Petition for Writ of Certiorari — American Investment Co. v. Harris
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TTTLRY Supreme Oourt, vu. &
wnie |< FILED SE
NOV 4 1975
MICHAEL RODAK, JR., CLERI
IN THE -
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1975
AMERICAN INVESTMENT COMPANY, DONALD L. BARNES, JR.,
HARRY W. HARTLEY, ALBERT L. LETOURNEAU, WARREN E. VAN
NORMAN, WALTER C. HAEUSSLER, ERWIN A. STUEBNER, R. BRUCE
SNOW, NORFLEET H. RAND, W. BENTON McMILLAN, BASIL L.
KAUFMANN, HENRY R, BARBER, H. REID DERRICK, ALBERT J.
O’BRIEN, CHARLES F. BURNS and HASKINS @ SELLS,
Petitioners,
vs.
MYRON HARRIS,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
To the United States Court of Appeals
For the Eighth Circuit
ROBERT S. ALLEN
KATHIANNE KNAUP
611 Olive Street—Suite 1400
St. Louis, Missouri 63101
Attorneys for Petitioner American
Investment Company and the In-
dividual Petitioners
LEWIS, RICE, TUCKER,
ALLEN & CHUBB
Of Counsel
VERYL L. RIDOLE
WILLIAM C. CONNETT, IV
ROBERT F. SCOULAR
LYNN D. HOWARD
500 North Broadway
St. Louis, Missouri! 63102
Attorneys for Petitioner
Haskins & Sells
BRYAN, CAVE, McPHEETERS &
McROBERTS
Of Counsel
St. Louis Law Printing Co., Inc., 812 Olive Street 63101 314-231-4477
a
Dee ReR eR
INDEX
Page
Meee ee ee rere Tee PUNT) CAPT EPULSPLOR TT Te ]
ER ee ee ere eee Se ny ee ee 1
RINT CL OeT EE eT CE RE TET eee ETE 2
Bk RR ee er ae es re ser 2
Statutes and Regulations Involved ................... 3
BE OE CRE ei aan Kcoa be wae Ne cse ieee aus 3
Reasons for Granting the Writ ...................... 7
I. The Court should grant a Writ of Certiorari because
the Court of Appeals erred in holding that the uni-
versally applied common law doctrine of mitigation
of damages is uniquely inapplicable to federal securi-
ties cases based upon Sections 10(b) and 18(a) and
that ruling conflicts with those of the other courts
which have addressed the issue .............. 7
II. The Court should grant a Writ of Certiorari because
the Court of Appeals’ decision on the “Date for Fix-
ing Damages” conflicts with the decisions of other
circuits and is erroneous. In addition, this question
was not properly before the Court of Appeals, was
unnecessary for the Court’s adjudication of the issues
properly before it, and was not briefed and argued
EEE ae WU OD 05 as Chew ie oes bee 1]
| OS PUT LUPO eC TET ST ere eh es Leo re 14
Appendix A—Memorandum of District Court ........ A-!
Appendix B—Original Opinion of Court of Appeals ....A-13
FRIEEAIA LTTE THAIS! EL HEINLEIN TT
Appendix C—Order on Petitions for Rehearing ........ A-28
Appendix D—Modified Opinion of Court of Appeals ....A-29
Appendix F—Portions of Securities Exchange Act of
ER ase hen Gite dre. WRC Swe yee wb 8 WA A-44
Cases Cited
Beecher v. Able, CCH Fed. Sec. L. Rptr. € 95,016 (S.D.
SUS LG) . vba be bree dw WE Oe WAS kes 10
Blue Chip Stamps v. Manor Drug Stores, — U.S. —, 95
RS es oan ee en er Ee area 10
Cant v. A. G. Becker & Co., 379 F.Supp. 972 (N.D.IIl.
