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.
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. ...