Case Name: MORGAN STANLEY & CO. INCORPORATED, Appellant, v. COLEMAN (PARENT) HOLDINGS INC., Appellee
Court: Florida District Court of Appeal
Jurisdiction: Florida
Decision Date: 2007-03-21
Citations: 955 So. 2d 1124
Docket Number: No. 4D05-2606
Parties: MORGAN STANLEY & CO. INCORPORATED, Appellant, v. COLEMAN (PARENT) HOLDINGS INC., Appellee.
Judges: SHAHOOD, J., concurs.
Reporter: Southern Reporter, Second Series
Volume: 955
Pages: 1124–1140

Head Matter:
MORGAN STANLEY & CO. INCORPORATED, Appellant, v. COLEMAN (PARENT) HOLDINGS INC., Appellee.
No. 4D05-2606.
District Court of Appeal of Florida, Fourth District.
March 21, 2007.
Rehearing Denied June 4, 2007.
Bruce S. Rogow of Bruce S. Rogow, P.A., Fort Lauderdale, and Sylvia H. Wal-bolt of Carlton Fields, P.A., West Palm Beach, for appellant.
Joel D. Eaton of Podhurst Orseck, PA., Miami, Jerold S. Solovy, Ronald L. Mariner and Paul M. Smith of Jenner & Block LLP, Chicago, IL, and Jack Scarola of Searcy Denney Scarola Barnhart & Ship-ley, P.A., West Palm Beach, for appellee.

Opinion:
TAYLOR, J.
This appeal arises from a merger between The Coleman Company, Inc., a manufacturer of camping gear, and Sunbeam, Inc., a manufacturer of household products. Coleman (Parent) Holdings Inc. (CPH), which owned most of the Coleman stock before the merger, exchanged its stock for shares of Sunbeam stock. Later, as reports emerged that Sunbeam's sales were falling and that the company had artificially inflated the value of its stock, Sunbeam's stock price plunged. Sunbeam ultimately declared bankruptcy. CPH sued Morgan Stanley & Co., Inc. (Morgan Stanley), Sunbeam's investment banker in the transaction, alleging that Morgan Stanley helped Sunbeam in carrying out its fraudulent scheme to inflate the price of its stock until after the merger. A jury returned a verdict against Morgan Stanley for conspiracy and aiding and abetting fraud. It awarded CPH compensatory damages of $604,334,000 and punitive damages of $850 million. Morgan Stanley appeals the $1.58 billion judgment entered on the jury verdict. We reverse.
Morgan Stanley raises several issues on appeal, including: (1) whether the trial court improperly entered a partial default against Morgan Stanley as a sanction for discovery misconduct; (2) whether the trial court properly applied Florida law rather than New York law on the issues of justifiable reliance and damages; (3) whether CPH failed to prove compensatory damages by not establishing the fraud-free value of the Sunbeam stock on the date of the merger transaction; (4) whether the trial court erred in denying Morgan Stanley a fair opportunity to contest and mitigate evidence of litigation misconduct presented during the punitive damages phase of trial; and, (5) whether the punitive damages awarded were excessive. Because our decision on the third issue regarding proof of damages is dispositive, we do not reach the other issues and confine our discussion to compensatory and punitive damages.
A. Compensatory Damages
Pursuant to the merger agreement, Sunbeam bought the Coleman stock and paid CPH approximately half of the purchase price with its own stock. CPH received 14.1 million shares of Sunbeam stock, with an estimated value over $600 million. The transaction closed on March 30,1998.
The merger agreement contained a "lockup" restriction, which limited CPH's ability to sell its Sunbeam stock for a specified period. CPH could not sell more than 25% of the Sunbeam stock for 90 days, then could sell another 25% in another 90 days and the remaining 50% in 270 days. A "lockup" provision is customary in situations where, as here, a company is selling a substantial number of shares and wants them sold in an orderly fashion. The shares were unregistered, but Sunbeam had agreed to register them promptly.
On April 3, 1998, Sunbeam issued a press release announcing that first quarter sales would be 5% below 1997 sales and that the company would show a loss for the quarter. Sunbeam stock dropped 10%, to $34 a share, after this report.
