Court Opinion

ID: 9430699
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:30:22.225673+00
Date Added: 2024-06-11T17:23:25.857826
License: Public Domain

Justice Blackmun,
concurring.
I join the Court’s well-reasoned opinion. As the Court recognizes, this case concerns the proper measure of damages under two distinct statutory schemes — § 12(2) of the Securities Act of 1933, 15 U. S. C. §77i(2), and §§ 10(b) and 28(a) of the Securities Exchange Act of 1934, 15 U. S. C. §§78j(b) and 78bb(a). See ante, at 649. The Court correctly concludes that, under the specific remedial formula set out in § 12(2), the tax benefits generated by an investment provide no basis for reducing a defrauded investor’s recovery. Ante, at 655-660. Since petitioners prevailed on their § 12(2) claim as well as on their § 10(b) claim, they are entitled to select the damages remedy more favorable to them. I write separately merely to explain why it may be proper to take tax benefits into account in a case brought solely under § 10(b) and Rule 10b-5 of the SEC, 17 CFR §240.10b-5 (1985), a question the Court leaves open. Ante, at 666-667.
The measure of damages in a § 12(2) case brought by an investor who still owns the security involved is rescissory: the statute permits the defrauded investor “to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the *668tender of such security . . . .” I agree with the Court that tax benefits cannot be considered either “income” or “consideration.” Ante, at 656-657, 659-660. Recovery in a case brought under § 10(b) is governed by § 28(a) which, unlike § 12(2), does not set out a specific method of calculating damages. Rather, § 28(a) merely limits recovery to the “actual damages on account of the act complained of.” A rescissory measure of damages may sometimes be appropriate. See ante, at 661-662. I agree with the Court that when rescission is the appropriate remedy tax benefits should not be taken into account. Normally, however, the proper measure of damages in a § 10(b) case is an investor’s out-of-pocket loss, that is, “the difference between the fair value of all that [the plaintiff] 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 (1972); see ante, at 661-662.
To ascertain out-of-pocket loss requires taking into account all the elements that go into the price of a tax shelter. That price will reflect both the value of the underlying asset— here, a motel with a potential income stream and a potential for capital appreciation — and the value of the tax write-offs that the construction and operation of the underlying asset will generate. See Salcer v. Envicon Equities Corp., 744 F. 2d 935, 938, 940 (CA2 1984), vacated and remanded, post, p. 1015. See also Austin v. Loftsgaarden, 675 F. 2d 168, 174 (CA8 1982) (Austin I) (respondent forced to increase potential tax benefits to attract investors). An investor will pay more for a share of an underlying asset when ownership will provide not only income and capital appreciation but also tax benefits.1
*669An investor who has invested in a tax shelter can be defrauded in either or both of two ways. First, the promoter may have misled him with respect to the level of potential tax benefits. See, e. g., Lasker v. Bear, Stearns & Co., 757 F. 2d 15 (CA2 1985); Sharp v. Coopers & Lybrand, 649 F. 2d 175 (CA3 1981), cert. denied, 455 U. S. 938 (1982). Second, the promoter may have misled him with respect to the value of the underlying asset. See, e. g., Salcer, 744 F. 2d, at 940, n. 5 (referring to views of the SEC as amicus curiae). This case falls only within the latter category: petitioners do not claim they were misled with regard to the tax benefits they could expect from their investment; rather, they claim respondents misled them with respect to the profitability of the motel.
An investor who receives the promised tax benefits, but not the promised income stream or appreciation, of course has been injured. But this injury — the difference between the value of what he received and the value of what he was promised — is represented, not by the entire purchase price, but rather by that portion of the purchase price which went toward a high quality underlying asset when what was received was a lower quality asset. In other words, the investor received the benefit of his bargain with respect to that part of the purchase price which went toward buying the tax benefits. The proper measure of recovery in such a case is therefore the part of the purchase price attributable to payment for an asset that was never received.2 See also Salcer, *670744 F. 2d, at 940, n. 5. The Court recognizes that it may be proper to reduce recovery in cases brought solely under § 10(b) and involving securities as to which tax consequences provided a major inducement to investment, and I therefore join its opinion.

 For example, investor A, who invests in a security that is not a tax shelter, might pay $100 for a share in a corporation that runs hotels in the expectation that he will receive $10 in dividends each year plus $5 in appreciation of the value of the stock. Investor B might pay $110 for a proportionate share in a partnership that runs hotels in the expectation that, in *669addition to receiving the same amount of income from the hotels and the same possible appreciation in the value of the partnership share as A receives, he will also receive $25 in deductions he can use to offset income from another source. The additional $10 investor B pays to obtain the tax benefits is a “premium” attributable to receipt of tax benefits rather than receipt of economic benefits from the underlying asset.

 Suppose that both investor A and investor B, see n. 1, supra, are victims of material misrepresentations and that, in both cases, the hotels actually are worthless. If investor A (the non-tax shelter investor) sued under § 10(b), he would be entitled to damages of $100. If investor B actually *670had received the anticipated tax benefits (e. g., because, although the roof leaked and the rooms were unusable, the construction costs were actually incurred), he too would have actual damages of $100 (because that part of the purchase price of the security that represented payment for the asset that was claimed to be worth $100 was in fact worthless) and not $110 (because he did receive the tax benefits he was promised, for which a fully informed investor would have paid $10 at the time B bought the investment). Similarly, if it turned out that the ownership shares in the hotel are worth only $40, rather than $100 (e. g., because occupancy is lower than had been projected and revenues are therefore less than anticipated), both investor A and investor B will have actual damages of $60.
This is not, however, to say, as the Court of Appeals did, see Austin v. Loftsgaarden, 768 F. 2d 949, 952 (CA8 1985) (Austin II), that a plaintiff’s recovery should be reduced by the amount of the tax benefits received. No rational investor would pay $1 for the ability to shelter $1 of income. Instead, recovery should be reduced by the market value of the economic benefits the plaintiff was promised and actually obtained, which includes the ability to shelter a particular amount of income. The value of that right can be established by expert testimony.