Court Opinion

ID: 8974010
Source: CourtListenerOpinion
Date Created: 2022-11-27 10:46:15.360212+00
Date Added: 2024-06-11T17:10:30.380252
License: Public Domain

TJOFLAT, Circuit Judge,
specially concurring:
In Shores v. Sklar, 647 F.2d 462 (5th Cir. May 1981) (en banc), cert. denied, 459 U.S. 1102, 103 S.Ct. 722, 74 L.Ed.2d 949 (1983),1 the former Fifth Circuit held that when a pervasive scheme of fraud has resulted in the issuance of unmarketable securities, a plaintiff can satisfy the reliance requirement under Rule 10b-5, 17 C.F.R. § 240.10b-5 (1988) merely by showing that he relied on the integrity of the market to exclude unmarketable securities. In essence, Shores made a Rule 10b-5 plaintiff’s *733burden of proving reliance much lighter. Shores also created much confusion2 and elicited much criticism.3 We granted rehearing en banc in this case to reconsider the holding in Shores.
The majority today affirms the district court’s grant of summary judgment in favor of the appellees by finding that the appellants have not met the “substantial” evidentiary burden of Shores; therefore, the majority declines to address the validity of the Shores holding. Ante at 729-30. I concur in the result reached by the majority, but I would reach that result by a different route. In my view, the evidence in this case does, in fact, satisfy the requirements of Shores. The Shores holding, however, is fundamentally flawed and should be overruled. Because the appellants’ cause of action is based entirely on Shores, I concur only in the result affirming the judgment in favor of the appellees.
Although the majority purports to refrain from directly addressing Shores, it adds a substantial gloss to the Shores holding and in effect reverses it. I dissented in Shores and am still convinced that it was wrongly decided. The majority’s reformulation of Shores does nothing to enhance my dim view of the Shores holding. Whether interpreted correctly or incorrectly, Shores has no basis in reason and cannot command the investing community’s or the general public’s respect. With Shores, the former Fifth Circuit, and thus this court, embarked on a path of confusion, and I fear that the majority today only pushes us farther down that path. It is time for this court to reverse its course. I write to explain the need for such a reversal.
This concurrence consists of four parts. In part I, I summarize the salient facts in this case. In part II, I discuss Shores, the majority’s interpretation of Shores, how that interpretation effectively reverses Shores, and what I believe to be the correct interpretation. I then show that under this correct interpretation, the appellants have produced sufficient evidence to withstand summary judgment on the issue of marketability.
Having shown that this case presents an appropriate opportunity for reexamining Shores, I consider in part III the traditional requirement of reliance in Rule 10b-5 actions and how Shores relaxes that requirement. I then discuss why the Shores extension of the fraud-on-the-market theory to primary markets for newly issued securities incorrectly relaxes the reliance requirement. I do this by showing (1) that reliance on primary markets is inherently unreasonable; (2) that Shores creates serious problems in the context of a jury trial; (3) that the calculation of damages in a Shores action is problematic; and (4) that Shores arbitrarily punishes some defrauders while passing over others who might have created even more egregious fraudulent schemes. Finally, in part IV, I address the argument that the doctrine of stare decisis should preclude any reevaluation of Shores.
I.
This case arose out of the sale of revenue bonds for the purpose of financing the construction of Mount Royal Towers — a residential/medical facility for the elderly, to be located near the City of Vestavia Hills, Alabama. In 1979, appellee Arthur Rice entered into an agreement with the City of Vestavia Hills. Under this agreement, Vestavia Hills was to create a municipal authority for issuing the bonds — Special Care Facilities Financing Authority. *734The bonds were to be repaid solely from funds generated by the sale of apartments in Mount Royal Towers. Rice sought to retain the services of two firms as underwriters for the bond issue, but both firms found the project too risky in light of sluggish markets for bonds and for similar apartment units. In December 1980, the Mount Royal Towers board of trustees abandoned the project, citing insufficient progress in obtaining pre-sale commitments and in securing conventional financing.
Rice, possibly seeking to protect his personal investment, proceeded with the project. Rice finally succeeded in creating a joint venture (Total Concept Retirement Communities) to develop the project. The venture consisted of Wellington Corporation (owned by Rice), Finerock Corporation (a subsidiary of Herreth, Orr & Jones — the new underwriter), and Robinson-Hall, Inc. (an Atlanta brokerage firm). Rice also secured bond counsel, Jones, Bird & Howell (now Alston & Bird).
The venture essentially required two steps. First, Herreth, Orr & Jones determined that the bond issue should be raised from $18,000,000 to $29,000,000 with a proportional increase in the price of the apartment units. Second, the venture required that fifty percent of the units be pre-sold in order to ensure the success of the bond issuance. By eliminating deposit requirements and selling to friends and family, Rice managed to secure commitments on fifty percent of the units.
The bonds were issued in September 1981. A disclosure statement pointed out that the bonds were extremely risky and that only the Mount Royal project’s income secured repayment. Neither appellee Ernest Ross nor appellee George Miller, the named plaintiffs in this case, read the disclosure statement prior to purchasing the bonds. In April 1984, Mount Royal filed for Chapter 11 reorganization. In October 1985, after a bankruptcy sale of the Mount Royal complex, the bondholders received $18,000,000 in satisfaction of the outstanding balance.
The district court granted summary judgment in favor of all defendants. A panel of this court affirmed with regard to Bank South (the indenture trustee), the City of Yestavia Hills, Special Care Facilities Financing Authority, and the Mount Royal trustees. Ross v. Bank South, N.A., 837 F.2d 980, 1003-04 (11th Cir.1988). The panel reversed the district court, however, with regard to the remaining defendants— Rice, the underwriter, the bond counsel, the feasibility consultant, and the joint venture (“the appellees”).4 Because no challenge was made on appeal to the dismissal of Bank South, the issuing defendants, or the Mount Royal trustees, the only question before this court is whether to affirm the district court’s grant of summary judgment in favor of the appellees.
II.
A.
