Opinion ID: 344913
Heading Depth: 1
Heading Rank: 3

Heading: Damage Causation for Purchase of SKI Stock on February 6

Text: 63 When the January 9 agreement was made between Sundstrand and Huarisa as to the Burke stock option, Huarisa's and SKI's intentional or reckless misrepresentations and omissions and Meers' reckless omissions had convinced Sundstrand that it should seriously consider merging with SKI. A prerequisite of the merger, viz., keeping the huge block of Burke stock out of Sun Chemical's hands, prompted Sundstrand to execute the agreement. However, as seen, that agreement only required Sundstrand to transfer 5,686 of its shares to Huarisa, which was accomplished on March 3. Sundstrand was not bound by the January 9 agreement to buy the Burke shares by paying the $6,360,915 balance on February 6 or later. 33 The record shows that the only reason Sundstrand completed the purchase was because its counsel (not the four lawyers who presented this lawsuit for Sundstrand) mistakenly told Ethington there was a legal obligation to do so. 64 We cannot accept the district judge's sua sponte suggestion that Sundstrand completed the transaction for investment purposes. During the January 7-20 survey period, Sundstrand had learned about SKI's faulty huge preproduction cost accounting. Its president, Ethington, had sold his 2000 shares of SKI stock on January 14 and its executive vice president, Sadler, sold 1000 shares on January 17. 34 The merger was called off on January 20 and Sundstrand tried to dispose of the Burke stock commencing February 10, thus belying any investment purpose. Sundstrand had been advised that such an investment would have been an improper use of corporate funds. The market price on February 7 was $5 less than the $30 per share Sundstrand paid for the Burke shares. Sundstrand would certainly not have paid a premium over market of some $1,000,000 if this purchase was an investment in SKI stock. Finally, being unregistered and therefore restricted, the Burke stock could only be sold by Sundstrand at a substantial discount below market. For these reasons, the investment theory advanced by Sundstrand for the first time in this Court simply will not wash. Our independent study of the record shows that the principal reason Sundstrand proceeded to purchase the Burke stock on February 6 was because counsel had wrongly advised Sundstrand officials that it was legally obligated to do so under the January 9 agreement with Huarisa. 35 Also Sundstrand had learned enough to apprise it that forfeiture of its down payment was better than further payments under that agreement. 65 While Rule 10b-5 imposes no obligation to pull back from a commitment previously made by the buyer and accepted by the seller because of after-acquired knowledge, it is true that for the purpose of damage assessment, the time of a 'purchase or sale' of securities within the meaning of Rule 10b-5 is to be determined as the time when the parties to the transaction are committed to one another. Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972). 36 Much as in antitrust law, the ultimate goal of securities regulation is to achieve fundamental fairness in the marketplace. For antitrust, the prime aim is to avoid anti-competitive actions, while in securities law the focus is on controlling practices which smack of fraud. Pursuing this analogy, the Supreme Court's recent statement on damage causation in antitrust can be usefully paraphrased here: 66 Plaintiffs must prove (securities law) injury, which is to say injury of the type the (securities) laws were intended to prevent and that flows from that which makes defendants' acts unlawful. The injury should reflect the (fraudulent) effect either of the violation or of (fraudulent) acts made possible by the violation. It should, in short, be 'the type of loss that the claimed violations    would be likely to cause.'  Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701. 67 Because the January 9 agreement was entered into due to Huarisa's and SKI's intentional or reckless misrepresentations and omissions and Meers' reckless omissions, Sundstrand is entitled to recover only what that contract bound it to pay. As seen, that amount was $334,785. Since Sundstrand was not obligated to pay the additional $6,360,915 and did so only because of incorrect legal advice, reiterated here and in the court below, its recovery must be limited to $334,785 plus interest thereon. The incorrect legal advice, in conjunction with sufficient knowledge to show that forfeiture of its down payment was better than further payments, serves as the superseding cause which breaks the damage causation chain running to the defendants. 68 Sun Chemical and Huarisa contend that they are not liable even for this $334,785 because Sundstrand's obligation to pay this amount to Huarisa remained executory until March 3, 1969, when it transferred 5,686 of its shares to Huarisa pursuant to paragraph 2 of the January 9 agreement. However, Sundstrand had not learned of the Burke and Ernst & Ernst reports until March 21. In any event, the commitment occurred on January 9, 1969, under Radiation Dynamics, Inc., supra, at 891. Therefore, we cannot agree that its March 3 transfer to Huarisa was voluntary rather than on account of material misrepresentations and omissions. Because the record supports the district judge's findings that SKI's and Huarisa's misrepresentations and omissions were intentional or reckless and because Meers' omissions were reckless, Sundstrand is entitled to prejudgment interest on a judgment for $334,785 at the rate of 6% per annum from January 9, 1969, to the date of judgment in this Court. 37