UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK.
March 17, 1975.
Beecher, et al.
Able, et al.; Levy v. Douglas Aircraft Company. Inc., et al.
The opinion of the court was delivered by: MOTLEY
FINDINGS OF FACT AND CONCLUSIONS OF LAW
MOTLEY, District Judge: In its Findings of Fact and Conclusions of Law, dated March 20, 1974, the court found that defendant Douglas Aircraft Company, Inc. (Douglas) had on July 12, 1966 sold $75 million of its 4 3/4% convertible debentures due July 1, 1991 under a materially false prospectus. In particular, the court found that the break-even prediction, use of proceeds section and the failure to disclose certain pre-tax losses rendered the prospectus misleading. The parties have agreed that no damages are properly attributable to the erroneous use of proceeds and pre-tax loss portions of the prospectus. (Tr. Pre-trial Conference of October 17, 1974 at p. 21.) Accordingly, trial of the damages sustained by plaintiffs and members of the class represented thereby, i.e., all persons who bought the convertible debentures between July 12, 1966 and September 29, 1966, was limited to those damages caused by the misleading break-even prediction in violation of § 11 of the Securities Act of 1933. 15 U.S.C. § 77k.
At the outset the court notes that the measurement for damages caused by violations of § 11, as set forth in the statute, is as follows:
"11(e) ... The suit authorized under sub-section (a) may be to recover such damages as shall represent the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and (1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and the value thereof as of the time such suit was brought: Provided, That if the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading, such portion of or all such damages shall not be recoverable."
As might be anticipated from a reading of this section of the statute, the parties are in disagreement regarding the content to be given several significant terms used in § 11(e).
First, there is a dispute as to "the time such suit was brought." Secondly, there is a dispute as to the value of the debentures as of the time of suit. Third, there is sharp disagreement as to the cause or causes of the drop in the value of the debentures after September 26, 1966. Fourth, there is a dispute as to the effect of later market action on certain damage claims.
For the reasons noted below, the court reaches the following conclusions. First, the court concludes that the time when the suit was brought was October 14, 1966, the day on which the first of these consolidated cases was filed. Secondly, the court concludes that the fair value of the debentures on the day of suit was 85, said figure reflecting an accommodation of the market price, panic selling, and intrinsic value of the offering. Third, the court concludes that defendant has failed to carry its burden of proving that damages sustained by plaintiffs were due to factors other than the misleading prospectus. Fourth, the court concludes that under the statute later market action of the debentures is irrelevant in determining the plaintiffs' claims. Finally the court makes certain findings with respect to named plaintiff Lawrence J. Beecher and establishes 6% as the pre-judgment interest rate, and 6% as the post-judgment interest rate.
TIME OF SUIT
The Levy, Beecher and Gottesman suits were commenced on October 14, 1966, October 19, 1966, and November 9, 1966 respectively. Plaintiffs' lead counsel has urged that October 19, 1966 be selected as the date on which suit was filed. Insofar as the closing price for the debentures on October 19, 1966 was 73, and insofar as price is some evidence of value, selection of the October 19th date - as opposed to the October 14th date, when the debentures closed higher at 75 1/2 - would tend to increase the damage award to the plaintiff class.
Defendant has treated date selection as a relatively unimportant issue, since defendant has consistently urged the court to look to the intrinsic value rather than market price of the debentures when measuring plaintiffs' damages, if any. In sum, to the parties, date selection is only as important as is their reliance on market price.
The court concludes that the most logical date for present purposes is October 14, 1966, the date on which the first, i.e., Levy, action was filed. In reaching this conclusion, the court notes that at the time of filing each of the three consolidated cases anticipated congruent classes. On October 14, 1966, when the first suit was filed, all those individuals who would eventually comprise the plaintiff class were already contemplated by the action, even though in subsequent proceedings the Levy class was voluntarily limited. Hence, there is no problem of selecting a date and suit which might prove under-inclusive.
During the course of the trial, defendant suggested that the first date be selected, since publicity surrounding the filing of suit may have artificially altered the market price of the debentures during subsequent days and weeks. Thus, defendant claimed, selection of either the second or third date, and its corresponding market price as evidence of value, might prove unreliable.While publicity about a securities case may have the effect claimed by defendant, here there was neither evidence of publicity nor any effect of the filing on the market. The court notes, therefore, that its decision to elect the date of filing of the first suit, as the date of suit is made without reliance on this argument.
