UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
November 17, 1978
Arnold B. ELKIND, Plaintiff,
LIGGETT & MYERS, INC., Defendant
The opinion of the court was delivered by: MOTLEY
OPINION AMENDING FINDINGS OF FACT AND CONCLUSIONS OF LAW
Defendant Liggett & Myers, Inc. (Liggett) has timely moved to amend the findings of fact and conclusions of law entered by this court on November 17, 1978. This court found that plaintiffs had failed to meet their burden of proof on their first claim of nondisclosure. The court found for plaintiffs on their second claim of tipping. As set out in this court's earlier opinion, the court awarded plaintiffs damages equivalent to the difference between what the plaintiffs paid for their stock and the value they received that is, what they would have paid had there been disclosure of the tipped information at the time they bought Liggett stock. The present controversy centers on the calculation by the court of what the stock would have sold at during the tipping period if there had been disclosure of the tipped information. The court used the "value line" method as suggested by Judge Sneed in Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1341 (9th Cir. 1976) (concurring opinion). The court constructed a value line which showed what the price of Liggett stock would have been for each day of the tipping period if the tipped information had been publicly disclosed on the first day of the tipping period.
Defendant does not quarrel with the value line method but rather contends that there was insufficient evidence to construct a value line for Liggett stock during the tipping period, July 11 through July 18, 1972. Liggett argues that plaintiffs' Exhibit 152, which was attached to this court's earlier opinion as an appendix, and the testimony of Mr. Torkelson, plaintiffs' expert witness, with respect to Plaintiffs' Exhibit 152 were relevant only to plaintiffs' first claim of nondisclosure which was dismissed by the court. It was this evidence on which the court based its award of damages. The court agrees that Plaintiffs' Exhibit 152 was not probative on the issue of damages under the tipping claim and amends its earlier opinion in accordance with this opinion.
Plaintiffs' Exh. 152 estimated what the price of Liggett stock would have been had there been disclosure in June 1972 of Liggett's internal reports which indicated a down swing in profits. Plaintiffs' Exhibit 152 showed the estimated price of Liggett stock for each day of the period June 19 to July 18, the day Liggett issued a press release disclosing the anticipated dip in profits. It was plaintiffs' first claim that Liggett had "puffed" the value of its stock by overestimating its projected earnings during the winter and spring. Plaintiffs claimed that Liggett was under a duty to disclose its internal reports in June. As Liggett now points out, Mr. Torkelson's testimony about the value line and Plaintiffs' Exh. 152, which summarized his testimony, was based on the premise that Liggett breached its duty in June, 1972. Since the court explicitly declined to make that finding, the testimony based on that premise is without evidentiary value on the question of damages on the tipping claim. Therefore the court finds that it cannot rely on Plaintiffs' Exh. 152 as evidence of the value line of Liggett stock during the tipping period.
Plaintiffs now argue that the court should rely on other testimony of Mr. Torkelson which was given in answer to a question about what the price of Liggett stock would have been had there been public disclosure at the time of the illegal tips. Mr. Torkelson stated:
". . . I believe that the stock would have gone down substantially.
It eventually went down to a price in the low 40-dollar area, approximately $ 42 a share, and it is my opinion that approximately half of that decline from $ 64 a share, which the stock was selling at at that time, to $ 42, which is a $ 22 decline, half of that would have occurred promptly, $ 11 a share. The stock would have sold at a price of $ 53.
Q. And on the date July 11 through July 18, 1972?
A. On July 11, additional information became available and the stock would have continued to sell off. We are dealing with a period July 11 through 18, which represents six trading days. The stock, in order to reach its final level, had to go down approximately 12 more points. It is my opinion that it would have gone down 2 points each day."
Unlike Plaintiffs' Exh. 152, this testimony is clearly relevant to the issue of damages under the tipping claim. However, the court finds that Mr. Torkelson's testimony on this point is speculative and is not supported by the evidence in the record. Therefore the court will not construct a value line for Liggett stock based on this testimony.