A nee rr eee ere ee eee 10
Chris-Craft, Industries, Inc. v. Piper Aircraft Corp., 480
fe LS rere eee ee eT ee er ee 9-10
Commodity Credit Corp. v. Rosenberg Bros. & Co., 243
F.2d 504 (9th Cir. 1957), cert. denied, 355 U.S. 837
EAE OR PES Rr Bee nee Pe eee ae 8
Competitive Associates, Inc. v. International Health
Sciences, Inc., CCH Sec. L.. Rptr. € 94,966 (S.D.N.Y.
ae Oe Ge dle die 6 ACA ha ON DAREN A a aA; 9
Courtland v. Walston & Co., Inc., 340 F.Supp. 1076
Rs ES rs eee eer ee ae 9
Department of Banking v. Pink, 317 U.S. 264 (1942) .... 2
Ellerman Lines, Ltd. v. President Harding, 288 F.2d 288
I SUE yd bck eee moka eA VARS COWRA OO We 8
Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968) ........ 12
Estate Counseling Service, Inc. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 303 F.2d 527 (10th Cir. 1962) 12
Foster v. Financial Technology Inc., 517 F. 2d 1068 (9th
| SR ee ae ere ree oe 10
eee EE TO a FR Ee PP IN Ne £2 REE eR S Tt RE TI ge
oe Pr ibe
George Cohen Sons & Co. v. Koch, 376 F.2d 629 (Ist
RR Ue A re re ENT eUr aarti ee eer 8
Gottlieb v. Sandia America Corp., 304 F.Supp. 980 (E.D.
Pa. 1969), aff'd in part, rev'd in part on other grounds,
452 F. 2d 510 (3rd Cir.), cert. denied, 404 U.S. 938
SSS Wake. hice COME Es oa 5e oe LS els KEK 12
Industrial Sugars, Inc. v. Standard Accident Ins. Co., 338
Sag UU I a eee ee 8
Janigan v. Taylor, 344 F.2d 781 (Ist Cir.), cert. denied,
ee I Es bie i a ee 12
Kohler v. Kohler Co., 208 F. Supp. 808 (E.D. Wis. 1962),
amd, 519 F.2d 634 (7th Cir. 1963) 2... cc ccs 12
Lack Industries, Inc. v. Ralston Purina Co., 327 F.2d 266
NE ST oe de es 8
Marth v. Industrial Incomes Inc. of North America, 290
Pes Taw CME. BOD occa can cacecarccean 9
Mitchell v. Texas Gulf Sulfur Co., 446 F.2d 90 (10th
Cir.), cert. denied, 404 U.S. 1004 (1971) .......... 9
Myzel v. Fields, 386 F. 2d 718 (8th Cir. 1967), cert. de-
ei eee Wee WOR CIMID och ack ecank cccans S, 38, 12
Occidental Life Ins. Co. v. Pat Ryan & Assoc., Inc., 496
F.2d 1255 (4th Cir.), cert. denied, 419 U.S. 1023 (1974) 12
O'Hara v. Derschug, 241 App. Div. 513, 272 N.Y.S. 189
CNN a SAARC Ns Sau Wkee ceed yh 0d7 468 Gia 10
Pearlstein v. Scudder & German, 346 F.Supp. 443 (S.D.
TO MUNG RANCH Aa DI ah WA vk GAGA be CRA cin 9
1974)
iv
Richardson v. MacArthur, 451 F.2d 35 (10th Cir. 1971) 12
Sackett v. Beaman, 399 F.2d 884 (9th Cir. 1968) .... 12
Sarlie v. E. L. Bruce Co., 265 F.Supp. 371 (S.D.N.Y.