In mid-June 1998, Sunbeam's CEO, AI Dunlap, was fired after an internal investigation revealed fraudulent bookkeeping. Jerry Levin, formerly Coleman's CEO, then took the reins as Sunbeam's CEO and brought several senior Coleman executives with him. By then, the stock price had dropped to $18. Shortly after Dunlap's firing, Arthur Andersen "pulled" its 1996 and 1997 audit certificates.
By the end of 1998, Levin and his team had been at Sunbeam for almost six months. The company had restated its financials for 1996 and 1997, reducing the loss in 1996 and moving it to 1997. Sunbeam still showed a profit for 1997, even after the restatement, and still had assets of $3.5 billion.
Originally, GpH had planned to sell the Sunbeam shares after the "lockup" period. However, several circumstances prevented it from 'doing so. ' First, because of the fraud and Arthur Andersen's restatement of Sunbeam's financials, registration of the Sunbeam shares could not be completed until late 1999. Registration of a security is required before it can be sold in the public markets. Second, according to CPH, if, at any time after June 1998, the market had learned that CPH was attempting to sell its Sunbeam stock, "the market would clearly have viewed that as CPH abandoning a sinking ship and would have destroyed any value for the CPH stock." Third, because senior executives previously affiliated with CPH had assumed positions on Sunbeam's board and gained access to information concerning Sunbeam's performance, CPH was concerned that selling any of its Sunbeam shares could subject it to liability for insider trading.
On February 6, 2001, nearly three years after the transaction closed, Sunbeam went bankrupt. Howard Gittis, the vice-chairman of CPH, testified that, in his opinion, Sunbeam went bankrupt because it was overleveraged, i.e., had too much debt. As a result of the bankruptcy, CPH's Sunbeam shares became worthless.
At trial, CPH sought benefit-of-the-bargain damages. To establish these, CPH presented the testimony of its expert, Dr. Blaine Nye, a financial economist. Dr. Nye testified that CPH suffered damages between $634 and $680 million. He used an expected value for the 14.1 million Sunbeam shares of $48.26 per share (based on the average share price from the time the deal was publicly disclosed until the day it closed), for a total expected value of more than $680 million. Dr. Nye stated his opinion that, because CPH never was able to realize any value from the shares, CPH effectively received "zero" value. As an alternative, he assumed that three-quarters of the shares were saleable in the first quarter of 2000, which would have yielded a share price of $4.35 per share (averaged over the quarter). By that method, CPH's loss amounted to $634 million.
Morgan Stanley objected to the admission of Dr. Nye's opinion on damages. It argued that Dr. Nye's testimony was incompetent, because he did not factor a valuation date into his analysis. Contrary to the requirements set by settled law on fraud damages, his opinion was not based upon the value of the stock on the March 30, 1998 date of the transaction. The court overruled the objection. During cross-examination of Dr. Nye, Morgan Stanley established that Dr. Nye did not calculate the actual value of Sunbeam shares at any point in time. Departing from his practice in other securities cases, he did not determine the "fraud-free" price of Sunbeam stock on the date of closing. He simply assumed CPH could not have recovered any value, as he was instructed to do by CPH. He did not consider whether other factors affected the stock price, such as business decisions by the new management team or the stock market crash of 2000. He did not analyze whether Sunbeam's acquisition of other small companies during this time created problems. He did not look at Sunbeam's expenses while it was being operated by the new management.
After Dr. Nye's examination, Morgan Stanley moved to strike Dr. Nye's testimony and renewed its earlier motions in li-mine and motion to exclude. Morgan Stanley argued that Dr. Nye's testimony was legally deficient, pointing out that the expert admitted at trial, as well as in deposition, that he "did not use the date of the deal at all" in his analysis and made no attempt to estimate the value of the loss as of March 30, 1998. The court denied the motions. It also denied Morgan Stanley's motion to direct a verdict in its favor due to CPH's failure to prove damages.