Liggett argues that since plaintiffs have failed to introduce sufficient evidence to allow the court to construct a value line for Liggett stock during the July 11-July 18 period, that plaintiffs have failed to prove damages with adequate certainty and cannot recover. Alternatively, Liggett proposes a calculation of a value line that would yield an award of approximately $ 279,000, a significantly smaller amount than the approximately $ 791,000 awarded by the court in its earlier opinion.
Few § 10b-5 cases have gone to judgment. Consequently, the law on the method of calculating damages for a defrauded purchaser in a tipping case is still in flux. This court is not bound to deny recovery because the plaintiffs have failed to prove a value line in accordance with Judge Sneed's concurring opinion in Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1341 (9th Cir. 1976), if there is sufficient evidence from which the court can calculate damages based on a different method.
The court ordered the parties to brief the issue of computing damages by the method suggested by the Tenth Circuit in Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90 (10th Cir.), Cert. denied, 404 U.S. 1004, 92 S. Ct. 564, 30 L. Ed. 2d 558 (1971). The court also referred the parties to an article, Damages under Rule 10b-5, 28 U.Fla.L.Rev. 76, 98 (1975). The court then held oral argument on the question.
In Mitchell, supra, the Tenth Circuit awarded the plaintiffs, who were defrauded sellers, the difference between the price at which they sold their Texas Gulf Sulphur stock and the price at which they would have sold their stock had there been full disclosure of the favorable prospects of the company. The court stated that it would calculate the latter price as the highest price to which the stock rose after the actual disclosure. The court held that it would consider how long it would take a reasonable investor to become apprised of the information disclosed in the press release, and look to the highest price to which the stock rose during the period up to that day from the day of disclosure. In other words, the Tenth Circuit looked to the actual market price of the stock after the disclosure rather than constructing an artificial value line for the stock. This yielded one figure for the value of the stock during the tipping period rather than a sloping value line with a different value or price for each day of the tipping period. The Tenth Circuit stated one of its rationales for this method:
"The award proposed would permit one to "cover' by reinvestment and suffer neither loss nor forced sale." (at 105).
As one commentator has noted, the "cover" rationale of the award "is inapplicable to the (defrauded purchaser) situation because the plaintiffs, if they no longer hold the stock would not wish to buy back into the market." Rule 10b-5 Damages, supra, 98. However, the reasoning of the Tenth Circuit that the actual price of the stock immediately after disclosure may be a good measure of the price that the stock would have sold at had there been disclosure a short time earlier absent unusual market conditions is applicable to the defrauded buyer situation present here. "Applying the reasonable investor criteria of Mitchell, . . . the parallel recovery in a defrauded buyer case would be the difference between the purchase price and the lowest market price within a reasonable period after the investor should have become apprised of the facts." Id.
The court finds that the price which plaintiffs would have paid for their stock in the period July 11-July 18, given the absence of unusual market conditions, and given the short period of time involved, can be inferred from the price which investors did pay for Liggett stock after they had absorbed the news contained in the Liggett press release of July 18. Mitchell, supra. Since Liggett's wrongdoing "has made difficult a more precise proof of damages, it must bear the risk of uncertainty created by its conduct." Lee v. Joseph E. Seagram & Sons, Ltd., 552 F.2d 447, 455 (2d Cir. 1977).
The court must next decide how long it would have taken a reasonable investor to become apprised of the information contained in the press release issued on July 18.
Mitchell, supra, has been criticised for using the standard of the time it would take a reasonable investor, rather than the market, to absorb the information disclosed. The Measurement of Damages in Rule 10b-5 Cases Involving Actively Traded Securities, 26 Stanford L.Rev. 373, 379-381. Under the facts of the instant case, the court does not find this distinction significant.
During the period July 11 to July 18, the price of Liggett stock fell from a closing price of $ 623/4 on July 11 to $ 551/4 on July 17, the day before the press release. On July 18, Liggett stock opened at $ 555/8. The press release was distributed at 2:15 that Tuesday afternoon. The stock closed at $ 521/2 at 3:30 P.M. The Wall Street Journal published an article on the release on July 19. The New York Times did not publish an article about it. By Friday of that week the price of Liggett stock had fallen to $ 461/4. By the end of the next week, on July 28, eight trading days later, the stock had fallen to $ 43. The price continued to fall to $ 401/8 on August 3 and did not reach $ 43 again until August 22. The price continued to fall. Plaintiff Elkind sold his stock on December 27, 1972 at $ 381/8.