SEY ed be diay cctiadd paceed hah caer eve eteuw en 12
Sigafus v. Porter, 179 U.S. 116 (1900) .............. 12
Southwestern Packing Co. v. Cincinnati Butchers’ Supply
Co., 139 F.2d 201 (Sth Cir. 1945) .............5.. 8
United States v. Healy, 376 U.S. 75 (1964) ............ 2
Walters v. City of St. Louis, 347 U.S. 231 (1954) ...... 11
Wolf v. Frank, 477 F.2d 467 (Sth Cir.), cert. denied, 414
Re ee EOE cy is GRMN Ue eae ues ea ta 12
Statutes Cited
3 Bromberg, Securities Law: Fraud 9.1 (1974) ........ 12
6 L. Loss, Securities Regulation (Supp. 1969) ........ 12
Securities Act of 1933:
OE Sk kW oN cae ee ck doen ek ean. 10
Securities Exchange Act of 1934:
Oe EE SC sk aves coved tak caved 3,4, 7,8
Se ee I Cs Carne ohn bakes < 60a eo 3,4,7,8
Rule 10b-5, 17 C.F.R. § 240.10b-5 (1975) ........ 3, 4,8
PE EE RA GRAS WEARS DAD ORG A KKB OOK 2
a ee < eON ALAR KAS baekiey vaiaueawas 3
BARON =
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1975
AMERICAN INVESTMENT COMPANY, DONALD L. BARNES, JR.,
HARRY W. HARTLEY, ALBERT L. LETOURNEAU, WARREN €E. VAN
NORMAN, WALTER C. HAEUSSLER, ERWIN A. STUEBNER, R. BRUCE
SNOW, NORFLEET H. RAND, W. BENTON McMILLAN, BASIL L.
KAUFMANN, HENRY R., BARBER, H. REID DERRICK, ‘ALBERT J.
O'BRIEN, CHARLES F. BURNS and HASKINS @ SELLS,
Petitioners,
vs.
MYRON HARRIS,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
To the United States Court of Appeals
For the Eighth Circuit
Petitioners respectfully pray that a Writ of Certiorari be is-
sued to review the judgment of the United States Court of Ap-
peals for the Eighth Circuit entered in this action on June 18,
1975, and modified on August 11, 1975.
OPINIONS BELOW
The memorandum opinion of the United States District Court
for the Eastern District of Missouri is reported at 378 F.Supp.
894 and reprinted in Appendix A hereto. The original opinion
of the three-judge panel of the United States Court of Appeals
soaks Ot lied
for the Eighth Circuit is reprinted in Appendix B. In response
to timely petitions for rehearing, the panel filed a modified
opinion, which is reprinted in Appendix C, and an Order deny-
ing the petitions for rehearing, which is reprinted in Appendix
D. The Court of Appeals’ opinion has not been officially re-
ported as of the date of the filing of this petition.
JURISDICTION
The jurisdiction of this Court is invoked under 28 U.S.C.
§ 1254(1).
The original opinion of the three-iudge panel of the Court
of Appeals was filed on June 18, 1975. In response to peti-
tioners’ timely petitions for rehearing or rehearing en banc,
the panel modified its original opinion and denied the petitions
in all other respects on August 11, 1975. This petition for a
Writ of Ceriorari has been filed within 90 days of August 11,
1975, as required by Rule 22(1). Department of Banking v.
Pink, 317 U.S. 264 (1942); United States v. Healy, 376 U.S.
75 (1964).
QUESTIONS PRESENTED
1. Under Sections 10(b) and 18(a) of the Securities Exchange
Act of 1934, does an allegedly defrauded purchaser of securi-
ties have any duty to mitigate his damages?
2. Under Sections 10(b) and 18(a) of the Securities Exchange
Act of 1934, should damages to an allegedly defrauded pur-
chaser continue to be measured as of the date of his purchase
or as of some later date when the market price of the securities
would be influenced by a myriad of factors other than the alleged
fraud?
STATUTES AND REGULATIONS INVOLVED
This case involves important questions concerning the measure
of damages in litigation based upon Sections !0(b) and 18(a) of
the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and
78r(a) (1970), and Rule 10b-5, 17 C.F.R. $ 240.10b-5 (1975),
which are reprinted in Appendix E.
STATEMENT OF THE CASE
This is a claimed class action seeking damages for alleged
violations of Sections 10(b) and 18(a) of the Securities Exchange
Act of 1934 (the “Act”), 15 U.S.C. $§ 78j(b) and 78r(a) (1970),
and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1975).