On May 16, 2005, the jury returned a verdict finding, by clear and convincing evidence, that CPH relied on the false statements made by Morgan Stanley or Sunbeam, and that it suffered damages as a result. The jury awarded CPH compensatory damages in the amount of $604,334,000. Two days later, after brief testimony regarding punitive damages, the jury returned a verdict for punitive damages in the amount of $850 million. Morgan Stanley appealed the entire judgment on these verdicts.
CPH sought benefit-of-the-bargain damages from Morgan Stanley. Under the "flexibility theory" of damages followed in Florida, a defrauded party is entitled to the measure of damages that will fully compensate him. Nordyne, Inc. v. Fla. Mobile Home Supply, Inc., 625 So.2d 1283, 1286 (Fla. 1st DCA 1993) ("The 'flexibility theory' permits the court to use either the 'out-of-pocket' or the 'benefit-of-the-bargain' rule, depending upon which is more likely fully to compensate the injured party."). At CPH's request, the trial court concluded that CPH was entitled to benefit-of-the-bargain damages. Damages under the benefit-of-the-bargain rule are measured by the difference between the value of the property as represented and the actual value of the property on the date of the transaction. Kind v. Gittman, 889 So.2d 87, 90 (Fla. 4th DCA 2004); Totale, Inc. v. Smith, 877 So.2d 813, 815 (Fla. 4th DCA 2004); Teca, Inc. v. WM-TAB, Inc., 726 So.2d 828, 829 (Fla. 4th DCA 1999); Perlman v. Ferman Corp., 611 So.2d 1340, 1341 (Fla. 4th DCA 1993). Actual value of the property at the time of purchase is a "crucial element in the damage equation." Teca, 726 So.2d at 829. This is so whether a plaintiff seeks benefit-of-the-bargain damages or an out-of-pocket measure of damages. Kind, 889 So.2d at 90; Totale, 877 So.2d at 815. The same standard is applied in federal securities cases. See Miller v. Asensio & Co., 364 F.3d 223, 227 (4th Cir.2004) (citing Affiliated Ute Citizens v. U.S., 406 U.S. 128, 155, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972)) (stating that the measure of damages in 10(b) case was the difference between the fair value of what plaintiff received and the fair value of what they would have received had there been no fraudulent conduct at the time of sale); In re Imperial Credit Indus., Inc. Sec. Litig., 252 F.Supp.2d 1005, 1014 (C.D.Cal.2003).
As a general rule, plaintiffs alleging securities fraud rely on expert proof to establish both the fact of damage and the appropriate method of calculation. Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 301 (3d Cir.1991). CPH's expert testified as to the bargained-for value of the Sunbeam stock, but he did not testify as to the actual value of the Sunbeam stock at the time of purchase — a necessary element of proof. He testified that although he had done such calculations in other cases, in this case he did not isolate the fraud-free price and perform the standard securities analysis to determine what would have been the stock's value on the date of transaction. Instead, he treated the stock as though it had no value when the transaction occurred in 1998.
CPH defends the evidence it presented at trial on damages. It argues that Morgan Stanley is liable for the full amount of its loss, because Morgan Stanley defrauded CPH into accepting shares that it could not resell. It contends that "in cases where misconduct induces a plaintiff to purchase stock and then hinders the plaintiff from reselling that stock, courts repeatedly have held that the wrongdoer is liable for losses until resale can occur." CPH maintains that, because it could not sell its stock, it was not bound by the date-of-transaction rule, but could recover for stock price declines until such time as it could resell the stock. Consistent with CPH's theory of damages, the trial court instructed the jury to value the stock on the date CPH could first resell it after December 1999, when the shares could be registered.
Morgan Stanley counters that CPH should not be allowed to recover for declines in Sunbeam's stock price during the period that CPH had agreed to a contractual "lockup". By agreeing to the "lockup", CPH bargained for at least part of the stock's illiquidity and accepted the risk of declines in stock price due to market conditions or other non-fraud related factors during the "lockup period". Thus, to allow CPH to recover for non-fraud related losses during the "lockup" period, when CPH had effectively agreed to absorb non-fraud related losses for that period, would amount to giving CPH more than what it bargained for. The record shows that Sunbeam lost approximately 90% of its value during the contractual "lockup" time-frame.
