until judgment.

InterPhone$20

per share

$15

per share

Bird gets $20 - $15 = $5 per share x 100 shares = $500.

Rosita gets $15 - $10 = $5 per share x 100 shares = $500.

1010


Section 11 LiabilityInterPhone (Hypothetical 4 , Scenario 4)

Eight months after the IPO (two months after filing suit), Bird sells her shares at $15 / share to Rosita.

InterPhone$20

per share

$15

per share


1111


Section 11 LiabilityInterPhone (Hypothetical 4 , Scenario 4)

Eight months after the IPO (two months after filing suit), Bird sells her shares at $5 / share to Rosita.

InterPhone$20

per share

$5

per share


1212


PLAINTIFF’S VALUATION

- market price is best evidence of fair value

- debenture market was free, open and sophisticated

- reduce the trading price on day of suit by a sum which reflects undisclosed financials

$75 million convertibledebentures

Section 11 LiabilityBeecher v. Able

DouglasAircraft

1313


DEFENDANT’S VALUATION

- market price is not an indicator of fair value

- debenture market was volatile

- look at the optimistic long-range prospects of the company: off-set panic selling and reflect anticipated future gains



DouglasAircraft

1414




DouglasAircraft

Mkt Price

Value is Less -Market Slow to Respond -Other undisclosed neg. info

Value is More -Panic Selling -Other undisclosed pos. info

1616



2. Does the analysis in Beecher give you much confidence in the ability of courts to determine the fair value of a security?

1717



9/26/1966(Right beforeClass End)

10/14/1966(Filing of Suit

Date)

$88

$75 ½ (Mkt P)

$84.92 (Court Calc. P)

Class End(Neg. Info

Announcement)

1818


Section 11 Liability

ValueValue < Mkt P (Filing of Suit) -Market Slow to Respond -Other undisclosed negative info

Value > Mkt P (Filing of Suit) -Panic Selling -Other undisclosed positive info

Offer P

Plaintiff:-Drop in excess of market movement-Other positive info disclosed at same time-Leaked info about fraud prior to event study

Defendant:-Drop due to overall market movement-Other negative info disclosed at same time

Loss Causation

1919


Section 11 LiabilityAkerman v. Oryx Communications Inc.

$5.00

$4.50

$4.00

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$0.50JUN AUG OCT DECJUL SEP NOV

$4.75

$4.00

$3.25$3.50

IPO

disclosureto public

disclosureto SEC date

of suit

2020



1. Is the accounting error in Akerman really material only as a “theoretical matter”? If you were an investor, would you care about such an error? If the error is material, does the fact that the error is “innocent” matter under § 11?

2121



2. Why might the date of announcement by the firm not coincide with the date at which the market learns of the fraud?

2626


Section 11Indemnification, Contribution, and Joint and Several Liability

2828


Section 11 LiabilityEichensholtz v. Brennan

International

Thoroughbred

Breeders

Garden StateRacetrack

publicoffering

Investors

First Jerseyunderwriters

settlement

indemnification

3131


Section 11 LiabilityEichensholtz v. Brennan

3. Should underwriters be allowed to purchase insurance against potential § 11 liability?

3737


Section 11 LiabilitySection 11(f)

(f)(1) Except as provided in paragraph (2), all or any one or more of the persons specified in section (a) shall be jointly and severally liable, and every person who became liable to make any payment under this section may recover contribution as in cases of contract . . . .

(2) (A) The liability of an outside director under subsection (e) shall be determined in accordance with section 21D(g) of the Securities Exchange Act of 1934 [establishing proportionate liability rule unless covered party found to have knowingly committed violation].

3838


Section 11C/L §10(b) §11 §12(a)(1) §12(a)(2)

Materiality

State ofMind

Reliance

Causation

Damages

yes

yes

scienter

yes

yes

unlimited

yes

yes

scienter

transactioncausation

loss causation

unlimited

yes

yes

strictliability

tracingrequirement

(losscausation)

offeringprice

Misstat. or Omission

3939


Section 11 LiabilitySummary

1. Critical issue for plaintiff class:a. Tracing, i.e., standing

2. Litigation points for issuer:a. Materialityb. Loss causation

3. For secondary defendants:a. Due diligenceb. Proportional liability

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11 & choi pritchardsecurities regulation Section 11 Damages