Shores arose out of the sale of tax-exempt revenue bonds for the construction of a facility to manufacture mobile homes in Frisco City, Alabama. Neither the manufacturer who was to use the completed facility nor the underwriter of the bonds was financially secure or experienced in projects of this sort. They managed, however, to induce Frisco City to create an Industrial Development Board for the purpose of issuing tax-exempt bonds, the proceeds of which would be used to build the facility. The Board would then lease the facility to the manufacturer and use the lease proceeds to satisfy the bond obligations. The offering circular that was issued omitted and misrepresented a number of crucial facts. For example, the circular failed to mention the SEC investigation of the underwriter for violations of the securities laws and misrepresented the qualifications and assets of the manufacturer. Shores, 647 F.2d at 465-66.
When the bonds were ultimately marketed, the plaintiff in Shores bought four of *735them. When he purchased them, he neither saw the offering circular nor knew that one existed; rather he relied on his broker’s assurances. Id. at 467. A little over a year after this purchase, the manufacturer defaulted on his lease of the facility. The plaintiff consequently sought relief under the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1982), the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1982), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1988). The district court dismissed his suit because he did not, and could not, allege any reliance on the offering materials.
The former Fifth Circuit, sitting en banc, held that Rule 10b-5(b)5 required proof of actual reliance on the omissions or misrepresentations in the offering materials but that under subsections (a) and (c) of the Rule, reliance could be implied in certain cases. The court determined that when an offering circular is only one component of a more pervasive fraudulent scheme,
[t]he requisite element of causation in fact would be established if [the plaintiff] proved the scheme was intended to and did bring the Bonds onto the market fraudulently and proved he relied on the integrity of the offerings of the securities market.
Shores, 647 F.2d at 469.6 Thus, the court held that to meet his burden of proof in such a case, a plaintiff must show that:
(1) the defendants knowingly conspired to bring securities onto the market which were not entitled to be marketed, intending to defraud purchasers, (2) [the plaintiff] reasonably relied on the Bonds’ availability on the market as an indication of their apparent genuineness, and (3) as a result of the scheme to defraud, he suffered a loss.
Id. at 469-70 (footnote omitted). The court then concluded that the plaintiff had met his burden under the new test.
The majority finds in the instant case that the appellants did not adduce “evidence sufficient to create a genuine issue of fact with regard to the bonds’ lack of marketability” and thus did not satisfy the first prong of the Shores test. Ante at 731. Although I believe that the Shores analysis is flawed, the evidence in this case clearly creates a genuine issue of fact with regard to marketability under the Shores test.
B.
Marketability, as envisioned by the Shores court, is an elusive concept. The court failed to specify whether the marketability test should apply to the securities that were actually issued or to some theoretical security that could be issued at any combination of price and interest rate. If the former interpretation is correct, then we should determine whether, in the absence of fraud, the bonds would have been issued given the actual price and interest rate at which they were issued.
The majority, however, apparently accepts the latter interpretation; it characterizes an unmarketable bond as one that “could ‘not have been offered on the market at any price’ absent the fraudulent scheme.” Ante at 729 (quoting Shores, 647 F.2d at 464 n.2) (emphasis added). *736Thus, the majority today focuses on what I term the economic unmarketability of the bonds: could the bonds, because of the enormous risk of nonpayment, have been brought onto the market at any combination of price and interest rate if the true risk of nonpayment had been known?7 See ante at 730-31 (evaluating only facts that relate to risk of nonpayment). Stated this way, one can easily see the error in the majority’s approach: no matter how great the risk of nonpayment, a bond can virtually always be sold at some combination of price and interest rate. See Fischel, Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities, 38 Bus.Law. 1, 12 (1983) (“Virtually all securities will sell for some positive price.”). Because a bond creates a legal right to repayment in the future, so long as that right is enforceable, a bond can never be completely worthless — even if a bondholder must become a bankruptcy creditor and seek only the salvage value of the bond.8 Consequently, the majority today creates a test that in both theory and practice cannot be met and negates any remedial effect that Shores might have had.
Correctly interpreted, Shores established a test for what I call factual unmarketability, which focuses on the bonds as issued. Under this interpretation, a bond is unmarketable if, but for the fraudulent scheme, some “regulatory” entity (whether official or unofficial)9 would not have allowed the bond to come onto the market at its actual price and interest rate. For example, in Shores, if the Town of Frisco City had received all relevant information, it presumably never would have created an industrial development board to finance the project. Thus, one can point to an entity that would have prevented the issuance of the bonds in Shores had all relevant information been available to it. Cf. Arthur Young & Co. v. United States Dist. Court, 549 F.2d 686, 695 (9th Cir.) (“the purchaser of an original issue security relies, at least indirectly, on the integrity of the regulatory process and the truth of any representations made to the appropriate agencies and the investors at the time of the original issue”), cert. denied, 434 U.S. 829, 98 S.Ct. 109, 54 L.Ed.2d 88 (1977). This is the only reasonable interpretation of the first prong of the Shores test: “securities ... which were not entitled to be marketed.” 647 F.2d at 469 (emphasis added). Even an extraordinarily risky security is entitled to be marketed; but a security that presumably would never have been issued by an entity but for the fraud is not “entitled” to be on the market.10
In the present case, Rice twice failed to retain an underwriter for the Mount Royal *737project. When Rice finally was able to retain Herreth, Orr & Jones as underwriter, Rice was required to pre-sell fifty percent of the units as a condition to issuance of the bonds. To this end, Rice not only eliminated the deposit requirement, but also began selling to friends and relatives in sham transactions. Here, as in Shores, the bonds were actually issued by a city (Vestavia Hills) and a municipal issuing authority (Special Care Financing Authority). Thus, here, as in Shores, one can point to entities that presumably would have prevented the issuance of the bonds had all relevant information been available to them.11 Consequently, the bonds arguably were not “entitled” to be on the market and hence were unmarketable under Shores. 647 F.2d at 469.12