In the present cases, the first date seems the most logical benchmark for measuring damages under § 11(e). In future cases the prospect of selection of the filing day of the first suit may well reduce date-shopping subsequent to the first filing and so far as possible limit the multiplicity of identical suits. Further, the certainty of the date of the first suit may shorten future damage trials, since evidence of value can be limited to one particular day.
VALUE AS OF THE TIME OF SUIT
As noted above, the value of the securities at the time of suit was sharply contested at trial. To establish "value", plaintiff asks the court first to look to the trading price on the day of suit and then to reduce that price by a sum which reflects the undisclosed financial crisis of defendant. At trial, plaintiff characterized the market for these debentures as free, open and sophisticated marked by a heavy volume of trading on national and over-the-counter exchanges. Plaintiffs relied on trading data from July to mid-October 1966 and the testimony of their expert, Mr. Whitman, in reaching the conclusion that market price was the best evidence of maximum fair value. (Def's Exh. D 820(26); Pl's Exh. 115; Tr. 455-56; 476-77.) The reason plaintiffs urge that market price reflects maximum fair value, as opposed to value, is because the buying public was unaware of the financial crisis gripping defendant in mid-October 1966. Thus, according to plaintiff, had the buying public been aware of the crisis they would have paid less for the security.
The factors precipitated by the falsity of the break-even prospectus forecast which led plaintiff to characterize defendant's financial condition as "critical" include the folliwing:
1) As of October 10, 1966, defendant forecast a post-tax loss of $21.9 million for fiscal 1966. (Pl.'s Exh. 109, "Consolidated Company Financial Report", p. 3).
2) The time was one of extreme cash tightness. Year-end liabilities were estimated at $512 million as against current assets of $561 million, of which $407 million consisted of inventories. (Pl.'s Exh. 109, "Consolidated Company Financial Report", pp. 6-7.)
3) During the period following October 10, 1966 the group of eight banks which had previously extended credit to defendant, altered their terms and made certain other demands. Those changes included a suspension of the open line of credit and security for outstanding loans.(Pl.'s Exh. 12, App. C. p. 9; Tr. 267-68, 270-71). The interest rate on loans to defendant was raised from prime to a point above prime. (Tr. 310) The banks insisted on frequent projections as to defendant's cash needs and such needs were only met on a fully collateralized basis. (Tr. 273, 296-67.) The banks insisted that defendant obtain additional advances from its airline customers, that defendant discount customer paper with the Export-Import Bank and that defendant apply to the Department of Defense for a Regulation V loan. (Tr. 283-84) Significantly, the banks were demanding an infusion of equity capital ($25 million by February 15, 1967 and an additional $75 million shortly thereafter).(Tr. 277-78, 291, 315-16) Defendant's investment bankers, Merrill Lynch, Pierce, Fenner & Smith, however, advised against another public offering as a source of such equity. (Tr. 276-77, Pl.'s Exh. 12, App. C, p. 11)
4) There was serious discussion among the banks to the effect that defendant's management needed strengthening. (Tr. 313-14)
5) No firm proposals for a merger, which would have solved defendant's problems with regard to management and an infusion of equity, had been made by mid-November 1966. (Pl.'s Exh. 93, pp. 3-4)
Plaintiff further claims that comments contained in various memoranda and reports prepared in support of the merger of defendant and McDonnell Company constitute admissions by defendant that its financial plight was grave. (See Pl.'s Exh. 12, pp. 5-6, 8; Pl.'s Exh. 12, App. D, p. 19; Pl.'s Exh. 99, pp. 3-4)
In sum, plaintiff's claim that the market price of the debentures reflects a sophisticated assessment of the security's value, but that insofar as the financial plight summarized above was undisclosed, market price should be lowered to arrive at fair value. That is, had investors known of the crisis, they would simply have paid less.
