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Securities Act - Liability. Section 11 Damages Negative causation Indemnification. (last updated 19 Feb 13). Compute §11 d amages …. §11(e) Measure of damages

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securities act liability

Securities Act - Liability

Section 11

Damages

Negative causation

Indemnification

(last updated 19 Feb 13)

slide3
§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
§11 damages

Pls purchase 

$25.00

IPO price

$20.00

Market price at suit 

$9.00

Market price at judgment

$1.00

11 damages5
§11 damages

(1) Plaintiffs hold stock

through judgment.

Pls purchase 

$25.00

(2) Plaintiffs sell at $15.00

on market before suit. 

IPO price

$20.00

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

Market price at suit 

$9.00

Market price at judgment

$1.00

11 damages6
§11 damages
  • 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

Pls purchase 

$25.00

IPO price

$20.00

Your advice

to § 11 plaintiffs?

Market price at suit 

$9.00

Market price at judgment

$1.00

beecher v able sdny 1975
Beecher v. Able(SDNY 1975)

Offering price

$100

$80.00-82.50 (Def: “panic selling”)

(small diff btn offering price

and “value at suit”)

$75.50 Market price

Damages =

Offering price minus “value at suit”

$41.00 (Pl: “financial crisis”

(big diff btn offering price

and “value at suit”)

beecher v able sdny 19759
Beecher v. Able(SDNY 1975)

Offering price

$100

$85.00

$80.00-82.50 (Def: “panic selling”)

(small diff btn offering price

and “value at suit”)

$75.50 Market price

  • 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)

$41.00 (Pl: “financial crisis”

(big diff btn offering price

and “value at suit”)

slide11
§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
Akerman v. Oryx Communications Inc(2d Cir 1987)

6/30/81

IPO

$4.75

What was false

about RS?

Only “theoretically

material”?

10/15/81

corrective disclosure to SEC 

$4.00

11/25//81

date of suit

$3.50

11/10/81

corrective public disclosure

$3.25

akerman v oryx communications inc 2d cir 198713
Akerman v. Oryx Communications Inc(2d Cir 1987)

6/30/81

IPO

$4.75

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

10/15/81

corrective disclosure to SEC 

$4.00

11/25//81

date of suit

$3.50

11/10/81

corrective public disclosure

$3.25

akerman v oryx communications inc 2d cir 198714
Akerman v. Oryx Communications Inc(2d Cir 1987)

6/30/81

IPO

$4.75

Plaintiff:

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

OTC

10/15/81

corrective disclosure to SEC 

$4.00

11/25//81

date of suit

$3.50

11/10/81

corrective public disclosure

$3.25

akerman v oryx communications inc 2d cir 198715
Akerman v. Oryx Communications Inc(2d Cir 1987)

6/30/81

IPO

$4.75

Defendant:

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

10/15/81

corrective disclosure to SEC 

$4.00

11/25//81

date of suit

$3.50

11/10/81

corrective public disclosure

$3.25

akerman v oryx communications inc 2d cir 198716
Akerman v. Oryx Communications Inc(2d Cir 1987)

6/30/81

IPO

$4.75

Who has BOP to show "negative causation"?

Did the defendants meet their burden, according to the court?  in your view?

10/15/81

corrective disclosure to SEC 

$4.00

11/25//81

date of suit

$3.50

11/10/81

corrective public disclosure

$3.25

slide18
§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
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 199520
Eichensholtz v. Brennan (3d Cir 1995)

Defendant

(settles)

Indemnification

(complete liability)

Contribution

(share liability)

Plaintiffs

Proportionate fault rule:

Non-settling defendant

liable only for its % fault

as found by jury. Plaintiff

argues for high % - risk of “bad settlement” on Pl !!

Defendant

(not settles)