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11 & choi pritchardsecurities regulation Section 11 Damages.

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Presentation on theme: "11 & choi pritchardsecurities regulation Section 11 Damages."— Presentation transcript:

1 11 & choi pritchardsecurities regulation Section 11 Damages

2 22 & choi pritchardsecurities regulation Section 11 Liability Section 11(e) Price Paid (but not greater than Offer Price) - 1. Value at suit filing 2. Resale P if sold before suit filing 3. Resale P if after suit filing (no lower than value at suit filing) (Price - X), where X =

3 33 & choi pritchardsecurities regulation Section 11 Liability Section 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.

4 44 & choi pritchardsecurities regulation Section 11 Liability Section 11(g) In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public

5 55 & choi pritchardsecurities regulation Section 11 Liability Damages § 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

6 66 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 4) InterPhone IPO 10 million shares $20 / share Registration Statement omitted Elmos criminal conviction overstated $10m in earnings $10 / share Bird 100 shares

7 77 & choi pritchardsecurities regulation Section 11 Liability InterPhone (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). InterPhone 100 shares Bird gets $10 per share x 100 shares = $1,000

8 88 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 4, Scenario 2) 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.

9 99 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 4, Scenario 3) 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.

10 10 & choi pritchardsecurities regulation Section 11 Liability InterPhone (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 Bird gets $20 - $15 = $5 per share x 100 shares = $500.

11 11 & choi pritchardsecurities regulation Section 11 Liability InterPhone (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 Bird gets $20 - $10 = $10 per share x 100 shares = $1000.

12 12 & choi pritchardsecurities regulation PLAINTIFFS 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 convertible debentures Section 11 Liability Beecher v. Able Douglas Aircraft

13 13 & choi pritchardsecurities regulation DEFENDANTS 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 $75 million convertible debentures Section 11 Liability Beecher v. Able Douglas Aircraft

14 14 & choi pritchardsecurities regulation $75 million convertible debentures Section 11 Liability Beecher v. Able Douglas Aircraft Mkt Price Value is Less -Market Slow to Respond -Other undisclosed neg. info Value is More -Panic Selling -Other undisclosed pos. info

15 15 & choi pritchardsecurities regulation Section 11 Liability Beecher v. Able 1. Is the court correct in dismissing the plaintiffs argument that the market would have reduced the price of Douglas had it known the negative non-public information? But why, even if the court were correct, wouldnt negative information at least increase the probability of poorer financial performance and therefore warrant a reduced price for the Douglas debentures?

16 16 & choi pritchardsecurities regulation Section 11 Liability Beecher v. Able 2.Does the analysis in Beecher give you much confidence in the ability of courts to determine the fair value of a security?

17 17 & choi pritchardsecurities regulation Section 11 Liability Beecher v. Able 9/26/1966 (Right before Class End) 10/14/1966 (Filing of Suit Date) $88 $75 ½ (Mkt P) $84.92 (Court Calc. P) Class End (Neg. Info Announcement)

18 18 & choi pritchardsecurities regulation Section 11 Liability Value Value < 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

19 19 & choi pritchardsecurities regulation Section 11 Liability Akerman v. Oryx Communications Inc. $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 JUN AUG OCT DEC JUL SEP NOV $4.75 $4.00 $3.25 $3.50 IPO disclosure to public disclosure to SEC date of suit

20 20 & choi pritchardsecurities regulation Section 11 Liability Akerman v. Oryx Communications Inc. 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?

21 21 & choi pritchardsecurities regulation Section 11 Liability Akerman v. Oryx Communications Inc. 2. Why might the date of announcement by the firm not coincide with the date at which the market learns of the fraud?

22 22 & choi pritchardsecurities regulation Section 11 Liability Akerman v. Oryx Communications Inc. 3.How does theoretical materiality relate to the defendants burden of showing loss causation? Do you think the plaintiff in Akerman benefited much from having the burden of proof on the loss causation issue placed on the defendants?

23 23 & choi pritchardsecurities regulation Section 11 Liability Akerman v. Oryx Communications Inc. 4.What is the importance of the procedural posture of the case?

24 24 & choi pritchardsecurities regulation corrective statement Section 11 Liability InterPhone (Hypothetical 5) InterPhone IPO rumors industry magazine article Federal Reserve Chairman testimony suit filed low trading volume covered by one analyst

25 25 & choi pritchardsecurities regulation corrective statement Section 11 Liability InterPhone (Hypothetical 5) InterPhone IPO rumors industry magazine article Federal Reserve Chairman testimony suit filed low trading volume covered by one analyst

26 26 & choi pritchardsecurities regulation Section 11 Indemnification, Contribution, and Joint and Several Liability

27 27 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Bonus Hypothetical) InterPhone Zoe CEO and Director Arthur & Young Auditor

28 28 & choi pritchardsecurities regulation Section 11 Liability Eichensholtz v. Brennan International Thoroughbred Breeders Garden State Racetrack public offering Investors First Jersey underwriters settlement indemnification

29 29 & choi pritchardsecurities regulation Section 11 Liability Eichensholtz v. Brennan 1. Is indemnification only an issue for underwriters who fail to meet due diligence?

30 30 & choi pritchardsecurities regulation Section 11 Liability Eichensholtz v. Brennan 2.Who bears the risk under the proportionate reduction method? Do the settling defendants or the plaintiffs end up making up the difference when the non-settling defendants judgment is reduced?

31 31 & choi pritchardsecurities regulation Section 11 Liability Eichensholtz v. Brennan 3.Should underwriters be allowed to purchase insurance against potential § 11 liability?

32 32 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 6) InterPhone Zoe CEO and Director Oscar Outside Director Sparrow Securities Managing Underwriter Arthur & Young Auditor

33 33 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 6) InterPhone Zoe CEO and Director Sparrow Securities Managing Underwriter enforceable indemnity provision

34 34 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 6) InterPhone settling CEO and Director settling Outside Director not settling Managing Underwriter not settling Auditor

35 35 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 6) InterPhone Zoe CEO and Director Oscar Outside Director Sparrow Securities Managing Underwriter Arthur & Young Auditor

36 36 & choi pritchardsecurities regulation Section 11 Liability InterPhone (Hypothetical 6) InterPhone Investors Sparrow Securities bonus payments shares (from allotment) InterPhone had no knowledge of compensation practice

37 37 & choi pritchardsecurities regulation Section 11 Liability Section 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].

38 38 & choi pritchardsecurities regulation Section 11 C/L §10(b) §11 §12(a)(1) §12(a)(2) Materiality State of Mind Reliance Causation Damages yes scienter yes unlimited yes scienter transaction causation loss causation unlimited yes strict liability tracing requirement (loss causation) offering price Misstat. or Omission

39 39 & choi pritchardsecurities regulation Section 11 Liability Summary 1.Critical issue for plaintiff class: a.Tracing, i.e., standing 2.Litigation points for issuer: a.Materiality b.Loss causation 3.For secondary defendants: a.Due diligence b.Proportional liability


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