The defendant urges the court to adopt a somewhat different approach from plaintiffs' in establishing "value" of the security at time of suit. Defendant contends that the market action of this offering was volatile and often unrelated to fair value. (Tr. 359-61) In particular defendant claims that on the date suit was filed the market price of the debenture was temporarily depressed by panic selling in response to the release of the defendant's disappointing third quarter earnings results. Thus, according to defendant, the market price of the debenture on the date of suit was not a reliable indicator of fair value. Defendant would have the court look to the optimistic long-range prospects of the defendant company and set a value which would not only off-set panic selling but which would reflect defendant's anticipated future gains, or the investment feature of the offering. That value, of course, would be in excess of the closing market price on October 14, 1966 of 75 1/2.
In support of the above argument defendant relies on the following evidence.
1) To demonstrate the volatile nature of this offering defendant notes, by way of example, that the debentures were temporarily depressed from August 25, 1966 through mid-September due to the introduction of competitive Boeing debentures. (Def's Exh. 866, Def's Exh. 820(2); Tr. 465-69, 493-97, 505-09).
2) As evidence of panic selling on the date of suit, defendant points to the fact that prior to the announcement of the third quarter results on September 28, 1966 the price of the debentures had consistently been well above 80 to 82 1/2. (Def's Exh. 820(26)). Defendant also notes that the market price had again recovered by November 1966 and remained above 100 throughout calendar 1967. (Def's Exh. 820(2)).
3) As further evidence of panic selling and the peculiar - hence unreliable - market price on the date of suit, defendant notes that although the market price of the debentures had been steadily declining since July 1966 the price of the debentures fell off at an accelerated rate after the announcement of the third quarter results in late September, 1966.
4) Defendant also notes as evidence of panic selling that defendant's common stock dropped in price at a rate in excess of comparable offerings after the third quarter results were announced. In particular defendant relies on the Barron's Aircraft Manufacturers Group stock average, an index with which the actual price of defendant's stock had enjoyed a 92% correlation during 1964, 1965 and 1966. (Def's Exh. 820(9), Def's Exh. 820(33); Tr. 373-74, 380) Based upon the Barron's Aircraft Manufacturers Group stock average, the price of defendant's common stock the price of defendant's common stock should have been about 42 1/2 in late September 1966. (Def's Exh. 820(9), Tr. 385) In fact, the defendant's stock closed at 36 3/8 on September 30, 1966. (Def's Exh. 820(26)) According to defendant, this difference between the expected and the actual stock price - and the correspondingly low market prices for the debentures - was a temporary aberration attributable to the revelation of the third quarter earnings. (Tr. 385)
5) With respect to the argument that the court should set a value which reflects future recovery, defendant relied on evidence establishing that it had a significant backlog, amounting to $3.3 billion by the end of 1966. (Tr. 58-59) Defendant claims that this backlog would eventually result in profits which according to historical price-earnings ratios would lift the defendant's stock to at least $81 and simultaneously raise the price for debentures well in excess of 80 to 82 1/2. (Def's Exh. 820(1) and (2)) Defendant argued that its production problems with respect to the DC-8 program would be readily resolved, notwithstanding then current increasing costs due to a "reverse learning curve".
(Liability Trial, Tr. 988, 990-91)
6) With respect to establishing the creditworthiness of defendant, and to defeat plaintiffs' argument that defendant was beset with a financial crisis, evidence was introduced which showed that the banks continued to extend credit to defendant, albeit on stricter terms. In particular, between July 31, 1966 and November 30, 1966 the American and Canadian Banks extended Douglas $110,783,454 of new bank credit. (Pl's Exh. 55, p. 21, Pl's Exh. 80, p. 18)
7) Similarly, defendant argued that the purchase of 1,500,000 shares of Douglas stock by McDonnell Aircraft Corporation at $45.80 a share on January 26, 1967 was further evidence of defendant's substantial intrinsic value and good future. (Tr. 57) Defendant notes that when the common stock was at approximately $45.80 the corresponding price of the debentures was typically around 82. (E.g., Def's Exh. 866) The ultimate merger of McDonnell and Douglas on April 28, 1967 accompanied by limited changes in management was cited as further evidence of defendant's soundness and hence the high value of its debentures.
As the above arguments indicate both parties for different reasons are dissatisfied with market price as conclusive evidence of value. The court is urged to look to market price and then either add or subtract a certain amount, depending on which party's claims proves more convincing. Plaintiffs through their expert conclude that fair value on the date of suit was 41. (Tr. 480) In contrast, defendant through its expert concludes that the value of the debentures on the date of suit was between 80 and 82 1/2. (Tr. 393) As noted elsewhere, closing market price on date of suit was 75 1/2.