Myron Harris, plaintiff-respondent, and two others! filed the
action on April 9, 1971 against American Investment Company
(“AIC”), officers and directors of AIC, and Haskins & Sells
(AIC’s independent certified public accountant), all of whom
are petitioners here. The case was filed in the United States Dis-
trict Court for the Eastern District of Pennsylvania and was
transferred to the Eastern District of Missouri pursuant to de-
fendants’ motions based upon 28 U.S.C. § 1404(a).?
After transfer of the case, defendants filed motions to dis-
miss. On December 29, 1972, the district court sustained these
motions and granted leave to plaintiffs to file an amended com-
plaint.
On February 1, 1973, plaintiff filed an amended four-count
complaint. In Counts I and II, plaintiff alleged that all of the
' The original plaintiffs were Arthur B. Harris, Myron Harris and
Milton Weissman. Only Myron Harris, respondent herein, remained
a plaintiff when the amended complaint was filed.
* The memorandum and order on the transfer is reported at 333
F.Supp. 325.
a wot a |
eae ere
defendants had violated Sections 10(b) and 18(a) of the Act
and Rule 10b-5 (App. 2-3). Plaintiff alleged that he purchased
1,000 shares of the common stock of AIC on August 4, 1969
and still retained the stock (App. 8); asserted numerous allegedly
false statements or material omissions in documents uttered by
AIC or filed by it with the Securities and Exchange Commis-
sion and the New York Stock Exchang: beginning on or before
June 30, 1968 (App. 2-3); claimed that he suffered a substan-
tial decline in the market values of the AIC stock retained by
him; and prayed for damages based upon that decline in value.
In Count III, plaintiff alleged a failure of defendants, other
than Haskins & Sells, to disclose merger proposals from other
corporations commencing in 1968 and continuing in 1969 (App.
5).
In Count IV, brought as a stockholder’s derivative action,
plaintiff alleged mismanagement by the defendant officers and
directors (App. 3).
Defendants filed motions to dismiss or strike all counts of the
amended complaint and motions for summary judgment on
Counts I and II. The motions for summary judgmet were based
upon the following uncontroverted facts: Plaintiff purchased his
1,000 shares of AIC common stock on August 4, 1969 at a
price of $18% per share. From the date of plaintiff's purchase
through May 31, 1971, AIC common stock sold on the New
York Stock Exchange at his purchase price or higher on 47
days. Within the one-month period after plaintiff filed this ac-
tion on April 9, 1971, the stock sold at his purchase price or
higher on eighteen days (App. 9).
On June 24, 1974, the district court (Hon. Roy W. Harper)
granted defendants’ motions for summary judgment with respect
to Counts I and II.* The district court stated:
* The Memorandum Opinion is reported at 378 F.Supp. 894
and reprinted in Appendix A.
See ea . a ELEY ASE PLIERS EMI OES ERE G TT EPR BARE OSS REG IY SL
a, on
“The defendants’ contention is that the undisputed facts
in this case disclose that plaintiff has not suffered any dam-
ages as a result of any alleged wrongdoing of the defend-
ants because subsequent to plaintiff's purchase of his AIC
common stock and subsequent to the filing of this lawsuit,
plaintiff could have recouped his investment or sold at a
profit on the open market: therefore, entitling defendants
to summary judgment in their favor on Counts I and II.
With this contention the Court agrees” (App. 9).
Judge Harper then held, in part, that “Plaintiff's loss, if any,
did not flow directly from the purchase or sale “f the AIC stock,
but flowed from plaintiff's own investment decision to retain
the AIC stock” (App. 10), and:
“Plaintiff's loss was not in connection with the purchase
of his AIC stock because he had numerous opportunities
to sell without a loss after he discovered the alleged fraud.
and plaintiff's loss was not in connection with the sale of his
AIC stock because of his investment decision to retain the
stock” (App. 11).