CPH maintains that it is entitled to recover for even non-fraud related stock price declines during this period, because it would not have entered the agreement, with its "lockup" clause, but for the fraud. However, CPH's "but for" causation argument disregards the proximate causation required for fraud damages and is at odds with the benefit-of-the-bargain recovery it elected. Benefit-of-the-bargain damages do not turn on what would have happened if CPH had known the representations were false. They measure what CPH would have received had the representations been true. By opting for benefit-of-the-bargain damages, CPH does not seek to rescind the transaction; it seeks to affirm the transaction and claim the benefit of the bargain. The bargain, in this case, included sale restrictions.
A plaintiff who seeks a benefit-of-the-bargain measure of damages is not entitled to a better bargain than the one it made. This is true even under Florida's "flexibility theory" of damages. The "flexibility theory" of damages, which allows a plaintiff to chose either benefit-of-the-bargain or out — of-pocket damages in fraud cases, is not so flexible as to allow a plaintiff to pick and choose which parts of the contract it wants to affirm and which parts it wants to disaffirm. Furthermore, applying CPH's "but for" rationale to proving damages would result in recovery of all non-fraud related losses in virtually every fraud case, because the defrauded party would need only assert that it would not have agreed to the contract had it known of the fraud.
To support its argument that it was entitled to all "pre-sale" losses, CPH relies primarily on Shearson Loeb Rhoades, Inc. v. Medlin, 468 So.2d 272, 273 (Fla. 4th DCA 1985). However, Shearson hinders rather than helps CPH's claim. In that case, we held that the measure of damages for delay in delivery of stock certificates is the difference between the value when the certificates should have been delivered and the value when they were actually delivered. We barred damages for subsequent depreciation absent proof that the plaintiff "would have sold" earlier had the stock been properly delivered. Here, CPH introduced no such proof. To the contrary, it had actually agreed not to sell during the most critical period when Sunbeam lost 90% of its value.
As to the date-of-transaction rule, CPH argues that the transaction date is not necessarily the operative valuation date in a case involving stock or other property that, due to fraud, could not be resold when the fraud was exposed. It contends that once it placed in evidence a stock price table showing the daily market price of Sunbeam shares from March 1998 until Sunbeam declared bankruptcy in February 2001, the jury could simply select a date when the effects of the fraud no longer existed and perform its own calculation in making an award. However, even if the jury had chosen a date, such as the date Arthur Andersen restated the Sunbeam financials, other factors existed that could have affected the stock price. As the Supreme Court explained in Dura Pharmaceuticals., Inc. v. Broudo, 544 U.S. 336, 342-43, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005):
When a purchaser subsequently resells such shares, even at a lower price, that lower price may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price.
Thus, recovering in a securities case "require[s] elimination of that portion of the price decline that is the result of forces unrelated to the wrong." Miller, 364 F.3d at 232 (quoting In re Executive Telecard, Ltd. Sec. Litig., 979 F.Supp. 1021, 1025 (S.D.N.Y.1997)).
Usually, a securities plaintiff proves the actual, or "fraud-free," value of the stock at the time of purchase by presenting an expert "event study" or "event analysis." In fact, an "event analysis" is often required to support an expert's damages calculation and "generally involves the computation of a statistical regression analysis or, at a minimum, the compilation of a detailed analysis of each particular event that might have influenced the stock price." Miller, 364 F.3d at 234. This is the kind of calculation that CPH's expert said he had done in other cases.
' In Miller, the expert claimed to have done the "event analysis" in his head, never committing any portion of it to paper, other than his final conclusion. The court characterized this analysis as "markedly thin" and upheld a zero verdict, stating that the record was one from which the jury "cannot" have awarded damages. Id. at 235.