C.
When determining whether to grant a motion for summary judgment, a court must view the evidence in a light most favorable to the nonmoving party and must resolve all doubtful issues in favor of the nonmovant. Hinesville Bank v. Pony Express Courier Corp., 868 F.2d 1532, 1535 (11th Cir.1989). Moreover, a court must act with caution in granting such a motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986). Given these well-established principles and in light of the correct interpretation of Shores stated above, I would hold that, with regard to the marketability of the bonds, appellants have adduced sufficient evidence to create a genuine issue of material fact.13
III.
Because the instant case should survive summary judgment under the Shores analysis, I now examine the validity of Shores, since overruling Shores would re-*738suit in a summary judgment in favor of the appellees anyway. I begin by reviewing the role that reliance has played in Rule 10b-5 actions and then discuss my concerns with the Shores court’s relaxation of the reliance requirement.
To state a claim under Rule 10b-5, plaintiffs have always been required to prove reliance on a defendant’s fraud. The Supreme Court has recently reaffirmed the importance of reliance as an element of a Rule 10b-5 cause of action. See Basic Inc. v. Levinson, 485 U.S. 224, -, 108 S.Ct. 978, 989, 99 L.Ed.2d 194 (1988). Over the years, however, courts have attempted to mitigate the harshness of this requirement in circumstances that make proof of actual reliance virtually impossible. See, e.g., id. at -, 108 S.Ct. at 990; Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1971). In Rule 10b-5 suits alleging misrepresentation, a plaintiff still must prove actual reliance. See Shores, 647 F.2d at 471; Dupuy v. Dupuy, 551 F.2d 1005, 1014 (5th Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977). When a plaintiff has proven a breach of a duty to disclose material information, however, he is not required to prove actual reliance: a rebuttable presumption of reliance arises. See Affiliated Ute Citizens, 406 U.S. at 153-54, 92 S.Ct. at 1472.
Many courts now presume reliance on the basis of the fraud-on-the-market theory. The Supreme Court in Basic explained that,
in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business.... Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements_ The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.
485 U.S. at -, 108 S.Ct. at 988-89 (quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir.1986)). Thus, most courts now recognize that, in an efficient securities market, competing judgments of knowledgeable buyers and sellers cause the market to reflect an accurate price based on all available information. See, e.g., Lipton v. Domination, Inc., 734 F.2d 740, 748 (11th Cir.1984), cert. denied, 469 U.S. 1132, 105 S.Ct. 814, 83 L.Ed.2d 807 (1985). Consequently, an investor is entitled to rely on the market price of securities and may recover under Rule 10b-5 if fraud has affected that price. Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir.1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976).
This brings me to Shores. The Shores court, citing Blackie and other fraud-on-the-market cases, applied the theory to a fraud that occurred in a primary market— one in which the securities had just been issued — despite the fact that the theory had only been used in cases involving fraud on well-developed markets. Essentially, Shores held that Rule 10b-5’s reliance requirement was satisfied if an investor relied on the primary market’s integrity to prevent the issuance of unmarketable securities. I find the Shores extension to be flawed for four reasons: (1) Shores encourages a form of reliance that is inherently unreasonable; (2) it creates tremendous practical difficulties at a jury trial; (3) it mandates a damage award that is inconsistent not only with Shores’ own reasoning, but also with the fundamental policy of the securities acts; and (4) it punishes some defrauders while passing over others who might have created even more egregious fraudulent schemes. I will address each of these concerns in order.
A.
As I noted above, courts have been willing to imply or presume reliance in situations that would make proof of reliance difficult, if not impossible. See Basic, 485 U.S. at -, 108 S.Ct. at 990; Affiliated Ute, 406 U.S. at 153-54, 92 S.Ct. at 1472. Courts, however, have always required that a plaintiff’s reliance be “justified” or “reasonable.” See L. Loss, Fundamentals *739of Securities Regulation 957-58 (2d ed. 1988); see, e.g., Bruschi v. Brown, 876 F.2d 1526, 1529 (11th Cir.1989); Straub v. Vaisman & Co., 540 F.2d 591, 596-98 (3d Cir.1976). The former Fifth Circuit held that a plaintiff’s reliance is reasonable if he did not “intentionally refuse[] to investigate ‘in disregard of a risk known to him or so obvious that he must be taken to have been aware of it, and so great as to make it highly probable that harm would follow.’ ” Dupuy, 551 F.2d at 1020 (quoting W. Prosser, Torts § 34, at 185 (4th ed.1971)). In other words, the plaintiff must not have been reckless in relying on the market. See Gower v. Cohn, 643 F.2d 1146, 1156 (5th Cir. Unit B May 1981); see also Shores, 647 F.2d at 470 n. 6. The adoption in many courts of the fraud-on-the-market theory and its presumption of reliance has not eliminated the reasonableness requirement. The Shores court, in fact, made reasonableness the second prong of its test. See supra note 13.
The fundamental flaw of Shores, however, is its failure to recognize what adoption of the fraud-on-the-market theory in a given context implies. Courts applying the theory must presume that investors can reasonably rely on the market to set an accurate price. Because all relevant information is accurately taken into account in well-developed markets, and because investors commonly rely only on market prices in making their investment decisions, courts essentially have determined that investors may reasonably rely on the prices set by well-developed markets. The Third Circuit recognized this presumption of reasonableness in Zlotnick v. Tie Communications, 836 F.2d 818 (3d Cir.1988). In Zlotnick, the court correctly noted that the fraud-on-the-market theory raises three presumptions: (1) that the misrepresentation affected the market price, (2) that the purchaser relied on the security’s price, and (3) that the reliance was reasonable. 836 F.2d at 822.14