The district court also held that plaintiff had a duty to miti-
gate his claime4 damages:
“Even in cases of alleged fraud, a plaintiff has a duty to
mitigate his damages upon discovery of the fraud. * * *
Piaintiff in our preser.t cause had eighteen opportunities to
sell his stock at the price he paid for it or at a profit within
the first month after he filed suit. The only reason plaintiff
gives for not selling his AIC stock is that if he had done so
he would have lost his standing to pursue a derivative ac-
tion on behalf of the AIC. This was a personal decision
and not the result of any alleged fraud on the part of any
of the defendants” (App. 10).
Plaintiff appealed from the judgment of the district court.
On June 18, 1975, the three-judge panel of the Court of Appeals
sinc ca
filed its original opinion reversing the judgment of the district
court.* The panel held, in part: (1) “{[T]he public discovery of
the fraud is the proper date at which to ascertain damages (App.
21) and “the value of [plaintiff's] AIC stock, for purposes of
computing damages, must be measured by the market price after
the fraud had been discovered by the general public . . .” (App.
23); and (2) “[{Plaintiff] was under no duty to sell his AIC
stock, for mitigation of damages or any other purpose, prior to
commencing this action” (App. 24) and he was not “under a
duty, after discovery of the fraud, to sell his AIC stock for the
benefit of the appellees” (App. 25).
Defendants then filed timely petitions for rehearing or re-
hearing en banc. On August 11, 1975, the Court of Appeals
denied rehearing. The panel, however, modified its opinion with
respect to the date upon which damages should be measured,
as follows:
“(U]nder the allegations made in the instant case the
public discovery of the fraud may be the proper date at
which to ascertain damages.
» * * * x * *
“Thus, assuming, arguendo, the truth of [plaintiff's]
claims that the actual value of the securities cannot be
established at or near the date of purchase due to an arti-
ficially inflated market price of long duration attributable
to defendants’ fraudulent misrepresentations, [plaintiff] may
+ The Court of Appeals “resolve[d] the merits only with respect
to . . . counts I and II” (App. 16) and only these counts are in-
volved in this petition. Plaintiff did not appeal from the dismissal of
Count III. The dismissal of Count IV (on the grounds plaintiff failed
to allege that he was a shareholder at the time of the claimed wrongs,
as required by Rule 23.1, F.R.Civ.P) was not reached on appeal.
* Emphasis ours here and throughout this petition unless other-
wise noted.
TABATA
a, Fan)
be able at the trial to establish an alternate basis for re-
covery by introducing evidence of his damages as of the
date of public discovery of the fraud” (App. 37, 39).
The panel did not modify its original holding that a plaintiff
in a Federal securities case has no duty to mitigate his claimed
damages.
REASONS FOR GRANTING THE WRIT
This Court should grant a Writ of Certiorari and review the
decision of the Court of Appeals because:
(1) The decision creates an unprecedented, unwarranted,
and far-reaching exception to the universally applied common
law doctrine of mitigation of damages by holding that the doc-
trine is uniquely inapplicable to Federal securities cases based
upon Sections 10(b) and 18(a), which ruling conflicts with
those of the other courts, including the Ninth Circuit, which
have addressed the issue; and
(2) The decision adopts or recommends an equally novel,
erroneous, and far-reaching rule that the date of public dis-
covery of the alleged fraud is the proper date at which to ascer-
tain damages in Federal securities cases, which ruling also con-
flicts with those of all other Circuits which have addressed the
issue,
I. The Court Should Grant a Writ of Certiorari Because the
Court of Appeals Erred in Holding That the Universally Ap-
plied Common Law Doctrine of Mitigation of Damages Is
Uniquely Inapplicable to Federal Securities Cases Based Upon
Sections 10(b) and 18(a) and That Ruling Conflicts With Those
of the Other Courts Which Have Addressed the Issue.
The district court granted summary judgment on the grounds
that the uncontroverted facts established that plaintiff had not
sii A ce
been damaged because he had the opportunity on numerous oc-
casions, both before and after filing suit, to mitigate his claimed
damages by selling his stock at his purchase price or at a profit.