In In re Imperial Credit Industries, Inc. Securities Litigation, 252 F.Supp.2d 1005 (C.D.Cal.2003), at the summary judgment stage, the court excluded the defense expert's damages report as junk science under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), then entered summary judgment for the defendant, because the report contained no "event study" or similar analysis. In so doing, it noted:
11. Because of the need "to distinguish between the fraud-related and non-fraud related influences of the stock's price behavior," In re Oracle Sec. Litig., 829 F.Supp. 1176, 1181 (N.D.Cal.1993), a number of courts have rejected or refused to admit into evidence damages reports or testimony by damages experts in securities cases which fail to include event studies or something similar. See, e.g., In re Northern Telecom Sec. Litig., 116 F.Supp.2d 446, 460 (S.D.N.Y.2000) ("Torkelson's testimony is fatally deficient in that he did not perform an event study or similar analysis to remove the effects on stock price of market and industry information and he did not challenge the event study performed by defendants' expert."); Executive Telecard, 979 F.Supp. at 1024-26 (finding an expert's methodology not reliable because he failed to conduct an event study or regression analysis to detect whether stock price declines were the result of forces other than the alleged fraud; applying Daubert v. Mer rell Dow Pharm., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993) to exclude the expert damages report); Oracle, 829 F.Supp. at 1181 ("Use of an event study or similar analysis is necessary more accurately to isolate the influences of information specific to Oracle which defendant allegedly have distorted-— As a result of his failure to employ such a study, the results reached by [plaintiffs' expert] cannot be evaluated by standard measures of statistical significance.")
12. The importance and centrality of the event study methodology in determining damages in securities cases-and the propriety of rejecting expert damages reports which do not use such a methodology-has been conceded by plaintiffs in other securities fraud cases:
"[According to [plaintiffs], the methodology-'event study methodology'used to calculate shareholder damages during the class period 'has been used by financial economists since 1969 as a tool to measure the effect on market prices from all types of new information relevant to a company's equity valuation.' It is so accepted, plaintiffs add, that courts now reject expert damage estimates which do not use event study methodology to evaluate the impact on the market of a company's disclosures."
In re Cendant Corp. Sec. Litig., 109 F.Supp.2d 235, 253-54 (D.N.J.2000).
Imperial Credit, 252 F.Supp.2d at 1015.
CPH was not entitled to have the jury speculate as to the value of the stock on the date of sale. Rather, it was required to prove the stock's value on that date. As we explained in Totale, "the crucial time for the measurement is the time of the fraudulent representation. Later appreciation or depreciation of the property that is subject of the false representation generally does not alter the fraud damage computation." 877 So.2d at 815. The federal cases cited above merely expand on Florida law that requires the plaintiff to prove the actual, "fraud-free" value of the stock at the time of purchase. Although CPH insisted in oral argument that the stock market was doing well and that there were no non-fraud related factors affecting the stock price during the "lockup" period, it failed to present any competent proof at trial establishing the absence of non-fraud related factors.
In sum, CPH failed to meet its burden of proving the actual, "fraud-free" value of the Sunbeam stock on the date of the transaction. Instead, it measured damages based on the stock's value years after the transaction. Because there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley's motion for directed verdict. We therefore reverse the final judgment for compensatory damages and remand for entry of a judgment for Morgan Stanley. See Kind, 889 So.2d at 90; Tec a, 726 So.2d at 830.
We reject CPH's argument that it should, at the least, be given a new trial to prove damages because the trial court erred in its pretrial rulings and jury instructions concerning the proper measure of damages. CPH cannot complain about rulings that it urged the court to make in accordance with its damages theory. Furthermore, as we held in Teca, a plaintiff is not entitled to a second "bite at the apple" when there has been no proof at trial concerning the correct measure of damages. Id. at 830.
B. Punitive Damages
The trial was bifurcated, with the jury deciding liability and compensatory damages in Phase I. In Phase II, the jury tried the issue of punitive damages and awarded CPH $850 million in punitive damages. Because we conclude that Morgan Stanley was entitled to a directed verdict and reversal of the compensatory damages award, we reverse the punitive damages award as well. The punitive damages award cannot stand where, as here, no legally cognizable damage was shown as a result of the alleged fraud. Had the trial court properly directed a verdict for Morgan Stanley, the case would have ended at that point and the punitive damages phase never would have been reached.