In Mitchell, the district court found that it would take a reasonable investor seventeen trading days to become apprised of the information contained in the Texas Gulf Sulphur press release.
The Tenth Circuit suggested that it would have found that a reasonable investor would have become apprised of the information within nine trading days in light of the extensive publicity which the press release received. The Tenth Circuit affirmed the lower court's result in that respect since under the facts of the case the result was the same whether the chosen time period was nine or 17 trading days.
In the instant case, although the press release did not receive as much attention as did the release in Mitchell, the court finds that eight trading days is sufficient time to allow the market or a reasonable investor to become apprised of the new information. The court will therefore award damages based on the price of $ 43, which is the lowest closing price for Liggett stock during the eight trading days following the press release on July 18. Plaintiffs will be entitled to the difference between the price that they paid for Liggett stock purchased between July 11 and July 18 and $ 43 a share.
Liggett urges this court to limit damages on the ground that it would be unfair to impose a "Draconian liability" on the corporation. In Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228 (2d Cir. 1974), the Second Circuit while not reaching the issue of damages, set out several factors for the district court to consider in shaping relief. In Shapiro, plaintiffs contended that they had been defrauded in their purchases of Douglas Aircraft stock and that there had been illegal tips. The Second Circuit stated:
"Other questions bearing upon the appropriate form of relief which must await trial include the extent of the selling defendants' trading in Douglas stock, whether such trading effectively impaired the integrity of the market, what compensation if any was paid by the selling defendants to Merrill Lynch for the inside information, what profits Or other benefits were realized by defendants, what expenses were incurred and what losses were sustained by plaintiffs, and what should be the difference, if any, in the extent of the liability imposed on the individual defendants and the selling defendants, respectively . . . In leaving to the district court the fashioning of appropriate relief, including the proper measure of damages, we are not unmindful of the arguments pressed upon us by all defendants that the resulting judgment for damages may be very substantial in amount in the words of defendants' counsel, a "Draconian liability". This is an additional reason for leaving to the district court the appropriate form of relief to be granted . . . ." (at 242) (emphasis added)
The court has considered these and other factors and finds that the award of damages is not an excessive liability to impose on Liggett for the conduct involved and is necessary to effectuate the purpose of 10b-5 as well as to partially compensate the plaintiffs for the losses which they suffered.
Based upon the volume of stock transactions during the July 11-July 18 period, and the closing price for the stock on each day, the court estimates that at most the amount that plaintiffs will recover is approximately $ 740,000. (See Appendix). Evidence at trial showed that Liggett's net operating profits for 1971 and 1972 were, respectively, $ 35,374,000 and $ 31,274,657. The damages in Mitchell, supra, were estimated by the court to be $ 14 million dollars. Mitchell, supra, at 105 n.13. If past experience is a guide, the chances are that due to the lapse of time not all members of the plaintiff class will come forward to prove their claims. Beecher v. Able, 435 F. Supp. 397 (S.D.N.Y.1977). The court will order that any amount of the damage award which is not claimed by October 1, 1979 will be returned to the corporation. In light of these findings, the court does not consider the damage award to be a "Draconian liability".
Liggett contends that it did not benefit financially from the tips to financial analysts. However, the court finds that Liggett acted in order to obtain other benefits. Shapiro, supra. There was evidence that Liggett started a public relations campaign to cultivate good relationships with selected financial analysts who followed Liggett. In 1972 these analysts were projecting earnings for Liggett which were far too optimistic. In its earlier opinion the court held that Liggett was under no legal duty in June 1972 to correct the mistaken impressions of the financial analysts as to Liggett's projected earnings. Nonetheless, Liggett knew when it issued the press release that the financial analysts were going to be taken by surprise and that they would have to revise their analysis of Liggett for their customers. Liggett also realized that its credibility as to its future statements about its financial condition would be weakened. In order to avoid this result and to save from embarrassment the selected analysts with whom it had worked to maintain a good relationship, Liggett tipped the information to selected analysts before disclosing the information to the investing public. Thus Liggett acted to obtain a benefit although not one of a financial kind. As the Second Circuit stated in Shapiro, supra,
"As we have stated time and time again, the purpose behind Section 10(b) and Rule 10b-5 is to protect the investing public and to secure fair dealing in the securities markets by promoting full disclosure of inside information so that an informed judgment can be made by all investors who trade in such markets." (at 235).