The Court of Appeals held, however, that a plaintiff has no
duty to mitigate his damages in a Federal securities case. In so
holding, the Court rejected (a) the universally applied common
law doctrine that a failure to mitigate damages prevents recovery
of such damages as might have been avoided by reasonable
effort, whether the action is based upon contract (e.g., /ndus-
trial Sugars, Inc. v. Standard Accident Ins. Co., 338 F.2d 673,
676 (7th Cir. 1964); Commodity Credit Corp. v. Rosenberg
Bros. & Co., 243 F.2d 504, 511-12 (9th Cir. 1957), cert. de-
nied, 355 U.S. 837 (1957), or tort (e.g., George Cohen Sons
& Co. v. Koch, 376 F.2d 629, 632 (1st Cir. 1967); Ellerman
Lines, Ltd. v. President Harding, 288 F.2d 288, 290 (2d Cir.
1961), including fraud (e.g., Southwestern Packing Co. v. Cin-
cinnati Butchers’ Supply Co., 139 F.2d 201, 208 (Sth Cir.
1943)); (b) its own prior decision that where the out-of-pocket
rule of damages is applied in fraud cases, there is a duty to
mitigate damages (Lack Inaustries, Inc. v. Ralston Purina Co.,
327 F.2d 266, 281 (8th Cir. 1964));° and (c) its own prior
decision that the Act does not promote speculation at the “total
risk” and “expense” of the defendant (Myzel v. Fields, 386 F.
2d 718, 740-41 n.15 (8th Cir. 1967), cert. denied, 390 US.
951 (1968)). Furthermore, the court's decision conflicts with
the decisions of the other Circuits and district courts, which
hold that there ds a duty to mitigate damages in Federal secu-
rities cases.
For example, in Foster v. Financial Technology Inc., 517 F.
2d 1068, 1072 (9th Cir. 1975), a case based upon Section
10(b) and Rule 10b-5 of the Act, and Section 5 of the Securi-
ties Act of 1933, the Court held:
* The Court of Appeals observed in that earlier case, “Since the
representer is not a guarantor, the victim of misrepresentation may
not irresponsibly accumulate his losses to the detriment of the mis-
representor”’.
ERS BNF EO EERE PI IIS ROI LL PING EL OP LD IE TE LEO OITA IT SAE EOE tS
ial Kee
“Under the familiar mitigation of damages principle, a
party cannot recover that part of his loss caused by his
own failure, once he has reason to know of the breach,
to take reasonable steps to avoid further harm. Although
plaintiffs are not here asserting a breach of contract claim,
the notion of what constitutes reasonable conduct by the
nonbreaching party carries over to the determination of
the amount of plaintiffs’ loss for which defendants should
be held responsible. Consequently, at the point where a
reasonable man—either because of the breach or discovery
of the fraud—would have taken action to protect himself
from further depreciation in the value of the claim, the
chain of causation is cut and plaintiffs cannot recover dam-
ages for subsequent losses.”
See also, Mitchell v. Texas Gulf Sulfur Co., 446 F.2d 90,
105-06 (10th Cir.), cert. denied, 404 U.S. 1004 (1971) (Stock-
holder given reasonable amount of time within which to “ ‘cover’
by reinvestment” thereby suffering “neither loss nor forced sale”
