Securities Act - Liability

Section 11 • Damages• Negative causation • Indemnification

(last updated 19 Feb 13)

Compute §11 damages …

§11(e) Measure of damages

The suit authorized under subsection (a) of this section may be to recover such damages as shall represent the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and (1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and the value thereof as of the time such suit was brought …

Damages =

(1) Hold until judgment: amount paid (up to exceeding offering price) minus “value” at suit

(2) Sell in market before suit: amount paid (up to exceeding offering price) minus selling price

(3) Sell after suit, before judgment: amount paid (up to offering price) minus selling price BUT (3) cannot exceed (1)

§11 damages

IPO price $20.00

Pls purchase $25.00

Market price at suit $9.00

Market price at judgment $1.00

§11 damages

IPO price $20.00

Pls purchase $25.00

Market price at suit $9.00

Market price at judgment $1.00

(1) Plaintiffs hold stock through judgment.

(2) Plaintiffs sell at $15.00 on market before suit. 

(3) Plaintiffs sell at $5.00 on market after suit, before judgment.

§11 damages

IPO price $20.00

Pls purchase $25.00

Market price at suit $9.00

Market price at judgment $1.00

(1) Hold: $20 minus $9 (plus $1) = $12

(2) Sell bf suit: $20 minus $15 (plus $15) = $20

(3) Sell aft suit: $20 minus $9 (plus $5) = $16

Your advice to § 11 plaintiffs?

What is “fair” value?

Beecher v. Able(SDNY 1975)

$80.00-82.50 (Def: “panic selling”) (small diff btn offering price

and “value at suit”)

$41.00 (Pl: “financial crisis” (big diff btn offering price

and “value at suit”)

$75.50 Market price

Offering price$100

Damages = Offering price minus “value at suit”

Beecher v. Able(SDNY 1975)

$80.00-82.50 (Def: “panic selling”) (small diff btn offering price

and “value at suit”)

$41.00 (Pl: “financial crisis” (big diff btn offering price

and “value at suit”)

$75.50 Market price

Offering price$100

Court: • “market for debentures

was sophisticated”• “market [over] reacted to

news … panic selling”• “add 9-1/2 points to

market” (assume constant July-Oct decline)

$85.00

What if extraneous events caused losses?

§11(e) Measure of damages

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, not being true or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading, such portion of or all such damages shall not be recoverable.

Akerman v. Oryx Communications Inc(2d Cir 1987)6/30/81

IPO $4.75

10/15/81corrective disclosure to SEC 

$4.00

11/10/81corrective public disclosure

$3.25

11/25//81 date of suit

$3.50

What was falseabout RS? Only “theoretically material”?

Akerman v. Oryx Communications Inc(2d Cir 1987)6/30/81

IPO $4.75

10/15/81corrective disclosure to SEC 

$4.00

11/10/81corrective public disclosure

$3.25

11/25//81 date of suit

$3.50

Defendant: Oryx's stock price rose and fell at the "exact statistical median" of 100 companies that went public about time of Oryx

100 IPOs

Akerman v. Oryx Communications Inc(2d Cir 1987)6/30/81

IPO $4.75

10/15/81corrective disclosure to SEC 

$4.00

11/10/81corrective public disclosure

$3.25

11/25//81 date of suit

$3.50

Plaintiff: Oryx's stock price under-performed the OTC composite index by 24% (between 10/15 and 11/10).

OTC

Akerman v. Oryx Communications Inc(2d Cir 1987)6/30/81

IPO $4.75

10/15/81corrective disclosure to SEC 

$4.00

11/10/81corrective public disclosure

$3.25

11/25//81 date of suit

$3.50

Defendant: Oryx's stock declined after confidential SEC disclosure, but rose after public disclosure?

Akerman v. Oryx Communications Inc(2d Cir 1987)6/30/81

IPO $4.75

10/15/81corrective disclosure to SEC 

$4.00

11/10/81corrective public disclosure

$3.25

11/25//81 date of suit

$3.50

Who has BOP to show "negative causation"? Did the defendants meet their burden, according to the court?  in your view?

How is §11 liability distributed?

§11 liability

Joint and several liability – §11(f)(1)

Except:(1) UWs (except managing UW) only liable for their allotment - §11(e)(2) Outside directors subject to proportionate liability – §11(f)(2)(3) If liable, may seek contribution “as in cases of contract” (unless party seeking contribution fraudulent and other party not) – §11(f)(1)

Eichensholtz v. Brennan (3d Cir 1995)

IPO leads to §11 suit. Plaintiffs settle with some defendants. UWs do not settle and seek (1) contribution from settling defendants and (2) indemnification from issuer.

Why does indemnification (here from issuer) run counter to policies of the Securities Act?

Shouldn’t settlement be encouraged by not allowing contribution claims by non-settling defendants? What is ”proportionate judgment” rule?

Eichensholtz v. Brennan (3d Cir 1995)

Plaintiffs

Defendant(not settles)

Defendant(settles)

Contribution(share liability)

Indemnification (complete liability)

Proportionate fault rule:Non-settling defendantliable only for its % fault as found by jury. Plaintiffargues for high % - risk of “bad settlement” on Pl !!

The end