Because the fraud-on-the-market theory presumes reasonable reliance, courts must be very careful when applying this theory to markets other than well-developed, secondary markets; a court must closely examine the reasonableness of relying on the market in question. For example, the court in Cammer v. Bloom, 711 F.Supp. 1264, 1280-87 (D.N.J.1989), closely examined the over-the-counter market to determine whether it was an efficient market capable of supporting the fraud-on-the-market presumptions. See also Stinson v. Van Valley Dev. Corp., 714 F.Supp. 132, 137 (E.D.Pa.1989) (market for new issue does not warrant application of fraud-on-the-market theory). The Shores court, however, failed to conduct such an analysis. Instead, the court merely applied the theory to the primary market and added a reasonableness requirement to its three-prong test. Because fraud-on-the-market implies reasonableness, the second prong of the Shores test is nonsensical. Moreover, as I discuss next, the presumption of reasonable reliance on the primary market is simply invalid.
As I note above, Shores fails to state whether its unmarketability test focuses on the actual bonds issued (factual unmarketa-bility) or on hypothetical bonds that could be issued at any combination of price and interest rate (economic unmarketability). I have shown that the former interpretation is correct, but reliance on a primary market to exclude either type of unmarketable bond is unreasonable.
1.
Assuming for the moment that a bond could be economically unmarketable, a primary market cannot reasonably be expected to exclude such a bond. The cast of characters in a primary market consists of initial investors and parties involved in an issuance, such as the promoter/corporation, the underwriter, the bond counsel, and the issuer. Obviously, initial investors cannot rely on themselves to police the market for unmarketable bonds. Thus, Shores must stand for the proposition that initial *740investors may reasonably rely on the issuing parties to exclude worthless securities.
Such a proposition is patently without justification.15 All of the parties involved in an issuance have a significant self-interest in marketing the securities at a price greater than their true value. The promoter/corporation and the issuer (if a separate entity) have an obvious interest in marketing the securities regardless of their true fair market value. Likewise, the bond counsel and underwriter, who are often retained under a contingency fee contract, are interested in marketing the securities at an inflated price. The underwriter in particular, who, like an insurer, can spread the risk of loss among many stock or bond subscriptions, has a reduced incentive to investigate thoroughly the true value of the securities it underwrites. Additionally, to determine when a security is worthless is nearly, if not completely, impossible. Thus, to accept the economic unmarketability interpretation of Shores, we must believe that an initial investor may reasonably rely on clearly self-interested (perhaps dishonest) parties to make decisions that are at least burdensome and at most economically irrational. I cannot accept this proposition.
2.
Even if we interpret Shores to require factual unmarketability, reliance on the primary market to exclude such securities is equally unreasonable. The participants in the primary market remain the same — the initial investors and the parties involved in issuing the securities. Moreover, the issuing parties are subject to the same self-interest; they all might even be parties to the fraudulent scheme. Therefore, to accept the factual unmarketability interpretation of Shores, we must believe that an investor may reasonably rely on some participant in the issuance process to prevent fraudulently marketed securities from entering the market at the given price and interest rate.
In my view, such reliance could never be reasonable. Certainly, an investor might reasonably rely on a state regulatory agency to police a market. See Arthur Young & Co. v. United States Dist. Court, 549 F.2d 686, 695 (9th Cir.), cert. denied, 434 U.S. 829, 98 S.Ct. 109, 54 L.Ed.2d 88 (1977). Also, I recognize that in some cases, such as the present one, we might be able to point to a party who (1) had control over the issuance of the securities, (2) was unaware of the fraudulent scheme, and (3) would have prevented issuance had all relevant information been available. With the aid of hindsight and in-depth discovery, we could conceivably make such a determination. I cannot, however, sanction a rule that would encourage this type of reliance by investors who lack the advantages of hindsight and discovery that we now enjoy. Such reliance would be unreasonable. But this is exactly the sort of reliance that Shores encourages.
3.
Whether we adopt the factual or economic unmarketability interpretation, reliance on the primary market to exclude unmarketable securities is simply unreasonable. An investor who so relies takes a great and obvious risk. Cf. Dupuy, 551 F.2d at 1005.16 Shores created a presumption of reliance that is clearly wrong and then *741created a reasonableness test that can never be met.
B.
Shores also creates serious problems in the context of a jury trial. A hypothetical, although by no means atypical, Shores action demonstrates several of these problems.
First, suppose we have an exceedingly eager, but dishonest, entrepreneur named Smith who desires to defraud the investing community by issuing worthless bonds. Smith creates a sham corporation and then obtains the services of an underwriter, Jones, and an issuer, the City of Middle-town. Jones insists on some type of security for the bonds, and Smith pledges his interest in a producing oil well that he fraudulently represents as being worth $1,000,000, but is actually worth only $20,-000. Smith never intends to make a single payment on the bonds.
When the bonds are issued, certain fraudulent statements are made in a circular, but Johnson, an elderly widow who purchases several bonds, does not read the circular or know of its existence. The bonds are issued for $2,000,000, and Johnson invests $100,000 — most of her life’s savings. When the first interest payment comes due, the bonds go into default, and Johnson brings suit for damages under Shores against Smith and Jones.17
Whether a court adopts the economic un-marketability approach, as advocated by the majority today, or the factual unmark-etability approach, makes a difference in how the case of Johnson v. Smith will evolve. Therefore, I explore both scenarios. Regardless of which approach the court adopts, however, the results will be equally disappointing.
1.
Under an economic unmarketability approach, all cases, notwithstanding today’s decision, should survive summary judgment and go to a jury. Johnson will produce expert testimony to the effect that, because the bonds were doomed to default, they were worthless, hence unmarketable. Smith will produce expert testimony that the bonds had a salvage value (in this case, one cent on the dollar) and thus could have been marketed at some combination of price and interest rate. Since a material issue of fact will exist, the jury will be called upon to determine whether the bonds were marketable. Thus, the trial will result in a “battle of the experts.”
