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September 20, 1984

MORRIS AKERMAN and SUSAN AKERMAN, Plaintiffs, and DR. LAWRENCE KUHN, Intervenor-Plaintiff,

The opinion of the court was delivered by: SOFAER


Defendant Oryx Communications, Inc. ("Oryx"), a Delaware corporation with its principal executive offices in New York City, was incorporated on April 6, 1981, to acquire video rights to American films and to manufacture and sell video cassettes and video discs for home use abroad. Oryx was the brainchild of Steven Schiffer, an executive formerly with Columbia Pictures Home Entertainment, and Thomas Sherwood, one of Schiffer's business contacts. Oryx merged with Sherwood's company, Replicon, Inc. ("Replicon"), an exporter of Super 8mm films, which became an Oryx subsidiary at the time of Oryx's incorporation. Sherwood had been Director/Treasurer of Replicon since 1978 and President from March 1980 until the merger a year later; he became Chairman of the Board and Treasurer of Oryx. Schiffer became Oryx's President.They hired a third officer/director, Paul Levine. Sherwood, Schiffer, and Levine planned to develop a library of home video rights and to use the existing distribution network of the Replicon subsidiary to penetrate foreign video markets.

 To further these goals, Oryx sought to raise approximately $3,000,000 of capital through a public stock offering. Oryx's management filed a registration statement and an accompanying prospectus dated June 30, 1981, with the Securities and Exchange Commission ("SEC"), for a firm commitment offering of 700,000 units. Each unit sold for $4.75 and was composed of one share of common stock and one warrant to purchase common stock at a later date at $5.75.

 Shortly after issue, the price of Oryx units began to decline. On July 23, the bid price stood at 4 and 2/8ths. By September 23, it had fallen to 3 and 4/8ths. It rallied briefly in mid-October to 4, but by October 26 it had fallen back to 3 and 2/8ths where it remained until late February 1982. This represented a decline from the issue price of 23.5 percent by November 25, 1981, and the date on which this suit was filed.The Over-the-Counter Composite Index for the same period fell from 214.63 on July 1, 1981, to 198.91 on November 25, a decline of 7.3 percent.

 Plaintiffs alleged that the decline in Oryx's value was a result of an inaccurate prospectus and registration materials. On November 10, 1981, Oryx had publicly announced that its June 1981 prospectus and registration statement contained certain erroneous figures. This media announcement was followed by a letter to shareholders dated November 12. The innaccurate figures appeared in a pro forma unaudited financial statement entitled "Oryx Communications Inc. and Subsidiaries" and related to the eight months ending March 31, 1981. These unaudited financials stated net sales, net earnings, and earnings per share of $931,301.00, $211,815.00, and $0.07, respectively. Due to the fact that a substantial transaction had been incorrectly posted to March instead of April, these figures overstated Replicon's sales and earnings by $165,000.00, $117,286.00 and $0.04, respectively. Thus, net sales in that period were actually $766,301, net income was actually $94,529, and earnings per share were actually $0.03.

 On November 25, 1981, the Akerman plaintiffs initiated this action alleging violations of section 11 and section 12(2) of the Securities Act of 1933 (codified as amended at 15 U.S.C. §§ 77k and 77l (1982)). Mr. and Mrs. Akerman had purchased 200 units of Oryx on June 30, 1981, from defendant Laidlaw, Adams & Peck, Inc. ("Laidlaw"). The complaint also named Oryx, which issued the securities, and the two firms which had managed the underwriting, Moore and Schley, Cameron and Co. ("Moore") and Robertson Securities Corp. ("Robertson"). Defendants Oryx, Moore, Robertson, and Laidlaw have moved pursuant to Rule 56, Fed. R. Civ. P., for summary judgment dismissing the complaint for lack of materiality, lack of privity under section 12(2), and absence of provable damages under section 11(e). Plaintiffs Morris and Susan Akerman have cross-moved pursuant to Rule 23(c)(1) for class certificaion and pursuant to Rule 15(a) to amend their complaint further to include the underwriters as a defendant class. On June 14, 1983, Dr. Lawrence Kuhn moved to intervene as a plaintiff pursuant to Rule 24, with the intention to move for class certification should his motion to intervene be granted. Dr. Kuhn purchased 7,000 Oryx units from Robertson on June 30, 1981; Robertson was later acquired by Moore.

 The case is far from one of monumental significance, and the theories advanced by plaintiffs' counsel illustrate how legal ingenuity can greatly complicate securities litigation. Even after several rounds of briefing, argument, and amendments, and after the considerable efforts this opinion represents, the proper results on some of the issues presented are far from clear. Although plaintiffs showed that the statements in the Oryx prospectus were theoretically material, defendants have successfully demonstrated that the decline in the value of Oryx stock was in fact caused by factors other than the matters misstated. Plaintiffs are therefore ineligible for damages under section 11(e). Moreover, plaintiffs may proceed under section 12(2) against only those defenants who sold to them directly, because defendants not in privity with each individual plaintiff cannot as a matter of law be deemed co-conspirators or aiders and abettors on this record. Finally, while plaintiff Kuhn may intervene, *fn1" plaintiff's motions to certify classes must be held in abeyance pending submission of evidence as to the number of investors who purchased from each of the named underwriters; the present record lacks sufficient evidence as to the numerosity of the potential section 12 classes.