CPH argues that we should nevertheless uphold the award of punitive damages. It suggests that even after entering a directed verdict on compensatory damages, the trial court could have submitted the liability issue to the jury as a possible predicate for punitive damages. Relying on Ault v. Lohr, 538 So.2d 454 (Fla.1989), and Engle v. Liggett Group, Inc., 945 So.2d 1246 (Fla.2006), CPH argues that, where an intentional tort is proved, punitive damages are recoverable even in the absence of compensatory damages. We conclude that Ault is distinguishable and that Engle is not controlling in this case.
Ault was an assault and battery case. The jury in that case awarded the plaintiff punitive damages, but no compensatory damages. The Florida Supreme Court approved the punitive damages award because of the jury's express finding of liability. The court held that "a finding of liability alone will support an award of punitive damages 'even in the absence of financial loss for which compensatory damages would be appropriate.' " 538 So.2d at 456. Assault and battery torts, however, are fundamentally different from fraud.
Unlike in the ease of fraud, actual injury or compensatory damages are not essential to stating a cause of action for assault and battery. See, e.g., Paul v. Holbrook, 696 So.2d 1311, 1312 (Fla. 5th DCA 1997); Lay v. Kremer, 411 So.2d 1347, 1349 (Fla. 1st DCA 1982).
It is fundamental that "[ajctual damages and the measure thereof are essential as a matter of law in establishing a claim of fraud." Nat'l Equip. Rental, Ltd. v. Little Italy Rest. & Delicatessen, Inc., 362 So.2d 338, 339 (Fla. 4th DCA 1978). "Damage is of the very essence of an action for fraud or deceit." Casey v. Welch, 50 So.2d 124, 125 (Fla.1951). Without proof of actual damage the fraud is not actionable. Id.; Stokes v. Victory Land Co., 99 Fla. 795, 128 So. 408 (1930); Pryor v. Oak Ridge Dev. Corp., 97 Fla. 1085, 119 So. 326 (1928); Wheeler v. Baars, 33 Fla. 696, 15 So. 584 (1894); Nat'l Aircraft Servs., Inc. v. Aeroserv Int'l, Inc., 544 So.2d 1063 (Fla. 3d DCA 1989); Nat'l Equip. Rental, 362 So.2d at 339. Thus, to prevail in an action for fraud, a plaintiff must prove its actual loss or injury from acting in reliance on the false representation.
Even if CPH established the fact of some unquantified damage (which theoretically could have supported a nominal damage award), this is not enough to justify a punitive damage award in a fraud case. Punitive damages for fraud cannot be based on nominal damages alone. Nat'l Aircraft Servs., 544 So.2d at 1065. Although the Florida Supreme Court's recent Engle opinion does state that "an award of compensatory damages is not a prerequisite to a finding of entitlement to punitive damages," we read the opinion as addressing the order of proof in determining entitlement to punitive damages. 945 So.2d at 1262 ("Therefore we conclude that the order of these determinations is not critical.").
Accordingly, we reverse both the compensatory and punitive damage awards and remand this cause with directions to enter judgment for Morgan Stanley.
Reversed and Remanded.
SHAHOOD, J., concurs.
FARMER, J., dissents with opinion.
. CPH's argument on appeal that the jury actually awarded it $600 million in "consequential" damages is unpersuasive. The jury was not instructed on the concept of consequential damages. In any event, CPH's new theory is not supported by the authorities it cites.
. In his specially concurring opinion in Ault, Chief Justice Ehrlich observed that if actual damage is an essential element of a tort, then an award of compensatory damages is necessary for an award of punitive damages. Though we recognize that this concurring opinion is not binding precedent, we find it highly persuasive. The alternative view would, for example, permit virtually anyone who ever smoked a cigarette in the State of Florida to recover punitive damages in a fraud action against the tobacco companies, irrespective of a finding of any actual adverse health effects.
.Even if we were to accept CPH's argument that some amount of punitive damages would still be awardable after a directed verdict on compensatory damages, due process principles would not have permitted an $850 million punitive damage award to stand in a case where no compensatory damages were awarded. See BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996) (holding that punitive damages must bear a reasonable relationship to compensatory damages). Under due process principles, only a small fraction of the $850 million award would conceivably have been recoverable in this situation.