Once all of the evidence has been adduced at trial, the court will instruct the jury that Johnson can recover only if the jury finds the bonds unmarketable under Shores. Using the economic interpretation of unmarketability, the court will direct the jury to find for Johnson only if the bonds were completely worthless when issued and to find for Smith if the bonds had at least some value and could have been issued at some combination of price and interest rate.
Now we can see the dilemma faced by the jury. The jury is presented with a case in which the plaintiff invested $100,000 and recovered only $1,000 on that investment — a loss of 99% of the original investment. Johnson, moreover, is a plaintiff who will elicit strong feelings of sympathy from the jury. The jury, however, is being asked to grant or deny relief based on whether the bonds had a value of at least one cent when issued — a wholly fortuitous circumstance in the eyes of the jury. The facts most impressive to the jury will be Smith’s “bad” intent and that his scheme caused Johnson to lose 99% of her life savings. That Johnson lost $99,000 rather than $100,000 will be a meaningless distinction to a jury that represents the conscience of the community.
Two results are possible. First, and most likely, the jury might disregard the Shores instruction and find for Johnson — in effect taking the law into its own hands. Or, the jury might abide by the Shores *742instruction, contrary to its conscience. This result is just as bad as the first since Shores will fail to command the respect of (1) the community, which is being asked to grant or deny relief based on an apparently meaningless distinction; (2) the plaintiff/investor, who will lose his investment unless he can produce an expert to testify that the bonds were worthless; and (3) the person seeking to defraud the community, who can avoid Shores liability simply by creating some value for the bonds.18
2.
If the court interprets Shores to require factual unmarketability, the results in this hypothetical case will be equally disappointing. Johnson will produce experts to testify that, had all relevant information been available, some entity would have prevented the issuance of the bonds. Smith will produce experts to testify that every entity that could have prevented the issuance must have known of his scheme. Thus, Smith will argue, the bonds would have been issued even if all relevant information had been available to the entities capable of preventing the bonds from entering the market. The issue of marketability will again go to the jury, and the jury will again be faced with a decision to grant or deny relief based on a fortuitous circumstance. The jury will be most concerned with Smith’s fraud and Johnson’s loss, not with whether some entity in the issuance process knew of the fraud and would have done something to prevent the fraud had it known.
Consequently, we are faced with the same two possibilities: either the jury will disregard the Shores instruction, or it will follow the instruction. Again, the second possibility will create disrespect for the rule of law on the part of the community, the investor, and the potential defrauder, who now can avoid Shores liability by including in his fraudulent scheme all of the entities in the issuance process.
This exploration of how a typical Shores action would evolve in the context of a jury trial demonstrates that juries will find the distinctions drawn by Shores to be arbitrary and meaningless. Either the jury will effectively eliminate the reliance requirement when its conscience dictates,19 or the rule of law in this area will lose the respect of both those it seeks to protect and those it seeks to punish.
C.
The calculation of damages under Shores also presents serious problems. Not only would this damages calculation likely conflict with other aspects of the decision, but it also would undermine the primary goal of the securities acts — disclosure.
1.
In a Rule 10b-5 action against non-issuing parties, courts may not grant rescission as a remedy. Huddleston v. Herman & MacLean, 640 F.2d 534, 554-55 (5th Cir. Unit A Mar.1981), aff'd in part and rev’d in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Rescission is an equitable remedy that restores the parties to a transaction to their status quo ante. Id. at 554. Typically, a buyer discovers a seller’s fraud, promptly tenders the goods to the seller, and demands the return of his purchase price. The court then orders the seller to return the purchase price and uses its civil contempt power to coerce the seller’s compliance with its order. This remedy is available, however, only against parties to a contract — a court may not order rescission in a buyer’s action against a defrauding party who is not a party to the contract of sale. Id. at 555. Thus, in the context of Rule 10b-5, where buyers often sue parties that are not in privity of contract with the buyer, rescission is unavailable. Id. A Rule 10b-5 plaintiff who sues non-issuing parties must seek damages instead.
*743In a typical Rule 10b-5 case, the measure of damages allows for recovery of out-of-pocket losses. A plaintiff can recover for the damages actually and proximately caused by the Rule 10b-5 violation. See Woods v. Barnett Bank, 765 F.2d 1004, 1013 (11th Cir.1985); Huddleston, 640 F.2d at 555.
Under the Shores analysis, however, determining damages is problematic.20 Shores implicitly holds that an investor is not entitled to rely on the issuance price as an accurate reflection of a security’s worth. See 647 F.2d at 470. Only when the security is unmarketable can the investor recover damages. If the investor was not entitled to rely on the selling price, however, on what price can he rely in order to determine his out-of-pocket damages?
One response is that the investor has no price on which to rely and that therefore no damages are assessable. Presumably the Shores court did not intend such an empty victory for the investor. Another response is that the only price on which the investor can rely is one cent — the minimum value of a marketable security. Again, under Shores, this is presumably not an acceptable approach because the damages recoverable would be so nominal as to preclude the bringing of such suits.
The only other measure of damages is one that would allow the investor to recover the security’s original purchase price since no other price exists on which to peg the loss. This is also the only one of the three measures that would provide investors sufficient incentive to bring such suits. The anomaly of such a recovery, of course, is that although the investor had no right to rely on the issuance price when he bought the securities, he can recover that full amount if the securities were unmarketable. Moreover, this measure of damages in effect rescinds the contract of sale by awarding the investor the return of his full purchase price — a remedy wholly inappropriate when the defrauding parties were not the sellers of the securities.
