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
Pls purchase
$25.00
IPO price
$20.00
Market price at suit
$9.00
Market price at judgment
$1.00
§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
Market price at suit
$9.00
(3) Plaintiffs sell at
$5.00 on market after
suit, before judgment.
Market price at judgment
$1.00
§11 damages
Pls purchase
$25.00
IPO price
$20.00
(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
Market price at suit
$9.00
Your advice
to § 11 plaintiffs?
Market price at judgment
$1.00
What is “fair” value?
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
Offering price
$100
(SDNY 1975)
$85.00
$80.00-82.50 (Def: “panic selling”)
(small diff btn offering price
and “value at suit”)
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)
$75.50 Market price
$41.00 (Pl: “financial crisis”
(big diff btn offering price
and “value at suit”)
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
6/30/81
IPO
$4.75
(2d Cir 1987)
What was false
about RS?
Only “theoretically
material”?
10/15/81
corrective disclosure to SEC
$4.00
11/10/81
corrective public disclosure
$3.25
11/25//81
date of suit
$3.50
Akerman v. Oryx Communications Inc
6/30/81
IPO
$4.75
(2d Cir 1987)
100 IPOs
10/15/81
corrective disclosure to SEC
$4.00
11/10/81
corrective public disclosure
$3.25
Defendant:
Oryx's stock price rose
and fell at the "exact
statistical median" of
100 companies that
went public about time
of Oryx
11/25//81
date of suit
$3.50
Akerman v. Oryx Communications Inc
6/30/81
IPO
$4.75
(2d Cir 1987)
OTC
Plaintiff:
Oryx's stock price
under-performed the
OTC composite index
by 24% (between
10/15 and 11/10).
10/15/81
corrective disclosure to SEC
$4.00
11/10/81
corrective public disclosure
$3.25
11/25//81
date of suit
$3.50
Akerman v. Oryx Communications Inc
6/30/81
IPO
$4.75
(2d Cir 1987)
Defendant:
Oryx's stock declined
after confidential SEC
disclosure, but rose
after public disclosure?
10/15/81
corrective disclosure to SEC
$4.00
11/10/81
corrective public disclosure
$3.25
11/25//81
date of suit
$3.50
Akerman v. Oryx Communications Inc
6/30/81
IPO
$4.75
(2d Cir 1987)
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
11/10/81
corrective public disclosure
$3.25
11/25//81
date of suit
$3.50
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 nonsettling defendants? What is
”proportionate judgment” rule?
Eichensholtz v. Brennan
(3d Cir 1995)
Defendant
(settles)
Plaintiffs
Indemnification
(complete liability)
Contribution
(share liability)
Defendant
(not settles)
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 !!
The end