 I. Materiality

 A fundamental purpose of the Securities Act of 1933 ("the Act") "was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities injustry." Securities and Exchange Commission v. Capital Gains Research Bureau, 375 U.S. 180, 186, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963). The Act mandates disclosure of all material facts relating to the sale or offering of covered securities. As Judge Weinstein wrote in Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544, 549 (E.D.N.Y. 1971), "the prospective purchaser of a new issue of securities is entitled to know what the deal is all about." "Civil liability under section 11 and similar provisions was designed not so much to compensate the defrauded purchaser as to promote enforcement of the Act and deter negligence by providing a penalty for those who fail in their duties." Globus v. Law Research Service, 418 F.2d 1276, 1288 (2d Cir. 1969), cert. denied., 397 U.S. 913, 25 L. Ed. 2d 93, 90 S. Ct. 913 (1970).

 The existence of a misstatement sufficiently serious to be deemed "material" is a threshold issue in any claim under sections 11 and 12(2) of the Securities Act of 1933. The Supreme Court discussed materiality in the context of a Rule 14a-9 proxy violation in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976): "[t]he question of materiality . . . is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor. . . . An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Id. at 445, 449. Courts have widely adopted this formula as the test for materiality in securities law actions. See Alton Box Board Co., v. Goldman, Sachs & Co., 560 F.2d 916, 919-20 (8th Cir. 1977) (§ 12(2) actions); Elfenbein v. American Financial Corp., 487 F. Supp. 619, 626-27 (S.D.N.Y. 1980) (§ 11 and § 12(2) actions), aff'd, 652 F.2d. 53 (2d Cir. 1981); Greenapple v. Detroit Edison Co., 468 F. Supp. 702, 708 (S.D.N.Y. 1979) (§ 11 actions), aff'd, 618 F.2d 198 (2d Cir. 1980); Straus v. Holiday Inns, 460 F. Supp. 729, 736 (S.D.N.Y. 1978) (§ 11 actions).

 Defendants argue that investors who relied upon the information conveyed in the registration statement and prospectus would not have viewed Replicon's past earnings as material to the future success of Oryx and that there is consequently no genuine issue of fact as to the materiality of the overstatement of earnings.The Oryx prospectus emphasized that Oryx was an entirely new venture that would concentrate on opening video markets, and it forecast a decline in the Super 8mm business of the Replicon subsidiary. The prospectus states: "All of the Companuy's current sales and income are accounted for by the present Replicon business. The Company anticipates, however, that this business will decline both relative to the other activities of the Company and in absolute terms as a source of revenues and profits. . . . Oryx believes that as videocassettes and videodiscs acquire wider penetration in the home entertainment market the role of a Super 8mm film sales in its business will diminish and, although Oryx intends to continue this aspect of the business, it expects that such sales will decline." Prospectus at 4, 13 (Defendant Oryx's Motion for Summary Judgment, Exh. C). Defendants contend that the absence of an adverse market reaction after the public announcement of the overstatements proves its view that the mistakes were immaterial.

 Plaintiffs point out that, regardless of the issuer's disclaimers in text of the prospectus, Replicon was Oryx's only balance-sheet asset and accounted for almost one-sixth of Oryx's capital, even when the balance sheet was adjusted to reflect the proceeds of the June 1981 stock issue. Oryx said it intended to continue this business, thereby suggesting the continuation for at least some time of a flow of income. "There must be some point at which errors in disclosing a company's balance sheet become material, even to a growth-oriented investor." Escott v. BarChris Construction Corp., 283 F. Supp. 643, 682 (S.D.N.Y. 1968).Whether an error in balance sheet figures is material depends largely on the surrounding circumstances. In BarChris, the company's balance sheet depicted a current assets to liabilities ratio of 1.9 to 1 when the actual ratio was 1.6 to 1. Id. Although the BarChris court applied a more stringent standard of materiality -- whether the fact, had it been correctly stated, "would have deterred or tended to deter" investment, id. at 681 -- it held that this variance was material, even though an overstatement of the net earnings per share in previous years was nonmaterial because it was relatively unimportant to the growth-oriented investor. Id. at 681-82.

 As we have already seen, the figures published by Oryx were significantly overstated, the earnings per share by over one hundred percent. Moreover, the true figures reveal that Replicon's performance as a seller of Super 8mm films had declined sharply; net earnings, for example, had plummeted from $270,112 in the eight months ending March 31, 1980, to $94,529 in the comparable period ending March 31, 1981.A reasonable investor presented with these figures might well have questioned whether Replicon's management was capable of carrying forward its plan, outlined in the Oryx prospectus, of building a video business by captializing on Replicon's contacts and its president's experience in the industry. See Bertoglio v. Texas International Co., 488 F. Supp. 630, 643-45 (D. Del. 1980) (finding that failure to disclose first quarter losses in proxy materials is material since it bears upon management's credibility).

 Nor can the lack of a significant drop in the price of Oryx's stock after disclosure by itself establish immateriality as a matter of law. The price of a thinly traded over-the-counter new-issue stock such as Oryx cannot always be counted on to respond to such an announcement. As Judge Weinfeld has said: "The determination of materiality is to be made upon all the facts as of the time of the transaction and not upon a 20-20 hindsight view long after the event." Spielman v. General Host Corp., 402 F. Supp. 190, 194 (S.D.N.Y. 1975), aff'd, 538 F.2d 39 (2d Cir. 1976).

 II. Damages under Section 11.

 Although plaintiffs may be correct, as a theoretical matter, that the kind of statement Oryx made in its prospectus can be material within the meaning of section 11, they have failed to show that Oryx's statements were in fact material, in other words, that they caused whatever losses plaintiffs may have ...

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