2.
That the fundamental purpose of the securities acts is to implement a philosophy of full disclosure has become something of a maxim that guides courts in their efforts to construe the acts. See Basic, 485 U.S. at -, 108 S.Ct. at 982. Some jurists have expressed concern that the fraud-on-the-market theory conflicts with this philosophy because it enables investors to prove reliance on fraud contained in public disclosures without having to read those disclosures. See id. at -, 108 S.Ct. at 997-98 (White, J., concurring in part and dissenting in part) (quoting Shores, 647 F.2d at 483 (Randall, J., dissenting)). Consequently, they argue that the theory makes disclosure, which Congress deemed so important, meaningless. The Shores court, however, claimed that the goal of full disclosure would not be undermined by its extension of fraud-on-the-market to primary markets because, by limiting recovery to instances when unmarketable securities were sold, investors would still have to read public disclosures in order to recover for securities that were marketed at an improper price. 647 F.2d at 470.
Whether the fraud-on-the-market theory, as traditionally applied, undermines the goal of disclosure is not an issue here. The Shores extension, however, contrary to the Shores court’s protestations, clearly does undermine that goal. As discussed above, the only workable measure of damages in a Shores action would be the full price paid by the plaintiff for the new issue. That being so, a Shores award would simply be the plaintiff’s out-of-pocket expenses caused by the fraud — the same measure of damages for a standard Rule 10b-5 recovery based upon actual reliance, see L. Loss, Fundamentals of Securities Regulation 967 (2d ed.1988) (out-of-pocket normally means difference between price paid and value of securities). Thus, under Shores, any incentive to read disclosures essentially disappears since plaintiffs would receive the full purchase price for their securities without having to read disclosure information. *744Furthermore, an investor might rationally seek to avoid reading disclosures in order to preserve a possible claim under Shores.
Not only does Shores discourage investors from being informed about their investments, it does so in a context that requires investors to be extremely well informed. In a well-developed market, market professionals sift through public disclosures for relevant information. See Fischel, Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities, 38 Bus.Law. 1,13 (1982). Their buying and selling then incorporates relevant information into the market price, and a rational investor can rely on that price. Id.; see also Basic, 485 U.S. at -, 108 S.Ct. at 991-92. Because that process has not yet occurred where securities are newly issued, a rational investor in a primary market must personally sift through the disclosures for information relevant to his investment decision. By taking away the incentive for investors to read disclosure documents accompanying newly issued securities, Shores encourages irrational behavior by investors and undermines the securities acts’ philosophy of full disclosure.21
D.
. Finally, one could argue that the underlying goal of securities regulation is to promote free and honest securities markets and that Shores promotes that goal by attacking a certain type of fraudulent behavior, i.e., the type of behavior that causes unmarketable securities to appear on the market. Punishing this type of behavior only in primary market transactions, however, is arbitrary since sales of unmarketable bonds do not necessarily constitute the most egregious cases of fraud. One could easily characterize the fraudulent sale of bonds worth $100 for $10,000 as more egregious than the sale of bonds worth $0 for $10, although Shores punishes only the latter situation.22 Or, one could characterize a fraudulent scheme involving an issuer, underwriter, and bond counsel as more egregious than a scheme involving only the issuer. Factual unmarketability requires the existence of at least one honest issuing party to protect the integrity of the market from unmarketable bonds. Thus, Shores would likely sanction only the latter scheme. Moreover, although this type of behavior should be deterred, other means of deterrence are available without having to stretch Rule 10b-5 beyond recognition.23
E.
In summary, I find no reasons whatsoever in the caselaw, in the policies underlying the securities acts, or in the theoretical underpinnings of corporate finance that justify the Shores court’s departure from the established proposition that the fraud-on-the-market theory applies only to well-developed markets.
IV.
Finally, I am compelled to address the argument that, while Shores is probably bad law, the doctrine of stare decisis prevents us from overruling that case today. See post at 746 (Kravitch, J., dissenting). I am certainly mindful of the importance of stare decisis: it provides continuity to the law and allows members of socie*745ty to conform their conduct to the law without risk of surprise in the courthouse. Nevertheless, stare decisis is a “principle of policy and not a mechanical formula of adherence to the latest decision.” Helvering v. Hallock, 309 U.S. 106, 119, 60 S.Ct. 444, 451, 84 L.Ed. 604 (1940) (Frankfurter, J.). Obviously, a departure from precedent could impose certain costs on members of a community who have structured their commercial transactions to conform to precedent, but when the costs of following an erroneous precedent outweigh the costs of departing from it, “respect for precedent balks at the perpetuation of error.” United States v. Minnesota, 113 F.2d 770, 774 (8th Cir.1940).
I have shown that appellants in the instant case have produced sufficient evidence to withstand summary judgment on the issue of marketability under Shores. Marketability being the only disputed issue in this case, appellants have produced sufficient evidence to take their Shores claim to the jury. Therefore, the validity of the Shores holding is properly before this court, and, sitting en banc, we are obligated to address that issue. The arguments presented in this concurrence conclusively prove, I submit, that Shores is not justified by policy concerns or theoretical considerations and presents enormous difficulties at jury trials and in computing damages. Moreover, it erodes the public’s respect for the law and confidence in the ability of the courts to fashion fair and meaningful rules and distinctions. In short, Shores is bad law.
A venerable jurist has stated that, “[f]ew rules in our time are so well established that they may not be called upon any day to justify their existence as a means adapted to an end.” B. Cardozo, The Nature of the Judicial Process 98 (1921). I find no basis for Shores’ existence and therefore would take this opportunity to depart from that precedent.