Case law, commentators and the parties agree that realistic value may be something other than market price, where the public is either misinformed or uninformed about important factors relating to the defendant-offeror's well being. E.g., Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544, 587 (E.D.N.Y. 1971); 3 Loss, Securities Regulation 1735 (2d ed. 1961); C. T. McCormick, Damages, § 122a, p. 461 fn. 57 (1935); Comment, "Civil Liability For Misstatements in Documents Filed Under Securities Act and Securities Exchange Act", 44 Yale L.J. 456, 459-60 (1935); Note, "Legislation: Federal Regulation of Securities: Some Problems of Civil Liability", 48 Harv. L. Rev. 107, 114-15 (1934). The Court has previously indicated that in its view market price is merely some evidence of value. See Pretrial Order of October 22, 1974 at footnote 1. Moreover, the conclusion that "value" is not synonomous with "market price" seems clearly dictated by the plain language of Section 11(e) in which both "price" (sometimes "amount paid") and "value" are used, apparently deliberately, to connote different concepts.
After considering the above evidence offered by the parties with respect to "value" at the time of suit, the court makes the following observations and findings and reaches the following conclusions. Although the plaintiffs produced considerable evidence tending to show the unfavorable financial situation of defendant at the time of suit, the evidence does not convince the court that the situation was as desperate or life-threatening as it has been characterized by plaintiffs. More importantly, the court does not agree with plaintiffs that had investors known of the defendant's financial situation they would invariably have paid less for the debentures and that the court should set a value considerably below market price.
As the parties seem to agree, the market for these debentures was, in the main, a sophisticated market. As such, it no doubt was most interested in the long range investment and speculative features of this particular offering. (E.g., Tr. 349-51) The defendant's immediate financial troubles would likely be viewed as temporary rather than terminal by such a market. Certainly the existence of the warrant feature suggests a buying public which was future-oriented.
As defendant urged, notwithstanding the then current financial difficulties, the future of Douglas was hopeful. In particular, the substantial backlog of unfilled orders as well as the banks' continued extension of credit suggested a reasonable basis for belief in recovery. The court relies heavily on these factors in reaching the conclusion that at the time of suit the fair value of the debentures should reflect the reasonably anticipated future recovery of defendant.
Defendant also urged the court to rely on the merger between McDonnell and Douglas as evidencing the attractiveness and hence high value of defendant's offering. Since the merger prospects between McDonnell and Douglas were still equivocal at the time of suit, and in any event the ultimate merger was probably more a reflection of McDonnell's unique needs than Douglas' intrinsic value, the court does not rely on the merger or the price McDonnell was willing to pay in reaching the conclusion that defendant had a sound future at the time of suit.
Defendant also argued that the value of the debentures at the time of suit was higher than market price because on that date the market price was artificially lowered due to panic selling in response to the revelation of the third quarter earnings. The evidence strongly supports the conclusion that the market price on the day of suit was characterized by panic selling. The court relies heavily on the trading data in reaching this conclusion. (Def's Exh. 820(26), Pl's Exh. 115) In particular, these data show that following the announcement of the third quarter results the market price dropped off and continued to decline at a rate in excess of the pre-revelation rate. The sharp and continued increase in volume between revelation and mid-October suggests a market reacting to news, here presumably news of the third quarter earnings.In addition to these trading data, there was convincing expert testimony which tends to confirm the conclusion that panic selling was affecting the market price at the time of suit.
Although defendant introduced evidence of various indicies to demonstrate the variance between the expected and actual behavior of the debentures, and hence the unreliability of the panic-ridden market price on date of suit, the court does not find it necessary to rely on these projections in reaching the conclusion that panic selling did in fact exist.
The court notes that, notwithstanding the fact that the market for these debentures was normally sophisticated, elements of the buying public were apparently given to irrational investment behavior and the prices during the several weeks following the revelation were substantially affected by that behavior.In the court's view, there is nothing inherently contradictory in concluding both that the market for these debentures was normally intelligent and paid a price which fairly reflects value, and that the market was occasionally irrational and paid a price below fair value.
Based on the foregoing factual findings the court concludes that market price is some evidence of fair value.
