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Section 11 Damages

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

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Section 11 Damages

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  1. Section 11Damages

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

  3. 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. 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. 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. Section 11 Liability Bird 100 shares InterPhone • InterPhone (Hypothetical 4) Registration Statement omitted Elmo’s criminal conviction overstated $10m in earnings IPO10 million shares $20 / share $10 / share

  7. Section 11 Liability InterPhone • 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). 100shares Bird gets $10 per share x 100 shares = $1,000

  8. Section 11 Liability InterPhone • 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. $20per share Bird gets $0 because she sold above her purchase price. $30 per share

  9. Section 11 Liability InterPhone • 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. $20per share Bird gets $20 - $15 = $5 per share x 100 shares = $500. $15 per share Rosita gets $15 - $10 = $5 per share x 100 shares = $500.

  10. Section 11 Liability InterPhone • InterPhone (Hypothetical 4 , Scenario 4) Eight months after the IPO (two months after filing suit), Bird sells her shares at $15 / share to Rosita. $20per share Bird gets $20 - $15 = $5 per share x 100 shares = $500. $15 per share

  11. Section 11 Liability InterPhone • InterPhone (Hypothetical 4 , Scenario 4) Eight months after the IPO (two months after filing suit), Bird sells her shares at $5 / share to Rosita. $20per share Bird gets $20 - $10 = $10 per share x 100 shares = $1000. $5 per share

  12. Section 11 Liability $75 million convertibledebentures • Beecher v. Able • PLAINTIFF’S 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 DouglasAircraft

  13. Section 11 Liability $75 million convertibledebentures • Beecher v. Able • DEFENDANT’S 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 DouglasAircraft

  14. Section 11 Liability $75 million convertibledebentures • Beecher v. Able Value is More -Panic Selling -Other undisclosed pos. info DouglasAircraft Mkt Price Value is Less -Market Slow to Respond -Other undisclosed neg. info

  15. Section 11 Liability • Beecher v. Able • Does the analysis in Beecher give you much confidence in the ability of courts to determine the fair value of a security?

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

  17. Section 11 Liability Loss Causation Defendant: -Drop due to overall market movement -Other negative info disclosed at same time Offer P Value > Mkt P (Filing of Suit) -Panic Selling -Other undisclosed positive info Plaintiff: -Drop in excess of market movement -Other positive info disclosed at same time -Leaked info about fraud prior to event study Value < Mkt P (Filing of Suit) -Market Slow to Respond -Other undisclosed negative info Value

  18. 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 $4.75 IPO $4.00 disclosureto SEC $3.50 $3.25 dateof suit disclosureto public JUN JUL AUG SEP OCT NOV DEC

  19. 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?

  20. 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?

  21. Section 11Indemnification, Contribution, and Joint and Several Liability

  22. Section 11 Liability Garden StateRacetrack publicoffering Investors • Eichensholtz v. Brennan InternationalThoroughbredBreeders indemnification First Jersey underwriters settlement

  23. Section 11 Liability • Eichensholtz v. Brennan 3. Should underwriters be allowed to purchase insurance against potential § 11 liability?

  24. 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].

  25. Section 11 §12(a)(2) C/L §10(b) §11 §12(a)(1) Misstat. or Omission yes yes yes yes yes yes Materiality strictliability State ofMind scienter scienter tracingrequirement transactioncausation yes Reliance (losscausation) loss causation yes Causation offeringprice unlimited unlimited Damages

  26. Section 11 Liability • Summary • Critical issue for plaintiff class: • a. Tracing, i.e., standing • Litigation points for issuer: • Materiality • Loss causation • For secondary defendants: • Due diligence • Proportional liability

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