. In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), this court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to October 1, 1981.

. See, e.g., Peil v. Speiser, 806 F.2d 1154, 1162-63 (3d Cir.1986); Ross v. BankSouth, N.A., No. CV85-PT-0444-S, mem. op. at 11, 1986 WL 2702 (N.D.Ala. Feb. 25, 1986) ("the court must traipse through bog below and fog above to attempt to arrive at the present status of Eleventh Circuit law").

. See, e.g., Fischel, Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities, 38 Bus. Law. 1, 12 (1982) (suggesting that other courts not adopt the holding of Shores)', Comment, The Fraud on the Market Theory: The Debate Rages On, 27 Duq. L.Rev. 277, 293 (1989) (Shores decision "indefensible”); Note, Dredging the Shores Doctrine: Trends in the Fraud-on-the-Market Theory in the New Issues Context, 23 Ga.L.Rev. 731, 758-62 (1989); Note, The Fraud-on-the-Market Theory, 95 Harv.L.Rev. 1143, 1157-58 (1982) (rejecting possible rationales for Shores).

. Hereinafter, all remaining defendants, for the sake of simplicity, will be referred to collectively as “the appellees,” unless otherwise specified.

. Rule 10b-5 provides in relevant part:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails ...,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
Rule 10b-5, § 17 C.F.R. 240.10b-5 (1988).

. The court justified this expansive protection of investors under Rule 10b-5 by citing the specific language of subsections (a) and (c) and by referring to the securities acts’ broad purpose to "protect investors against fraud and ... to promote ethical standards of honesty and fair dealing.” Shores, 647 F.2d at 470 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668 (1976)).

. The majority holds that “appellants have failed to establish that the bonds as they were priced were unmarketable. A fortiori, appellants have failed to establish that the bonds were unmarketable at any price.” Ante at note 16. Thus, if the proposition that the bonds as they were priced were marketable is correct, then the majority has created a test that is even more conservative than is necessary to deny relief under Shores. The majority’s test, however, is not merely dicta: the majority explicitly holds that “[alppellants would have to prove that the pre-offering marketing program sufficiently predicted the failure of the project so as to render the bonds unmarketable at any price.” Ante slip op. at 86, at 731 (emphasis added). The test does not become dicta simply because the majority does not see this as a close case.

. Even bonds in default have a salvage value. See L. Gitman, Principles of Managerial Finance 554 tbl. 19.1 (3d ed.1982).

. Cf. 4 A. Bromberg & L. Lowenfels, Securities Fraud & Commodities Fraud § 8.6(652) (1988) ("The concept might be more accurately described as reliance on the market as a monitor.”).

