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 (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 damages Your advice to § 11 plaintiffs? Hold: $20 minus $9 Pls purchase  $25.00 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 IPO price $20.00 Your advice to § 11 plaintiffs? Market price at suit  $9.00 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 (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”)

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 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 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 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 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 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

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) Defendant (settles) Plaintiffs Indemnification (complete liability) Contribution (share liability) 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)

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