and denying “recovery to those who suffered only by their own
lack of due diligence”); Competitive Associates, Inc. v. Inter-
national Health Sciences, Inc., CCH Sec. L. Rptr. € 94,966 at
97,339 (S.D.N.Y. 1975); Courtland v. Walston & Co., Inc.,
340 F.Supp. 1076, 1079-80 (S.D.N.Y. 1972); Pearlstein v.
Scudder & German, 346 F.Supp. 443 (S.D.N.Y. 1972); Marth
v. Industrial Incomes Inc. of North America, 290 F.Supp. 755,
759 (S.D.N.Y. 1968) (“If indeed plaintiffs, upon learning of
the alleged misrepresentations, and prior to entering into the
agreement with [defendant], could have sold their shares for a
price equal to or greater than their purchase price and failed
to do so, they should properly bear the consequences”); Pfan-
enstiel v. Ling & Co., 371 F.Supp. 845, 848 (N.D.Tex. 1974)
(In action brought under the securities acts of 1933 and 1934,
even if alleged misrepresentations were part of a scheme to de-
fraud, plaintiff could not recover for damages he could have
mitigated by liquidating his account); but see Chris-Craft In-
a “oon
dustries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (1973)
(Section 14(e) of the Act).
The panel of the Court of Appeals did not cite these cases,
let alone attempt to distinguish them.
The three cases cited by the panel of the Court of Appeals
as supporting its holding that there is no duty to mitigate dam-
ages in Federal securities cases simply do not do so. O'Hara
v. Derschug, 241 App. Div. 513, 272 N.Y.S. 189 (1934), was
a common law fraud case and, rather than supporting the court's
decision, supports petitioners’ position.‘ Cant v. A. G. Becker
& Co., 379 F.Supp. 972 (N.D.Ill. 1974), did not consider di-
rectly the doctrine of mitigation of damages. Beecher v. Able,
CCH Fed. Sec. L. Rptr. €95,016 (S.D.N.Y. 1975), was a suit
brought under Section 11(a) of the Securities Act of 1933, 15
U.S.C. §77k, which does not apply the out-of-pocket damages
rule, and the court specifically restricted its opinion to the in-
terpretation of that statute.
The review by this Court of the question of mitigation of
damages in Federal securities cases presented by this case is of
exceptional importance because of the inconsistency of the Court
of Appeals’ decision with those of the other Federal courts
which have addressed the issue, the determinative nature of the
question with respect to the numerous lawsuits brought under
the Federal securities laws, and the erroneousness of the deci-
sion of the Court of Appeals.
Just last Term, this Court expressed concern about “the po-
tential for nuisance or ‘strike’ suits in this type of litigation.”
Blue Chip Stamps v. Manor Drug Stores, — U.S. —, 95 S.Ct.
539 (1975). The Court of Appeals’ opinion, if allowed to
* Indeed, the court cited Reno v. Bull, 226 N.Y. 546, 552 (1919),
as adopting the out-of-pocket measure of damages and stated that,
under that rule, if the purchase price later rose, “plaintiff would have
suffered no recoverable damage”.
EE FAB PN RT AE AIS PL FEF RED DO Meh TL OR? RK AR eT Po ear
aie A
stand, will invite and spawn such additional spurious litigation.
Moreover, under this decision, plaintiffs in Federal securities
litigation are directed and encouraged to “speculate” at the
“risk” and “expense” of defendants, which even the Eighth Cir-
cuit had previously condemned. See, Myzel v. Fields, supra.
II. The Court Should Grant a Writ of Certiorari Because the
Court of Appeals’ Decision on the “Date for Fixing Damages”
Conflicts With the Decisions of Other Circuits and Is Erroneous.
In Addition, This Question Was Not Properly Before the Court
of Appeals, Was Unnecessary for the Court’s Adjudication of
the Issues Properly Before It, and Was Not Briefed and Argued
by All of the Parties.
The district court held that plaintiff was not damaged as a
result of the alleged fraud and that the uncontroverted evidence
established that he had failed to mitigate his damages. No issue
concerning the “date for fixing damages” was presented to or
ruled upon by the district court. This irrelevant issue was gratui-
tously interjected into the case by the panel of the Court of
Appeals in disregard of the rule that an appellate court will not,
and should not, review what the lower court did not decide.
E.g., Walters v. City of St. Louis, 347 U.S. 231, 233 (1954).
Indeed, the panel itself stated, “The district court did not pur-
port to rely on these damage rules in dismissing the action (App.