Using the market price as a starting point, the court further concludes that whatever amount might rightly be subtracted to account for the temporary financial crisis of defendant at time of suit, should be off-set by adding a like amount to account for the reasonable likelihood of defendant's recovery. That is, in the court's view, with respect to value at the time of suit the defendant's financial difficulties were balanced off by the defendant's probable recovery.
Finally, the court concludes that there was convincing evidence that the market price of the debentures on the day of suit was influenced by panic selling. Hence the price was somewhat below where it might have been, even in a falling market. To correct for this aberration, the court adds 9 1/2 points to the market price of 75 1/2 to establish a figure of 85 as fair value on the date of suit. It is expected that the figure of 85 as value represents a fair value of these debentures unaffected by the panic selling which along with other factors depressed the market price from 88 on September 26, 1966 to 75 1/2 on October 14, 1966.
In reaching this figure the court notes that the market fell 12 points between July 12 and September 26, 1966 at an average rate of .22 per day for 54 trading days. Had that rate continued for the 14 trading days September 27 to October 14, 1966 the price of the debentures would have been at approximately 84.92. Thus, 85 seems a fair value as of October 14, 1966. The 85 figure may well have obtained in a falling market, unaffected by panic selling.
DEPRECIATION RESULTING FROM CAUSES UNRELATED TO THE FALSITY OF THE PROSPECTUS
Under the proviso in Section 11(e) the defendant has the opportunity and burden of proving that any portion or all of the damages claimed by plaintiffs represents damage other than the depreciation in value of such security resulting from that part of the registration statement with respect to which liability is asserted. At trial defendant introduced considerable evidence which was intended to demonstrate that unexpected and unforeseeable events adversely affected the Douglas debentures subsequent to the issuance of the prospectus. It was claimed that these various events largely caused the drop in the debentures and that damages otherwise arrived at should be adjusted by a factor of somewhere between 3 and 12. (See e.g., Defendants' Proposed Finding #347.)
More particularly, defendant identified the following developments among others as unexpected adverse factors.
1) Pratt & Whitney, Douglas' engine supplier, reduced its previous commitment for DC-9 and DC-8 engine deliveries on September 29, 1966, thereby causing defendant production delays. (E.g., Defendant's Exh. 800, Def's Exh. 865, pp. 64, 72.)
2) Bank credit was tightened in response to a Federal Reserve Bank letter of September 1, 1966 just at a time when defendant was requesting an expansion of its credit line. (Tr. 265-68.)
3) Various military demands, e.g., for A-4 fighters and bomb racks, unexpectedly increased. (Liability trial, Tr. 1873-1877) These demands affected Douglas' subcontractors who in turn sought financial assistance from defendant.
4) Priorities for commercial aircraft were restricted in response to a directive of the Executive Office of the President on July 22, 1966. As a result, Pratt & Whitney diverted production from commercial to military equipment and fell further behind in deliveries to defendant. (E.g., Def's Exh. 800, p. 3; Pl's Exh. 111)
5) Finally, defendant urged that the general economy declined in late 1966. In support of this proposition, defendant noted among other things that the supply of money contracted, that the federal budget incurred an unanticipated deficit, that the availability of bank loans declined, and that Industrial production as measured by the Federal Reserve Board's Index of Industrial Production declined. In sum, according to defendant, the "mini-recession" came in. (E.g., Def's Exh. 843)
In response, plaintiffs argue that the drop in the market price and value of the debentures after September 26, 1966 was caused by the revelation of the third quarter operating loss and that the losses themselves were foreseeable. Furthermore, plaintiffs remind the court, it was the likelihood of events which might cause losses and the defendant's failure to account for this which rendered the prospectus misleading. Plaintiff claims that while the quantity of events may have changed, their nature and quality were foreseeable. Thus, when the third quarter losses were revealed and accordingly the falsity of the prospectus forecast made apparent, there was a sharp decline in the market price for the debentures. That decline according to plaintiffs is causally related to the falsity of the prospectus and is not attributable to any allegedly unexpected events.
