Opinion ID: 197195
Heading Depth: 3
Heading Rank: 1

Heading: Securities Law

Text: 76 The Supreme Court has held that damages under Rule 10b-5 should be the difference between the fair value of all that the ... seller received and the fair value of what he would have received had there been no fraudulent conduct. Affiliated Ute Citizens v. United States, 406 U.S. 128, 155, 92 S.Ct. 1456, 1473, 31 L.Ed.2d 741 (1972); see also Holmes, 583 F.2d at 562. On the Ansins' securities law claim, the court instructed the jurors to find the difference between what the Ansins actually received for their stock and what you believe they would have received had they refused to sell or, instead, insisted on different terms. The jury was told that the issue is not hindsight, and that they must evaluate the Ansins' decision in light of the facts and circumstances that existed at the time that the decision to sell was made. 77 Defendants argue that the district court's jury instructions as to the damages for the fraud claims were flawed, in that the district court failed to tell the jury to determine value as of the time of the fraudulent transaction, i.e. in November 1992. The jury awarded damages of $12 per share, the public offering price of River Oaks. 8 This was less than the $17.40 a share which plaintiffs sought and more than the damages defendants say are the maximum allowable. Defendants contend that the pre-IPO value of the company was much lower, and support this contention by pointing to the immediate resale of the Ansin shares to knowledgeable insiders at the same price paid to the Ansins. 78 The federal securities statutes are not explicit as to the proper measure of damages. Section 28 of the Securities Exchange Act limits recovery to actual damages on account of the act complained of. 15 U.S.C. § 78bb. The definition of actual damages, however, has been left to the courts. This question presents difficulties, which are greatest in cases involving closely held securities that have no readily ascertainable market value. See 3 Bromberg & Lowenfels, Securities Fraud & Commodities Fraud § 9.1, at 228 (2d ed.1996). 79 The trier of fact may draw reasonable inferences in determining fair value, and is not restricted to actual sale prices in a market so isolated and so thin as one for a close corporation's stock. Affiliated Ute, 406 U.S. at 155, 92 S.Ct. at 1473. A variety of factors, including anticipated future appreciation, may affect the value of stock, so that an appraisal of value demand[s] a more sophisticated approach than the simple application of a price index to the shares. Holmes, 583 F.2d at 564. 80 Here, the very nature of the fraud was to induce the plaintiffs to sell their stock at a time before the stock would appreciate in value due to the contemplated IPO and stock split. To adopt defendants' argument that damages cannot exceed the price of the shares at the time of the sale would be to reward and encourage such chicanery. Defendants' attempt to limit plaintiffs' recovery to a hypothetical market price as of November 1992 is unavailing. The trier of fact was entitled to infer that a reasonable investor, fully informed of the IPO discussions, including the conditions set by J.C. Bradford, would not have sold his stock in November 1992 for less than his proportionate share of the IPO proceeds. 81 The anticipated appreciation in the value of the stock was not unforeseeable. Internal River Oaks documents as to planning and projections indicated that a 1993 IPO was anticipated. J.C. Bradford analysts had suggested a range of values for the company in light of the anticipated IPO, information which was withheld from the plaintiffs. That these analyses and projections were, to some extent, contingent does not mean that they are irrelevant to determining fair value. As another court of appeals has said: 82 The relevance of the fact [that the defendant close corporation was involved in merger negotiations] does not depend on how things turn out. Just as a lie that overstates a firm's prospects is a violation even if, against all odds, every fantasy comes true, so a failure to disclose an important beneficent event is a violation even if things later go sour. The news ... allows investors to assess the worth of the stock.... Investors will either hold the stock or demand a price that reflects the value of that information. 83 Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 440 (7th Cir.1987)(internal citation omitted). In these circumstances, the IPO price was a reasonable approximation of fair value. We note it was less than the aftermarket price plaintiffs suggested as damages. 9 84 Defendants draw our attention to two district court cases. In Ross v. Licht, 263 F.Supp. 395 (S.D.N.Y.1967), the court based damages for failure to disclose IPO plans not on the IPO price, but on the lower price obtained in an intervening private placement. Id. at 411. However, as one commentary has pointed out, the court was probably justified in using the lower measure because the private placement was a necessary precondition to the public offering. Bromberg & Lowenfels, supra, § 9.1, at 228 n. 12. Defendants have pointed to no such determinative intervening event here. Defendants also point to Hutt v. Dean Witter Reynolds, Inc., 737 F.Supp. 128 (D.Mass.1990). In Hutt, the accretion in value was due to the stock's trading in a public market over time. The court accordingly found plaintiffs' potential profits to be too speculative. Id. at 133. Here, by contrast, plaintiffs point to a specific, planned-for event. 85 Because we affirm the award of damages on the federal securities law claim, we do not reach the state fraud claim. Holmes, 583 F.2d at 560.