.The effects of laboring under the faulty economic unmarketability interpretation surfaced in a recent Fifth Circuit decision, Abell v. Potomac Ins. Co., 858 F.2d 1104 (5th Cir.1988), cert. denied, — U.S. -, 109 S.Ct. 3242, 106 L.Ed.2d 589 (1989). In Abell, the court faced a situation in which the subject enterprise had valuable assets at the time the bonds were issued. The bondholders made an argument to the court similar to the factual unmarketability interpretation set forth above. The court rejected this argument even though the bondholders persuasively pointed out that the worthlessness of the securities is not required by Shores. The court responded to the bondholders by arguing that marketability does not depend on the value of the bonds but rather on the value of the subject enterprise and the promoter’s knowledge of that value. According to the court, a bond is unmarketable, even if valuable, when the promoter knows that the enterprise is doomed to fail. As the court stated, "[ajlthough *737the assets may have added value to the securities, the sham 'business’ did not because the promoters never intended to start a legitimate one." Id. at 1122. The court then created a new test for unmarketability: whether the promoter knew that the subject enterprise was worthless when the securities were issued. Id. at 1122-23; see also Stinson v. Van Valley Dev. Corp., 714 F.Supp. 132, 138 (E.D.Pa.1989) (applying the Abell test).
Thus, the Fifth Circuit, recognizing the defect in economic unmarketability, but refusing to accept factual unmarketability, has created a test that is completely unrelated to protecting investors and that focuses entirely on the intent of the promoter. No precedent of which I am aware makes the promoter’s knowledge of his enterprise's worthlessness the gravamen of a Rule 10b-5 complaint. Moreover, I find nothing in Shores to warrant this type of inspection.
A short hypothetical illustrates my point. Suppose first that promoter A creates ACorp for the purpose of marketing widgets. ACorp possesses only nominal assets valued at $10. A is 99% certain that ACorp will fail, but is a risk taker. To market ACorp bonds, A misrepresents ACorp’s chance of success and its assets to investors. The bondholders receive less than 1% of their investment in bankruptcy.
Suppose now that B creates BCorp for the purpose of marketing widgets. BCorp possesses assets worth $100,000, but B is absolutely certain that BCorp will fail. The bonds issue for $200,000. The bondholders recover 50% of their investment. Under Abell's modification of economic marketability, BCorp bondholders could recover because B had the requisite bad intent, but ACorp bondholders could not recover. This result is nonsensical yet appears to be mandated by Abell and appears to be the next destination on the course that the majority charts today.

. The panel in this case found that "the evidence presented (at most) an inference that [the issuer] defendants were negligent in their reliance on Rice and several of the other defendants.” Ross, 837 F.2d at 1003. Thus, one could assume that had these entities actually known of the fraud, the bonds never would have been marketed.

. Although I agree with the dissenters' conclusion that the bonds in this case might have been unmarketable, I cannot concur in their interpretation that unmarketability depends solely on "whether there is any combination of price and interest rate at which the bonds would have been marketable but for the fraud.” Post, at 750 (Clark, J., dissenting). The dissenters have merely restated the majority’s test.

. As noted in the text, Shores set out a three-part test to determine whether the plaintiff has stated a cause of action. The panel in the instant case and the majority today discuss only the first prong of that test. Because the second and third prongs of the Shores test (reasonable reliance and causation) do not appear to be issues in this case, I will assume that the appellants have adduced sufficient evidence to withstand summary judgment on those points.

. Of course, this presumption can be rebutted by showing that the plaintiff knows of the misrepresentation and has reason to believe that it affected the market price. Zlotnick, 836 F.2d at 822.

. See Note, The Fraud-on-the-Market Theory, 95 Harv.L.Rev. 1143, 1158 (1982) (finding no justification except general fairness for relying on underwriting process).

. I am not unmindful of the growing jurisprudence on the issue of sophisticated and unsophisticated investors. Many courts now will deny relief under Rule 10b-5 to a plaintiff who is held to a higher standard of care because of her sophistication. See, e.g., J.H. Cohn & Co. v. American Appraisal Assocs., 628 F.2d 994, 998-99 (7th Cir.1980). See generally Fletcher, Sophisticated Investors Under the Federal Securities Laws, 1988 Duke LJ. 1081, 1085-90. One could argue that reliance on a primary market to exclude unmarketable securities is reasonable for an unsophisticated investor, but such an argument is not persuasive. Knowledge that those involved in issuing securities have an interest in successfully issuing unmarketable securities is certainly not within the exclusive domain of the sophisticated investor. The risk of reliance is obvious, and it should be obvious to all investors regardless of their sophistication.

. In this hypothetical, I assume that Johnson does not bring suit against the issuer, Middle-town, and therefore may not seek rescission as a remedy. As I discuss in the text, infra at 24, rescission is available only against the seller of the securities.

. As in our hypothetical case, this value can easily be created by securing the bonds with some asset of minimal value.

. This result is particularly likely when the plaintiff, as in our hypothetical case, arouses the sympathy of the jury.

. In Shores, interestingly, the en banc decision never states what relief the plaintiff was seeking. Because that case was ultimately settled, this issue was never reached.

. The Shores court also attempted to justify its decision by focusing on the protective nature of the securities acts and insisting that such laws should be read broadly. 647 F.2d at 470. I agree with the premise, but I find no reason to concur in a broad reading that makes no economic sense and that actually conflicts with the fundamental purpose of the securities acts.

. This hypothetical assumes that an economic unmarketability interpretation applies.

. For example, defendants such as those in this case might be subject to criminal liability. See, e.g., 15 U.S.C. § 78ff (1982) (authorizing criminal penalties for violations of 1934 Act's provisions); Ala.Code § 8-6-18 (1984) (authorizing criminal penalties for violations of Alabama securities laws). Additionally, in a case such as this, a plaintiff could bring a common law fraud or negligence action against his broker. The broker would then have an incentive to investigate thoroughly the proposed investment and expose any scheme of fraud. Finally, if the broker is involved in a larger fraudulent scheme, the other participants could be held liable under a theory of vicarious liability.