Plaintiffs concede that defendant has established that the decline in market price from 100 to 88 from July 12 to September 26, 1966 (the last trading date before there was some revelation of the losses during the third quarter) resulted from increased interest rates and other general economic phenomena which were unrelated to the falsity of the prospectus forecast or other material falsities in or omissions from the prospectus.It follows therefore that no one who sold before September 27, 1966 has a claim. That is because any loss that was sustained in a pre-September 27th sale was due to a drop in market price unrelated to any falsity in the prospectus. Thus, the pre-September 27th drop caused by general market phenomenon cannot be charged against the defendant, regardless of defendant's wrong doing. As noted above, however, the cause of the decline in the market price for the debentures after the revelation is in controversy.
As a preliminary matter, there appears to be some disagreement as to precisely when the third quarter losses became known to the trading public. The court concludes that the evidence establishes that the falsity of the prospectus forecast was revealed when rumors that Douglas was about to announce a large operating loss for the third quarter circulated widely on September 27, 1966. (Tr. 430-35, Pl's Exh. 111).The court selects September 27th, notwithstanding the fact that on September 28, 1966 Douglas more formally announced a pre-tax loss of $32,796,000 and a post-tax loss of $17,061,000 for the third quarter fiscal period. (Pl's Exh. 37, pp. 9-10; Pl's Exh. 44)
With respect to the causes of depreciation after the revelation the court concludes that defendant has failed to carry its burden of proving that the depreciation was caused by factors unrelated to the falsity of the prospectus. In reaching this conclusion the court agrees with plaintiffs' analysis that the depreciation was immediately occasioned by the revelation of third quarter losses, and that the losses themselves were largely foreseeable, or at least not unexpected. In sum, investors were influenced to buy the debentures in reliance on misleading forecasts assuming recovery. When the misleading nature of the prospectus was exposed by the announcement of third quarter losses the price of the debentures dropped and the purchasers who had bought in reliance on the prospectus suffered losses. These losses were clearly related to the falsity of the prospectus.
Defendant referred to many events, summarized above at pp. 23-24, which were characterized as unexpected or wholly unforeseeable. In the alternative, defendant argued that even if the events were foreseeable or should have been foreseen their quantity was such that the magnitude of their impact was not foreseeable.The court does not agree.
In its Findings of Fact and Conclusions of Law on Liability the court noted that "[conditions] in the aerospace industry were gravely unsettled during fiscal 1966 rendering income forecasting uncertain. The Vietnam War had resulted in acute shortages of manpower and essential parts. ... Because future availability of manpower and parts would depend largely on the progress of the War, a matter about which predictions were plainly risky, earnings forecasts for fiscal 1966 would likewise be uncertain." (Findings on Liability at 21) As this quotation demonstrates, the court has already concluded that the conduct of the Vietnam War and the attendant military demands on the aerospace industry were subject to wide fluctuation during 1966.Defendant's present claim that it was surprised by the changing military demands and production priorities is inconsistent with the facts as previously found by the court.
Elsewhere in its Findings on Liability, the court noted that Pratt & Whitney "... had failed repeatedly and for several months prior to the effective date of the prospectus to meet its firmest commitments." (Findings on Liability at 21) Furthermore, "... there was a fair possibility that some of the conditions which were beyond Douglas' control, such as failure of its engine supplier [Pratt & Whitney] to meet its commitments, might continue to deteriorate. ..." (Findings on Liability at 31) Again, defendant's present claim of surprise at the deteriorating Pratt & Whitney delivery situation is defeated by the court's previous Findings.
Finally the court rejects defendant's claim that depreciation resulted from unforeseen developments in the market generally and in the market for money specifically. While credit arrangements may have become more difficult to make, testimony by defendant's own witnesses establishes that at no time between July 12, 1966 and May 1967 was Douglas unable to arrange financing in order to meet its obligations in the ordinary course of business. (Tr. 293-94) Furthermore, the stability of yields for other corporate bond rated Baa by Moody's (Def's Exh. 820(19), Tr. 359-60, 465-67), and the essentially flat price action of the highly comparable Boeing Co. convertible debentures due 1991 (Pl's Exh. 114, Tr. 458-59, 465-69) and of 18 other roughly comparable convertible debentures (Def's Exh. 820(19), Pl's Exh. 112, Tr. 465-66, 471-74, 480-81, 484-85, 510-11, 356-57, 395-96), between September 26 and October 14, 1966, belie defendant's claim that industry and the bond market in general were suffering in late 1966.Instead, a comparison of the falling price of defendant's debentures and the stable market action of other Baa corporate bonds, the Boeing convertible debenture and the 18 other convertible debentures confirms the conclusion that the decline in market price for the Douglas debentures after September 26, 1966 was caused by the revelation and was related to the falsity of the prospectus, rather than by market conditions generally.