Here Liggett chose to maintain its ties to leading financial investors at the expense of the investing public who bought Liggett stock during the tipping period unaware of the tipped material inside information.
Liggett also contends that the damages should be limited since plaintiffs purchased in an impersonal market and there was no evidence that the market was impaired by the tips. However, there was evidence that the market price of Liggett stock dropped ten points during the period July 11 to July 18.
Furthermore, defendant's reliance upon Fridrich v. Bradford, 542 F.2d 307 (6th Cir. 1976), is misplaced for several reasons. The Sixth Circuit explicitly rejected the contention made by defendant here that it should limit the amount of damages assessed on the ground of equity. The Sixth Circuit discussed a rule of limitation of damage contained in the proposed ALI Federal Securities Code, § 1402(f)(2)(B) (Tent. Draft No. 2 March 1973), and stated:
"As compared to Congress or administrative agencies such as the SEC, we think the courts are ill-fitted to the task of rulemaking which would be required". (at 322).
Furthermore, the Sixth Circuit refused to follow the Second Circuit's holding in Shapiro v. Merrill Lynch, supra, by which this court is bound, with respect to the question of causation in an impersonal market when damage is claimed to have resulted from insider trading. Fridrich, supra, at 316-20. The Sixth Circuit stated that it would be more likely to impose liability in a case of illegal tipping, such as was alleged in Shapiro and here than in the case of insider trading, as was alleged in Fridrich. The court stated:
"Tipping because it involves a more widespread imbalance of information presents an even greater threat to the integrity of the marketplace than simple insider trading. Tipping, by its very nature, is a more open-ended violation than that of the insider who enters the market, trades on his own account and withdraws." (at 327 n. 12).
The court finds that this factor does not require limitation of damages.
The award of damages in this action will not fully recompense all the plaintiffs. For example, Elkind will be able to recover only the difference between what he paid and the price of $ 43 a share, not the lower price at which he eventually sold the stock, $ 381/8.
In light of the amount of the award in relation to the financial status of Liggett, the harm to plaintiffs, and the nature of the conduct involved, the court does not find the imposition of a possible maximum of approximately $ 740,000 a "Draconian liability".
Defendant has also moved to limit recovery to those plaintiffs who purchased Liggett stock before 2:15 P.M. on July 18, the moment at which Liggett issued its press release. Plaintiffs ask recovery for class members who purchased Liggett stock through the close of the market at 3:30 P.M. on July 18. In light of the Second Circuit's holding that the critical time is the point at which the information is "effectively disseminated" rather than when a press release is issued, defendant's motion is frivolous. Shapiro, supra, at 242; SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 854 n. 18 (2d Cir. 1968), Cert. denied, sub nom. Coates v. SEC, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969). It was not until the next day, July 19, that the story was reported in the Wall Street Journal. The press release did not receive the attention that the press releases did in Texas Gulf Sulphur or Shapiro. Without deciding at what point the release was effectively disseminated, the court finds that it is clear that it had not been effectively disseminated at the moment of its release at 2:15 and that plaintiffs who purchased through the rest of the day on July 18 are entitled to recover. Shapiro v. Merrill Lynch, 1975 CCH Fed.Sec.L.Rep. P 95,337 (S.D.N.Y.1975) at 98, 878.
In summary, the court amends its earlier findings of fact and conclusions of law to provide that the measure of damages will be the difference between the price paid by the plaintiffs who purchased Liggett stock between July 11 and the close of the day on July 18 and the price which they would have paid had there been disclosure of the tipped information, that is $ 43 a share. Any amount of the damage award which is not claimed by the plaintiffs by October 1, 1979 will revert to the treasury of the corporation.
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