In reaching the above conclusion the court emphasizes that unlike some commentators, the court does not believe that defendant's burden of proof of "negative causation" is "impossible." Compare, R. Jennings & H. Marsh, Securities Regulation, Cases and Materials, 810 (1968). Indeed, the court is aware that defendants have benefitted from clearly falling markets in other similar cases. E.g., Feit v. Leasco Data Processing Equipment Co., 322 F. Supp. at 586 and Fox v. Glickman Corp., 253 F. Supp. 1005, 1010 (S.D.N.Y. 1966). Here, the court's conclusions are based on an assessment of all the evidence.In the court's view, the weight of the evidence clearly establishes that the depreciation in the Douglas debentures was due to causes directly related to the falsity of the prospectus rather than the unrelated factors urged by defendant.
In contrasting the market action of the Douglas debentures and other groupings of bonds the court is very much aware of the possibility of relying on an inappropriate comparison. Nevertheless, the court finds each of the proferred comparisons, i.e., those bonds rated Baa, the Boeing offering, and the 18 convertible debentures, of some relevance. The Baa group demonstrates the stability of yields of bonds of the same general quality. The action of the Boeing offering provides a relevant comparison of a roughly comparable offering, presumably unaffected by news the magnitude of Douglas' third quarter report. Finally, the action of the 18 convertible debentures which were selling close to investment value and at premiums of 10% or more over conversion parity demonstrates the behavior of offerings which share, along with Douglas, the risk-taking aspect peculiar to convertible debentures. Although, no one of the comparisons taken alone would have convinced the court that the price of the Douglas offering was varying in an unusual manner, the essentially flat prices of all three of the other indicators taken together had a synergistic impact on the court's assessment of the weight of that evidence. It appears that Douglas alone declined so dramatically over the period in question. The court attributes the depreciation to factors related to the falsity of the prospectus but unrelated to alleged market decline generally.
EFFECT OF LATER MARKET ACTION ON DAMAGE CLAIMS OF PLAINTIFFS WHO EITHER SOLD AFTER 1967 OR RETAIN THEIR DEBENTURES
Defendant has brought to the court's attention the fact that the debentures regained their issue price of 100. on February 1, 1967, thereafter peaked at 145. and remained above 100. for the remainder of 1967. According to defendant, the claims of plaintiff Beecher and others who sold at a loss in 1967, and the claims of those plaintiffs who still retain their debentures should be disallowed because 1) the deleterious effects of the false prospectus were presumably spent when the debentures reached par by February 1967, 2) those plaintiffs could have and should have mitigated their damages by selling, and 3) the "negative causation" proviso of § 11(e) requires this result. The court does not agree.
As the court understands the statute, with the exception of § 11(e)(3), post-suit market action is irrelevant in establishing plaintiffs' damages. Section 11's damage formulae are explicit, comprehensive and hence, exclusive. Clause (1) covers those who never sold; clause (2) covers those who sold before suit; and clause (3) covers those who sold after suit. With respect to post-suit sellers, the impact of post-suit market action has been fully accommodated under clause (3) in which the recovery of post-suit sellers is limited to actual or realized loss.
Clause (3) provides for damages which are the difference between the amount paid (not exceeding par) and "the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding [par] ...) and the value thereof as of the time such suit was brought." With repect to those who never sold, clause (1) clearly limits the relevant considerations to the time of suit. Clause (1) provides for damages which are the difference between the amount paid (not exceeding par) and "the value thereof as of the time such suit was brought."
These statutory formulae were devised for the unique situations presented by the instant cases.The usual tort out-of-pocket measure (price paid less value at the time of purchase ) was apparently rejected by the legislature.
In preference, § 11(e) provides that price paid less value at the time of suit be awarded where a plaintiff retains the security and that the lesser of price paid minus suit value or realized loss be awarded where plaintiff made a post-suit sale. See III L. Loss, Securities Regulation, pp. 1629 and 1728 (2d Ed. 1961). Price paid less the time of suit value is the statutory benchmark. Further, defendant benefits from post-suit sales in a rising market but is unaffected by post-suit sales in a falling market. Beyond this, however, defendant cannot stretch its advantage to bar claims because of post-suit market increases.
The court agrees with Judge Weinfeld's reasoning made in a similar context in which the fortuitous events of the market could not be invoked to immunize the defendants wrongdoing. Voege v. Ackerman, 364 F. Supp. 72, 73 (S.D.N.Y. 1973). The time of suit value is the statutory cut-off. In general, damages are frozen as of that date. The defendant cannot be charged with declines unrelated to the falsity of the prospectus. Neither can the defendant benefit from a rising market, except to the limited extent provided for in § 11(e)(3). The court finds no authority in case law or logic for demanding that victimized purchasers mitigate damages by making investment decisions subsequent to filing suit. Given the statutory damage formulate defendant will benefit from a post-suit sale in a rising market, should a purchaser choose to sell. Although the statute confers this benefit, a purchaser is not required to sell merely to reduce defendant's damages.
DEBENTURE TRANSACTIONS AND DAMAGES OF A NAMED PLAINTIFF
The court makes the following findings with respect to damages sustained by the named plaintiff Lawrence J. Beecher. Plaintiff Beecher bought $5,000 in principal amount of the debentures on July 12, 1966. In two separate transactions on November 13, 1970 plaintiff Beecher sold 3,000 of the principal amount at 58 1/4 for a sum of $1,787.49, less a commission of $15.00 and registration fee of $.03, and 2,000 of the principal amount at 58 3/4 for a sum of $1,201.68, less a commission of $10.00. The gross proceeds total $2,922.50, but the realized net sale proceeds total $2,897.47 (Pl's Exh. 83 not reproduced. CCH.) Insofar as plaintiff Beecher sold after suit but before judgment, his claims are to be measured by § 11(e)(3). Since the price which plaintiff Beecher received upon sale was less than value as determined by the court, plaintiff Beecher is entitled to the difference between amount paid and value, i.e., $5,000 minus $4,250 or $750.
The court further finds that plaintiff Beecher's claim is typical of those of the other named plaintiffs and of the class generally, and that the damages of the remain-plaintiffs, whether they sold before suit (but after September 27, 1966), after suit or still retain the debentures, can be calculated in a similar manner. To expedit the determination of damages, the court will appoint a Special Master who will ascertain the damages suffered by the other named plaintiffs and the class generally in accordance with the findings and conclusions reached in this opinion.
With respect to interest, the court in its discretion concludes that plaintiffs shall be entitled to recover interest on their damages from the date of suit unless the debentures were sold before suit, in which case interest shall run from the date of sale. Austrian v. Williams, 103 F. Supp. 64, 117-19 (S.D.N.Y.), reversed on other grounds, 198 F.2d 697 (2d Cir.), cert. denied, 344 U.S. 909, 97 L. Ed. 701, 73 S. Ct. 328 (1952). In the court's view such an award is compensation for the damage caused by the wrong done, as found in the liability trial, and is consistent with fundamental considerations of fairness. Norte & Co. v. Huffines, 416 F.2d 1189, 1191 (2d Cir. 1969), cert. denied, 397 U.S. 989, 90 S. Ct. 1121, 25 L. Ed. 2d 396 (1970).
In reaching a rate at which interest shall be awarded, the court notes that the prime rates charged by banks have ranged from approximately 6% in late 1966 to 11 1/4% in November 1974, with a low of approximately 4 3/4% in early 1972.The court also notes that it was not until relatively recently, i.e., mid-1973, that the rates consistenty remained above 8%. Further, the court notes that the debentures themselves bore a rate of 4 3/4% due in 1991 which is some indication of the expectations of the plaintiff class with respect to a reasonable rate of return. In light of the foregoing, the court concludes that a rate of 6% as prejudgment interest is equitable. This figure represents an accommodation of prevailing rates, plaintiffs' expectations, and an assessment of the severity of the loss for which plaintiffs are to be compensated.
With respect to post-judgment interest, the parties are in apparent agreement that the court is to look to the prevailing rate in the forum. 28 U.S.C. § 1961. Accordingly, the court finds 6% as authorized in C.P.L.R.§ 5003 to be the appropriate rate.
The trial with respect to liability, if any, under Rule 10(b)(5) will commence August 5, 1975.
Submit order on five days' notice.