39). Nevertheless, the panel proceeded to judicially write new
law in vacuo without the benefit of thorough briefing and ex-
haustive oral argument by the parties or careful consideration of
the ramifications of its decision.
The panel of the Court of Appeals held in its original opinion
that “public discovery of the fraud is the proper date at which
to ascertain damages” (App. 21) and “the value of [plaintiff's]
AIC stock, for purposes of computing damages, must be meas-
ured by the market price after the fraud had been discovered by
mee
Ren: |. pee
the general public . . .” (App. 23). In response to defendants’
petition for rehearing, the panel modified that opinion to hold
that the date of the public discovery of a fraud is a proper date
on which to measure damages.
No other court has so held. This holding rejects the long-
standing rule, based upon Sigafus v. Porter, 179 U.S. 116, 125
(1900), that damages under the securities acts are determined
as of the date of purchase—i.e., the difference between the
actual value of the stock on that date and the price paid by the
defrauded plaintiff. This rule, as even noted by the Court of
Appeals, has been acknowledged by «he First Circuit (Janigan
v. Taylor, 344 F.2d 781, 786 (ist Cir.), cert. denied, 382 US.
879 (1965)); Fourth Circuit (Occidental Life Ins. Co. v. Pat
Ryan & Assoc., Inc., 496 F.2d 1255, 1264-65 (4th Cir.), cert.
denied, 419 U.S. 1023 (1974) ); Fifth Circiut (Wolf v. Frank,
477 F.2d 467, 478-79 (Sth Cir.), cert. denied, 414 U.S. 975
(1973) ); Seventh Circuit (Kohler v. Kohler Co., 208 F. Supp.
808, 825 (E.D. Wis. 1962), aff'd, 319 F.2d 634 (7th Cir.
1963)); Ninth Circuit (Sackett v. Beaman, 399 F.2d 884,
891 (9th Cir. 1968)); Tenth Circuit (Estate Counseling Serv-
ice, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303
F.2d 527, 533 (10th Cir. 1962) );* and even previously by the
Eighth Circuit (Myzel v. Fields, 386 F.2d 718, 744-45 (8th
Cir. 1967), cert. denied, 390 U.S. 951 (1968)). See also,
Gottlieb v. Sandia America Corp., 304 F. Supp. 980, 991 (E.D.
Pa. 1969), aff'd in part, rev'd in part on other grounds, 452 F.
2d 510 (3rd Cir.), cert. denied, 404 U.S. 938 (1971); Sarlie
v. E. L. Bruce Co., 265 F. Supp. 371, 375-6 (S.D.N.Y. 1967).
See generally, 6 L. Loss, Securities Regulation 3922-23 (Supp.
1969); 3 Bromberg, Securities Law: Fraud 9.1 at 226 (1974).
* A variation of this rule in two Tenth Circuit cases is the adoption
of the date of discovery of the fraud by the purchaser as the date for
measuring damages. Richardson v. MacArthur, 451 F.2d 35, 43-44
(10th Cir. 1971); Esplin v. Hirschi, 402 F.2d 94, 104 (10th Cir.
1968).
ORR SSA FS
seat Ik alnie
The panel’s sua sponte departure from the holdings of other
Circuits and the district courts is also illogical and almost impos-
sible to implement. As only one example, the panel justified
its original conclusion by stating “[iJt is only then [i.e., after
public discovery] that the market can reflect the true value of
the stock, unaffected by what is alleged to have been defend-
ants’ continuing fraud” (App. 21).° This rationale simply ignores
the realities of the open market. It is far from the sterile labora-
tory which the panel's opinion presupposes. The value of stock
is affected daily by innumerable factors other than alleged “con-
tinuing fraud.”
Moreover, the panel's opinion would frequently permit a plain-
tiff to collect more damages than he could under the traditional
application of the out-of-pocket rule.
In adopting a new rule sua sponte with respect to the date
upon which damages are to be fixed in Federal securities litiga-
tion, the Court of Appeals has rendered a decision in conflict
with those of all of the other Circuits which have addressed the
issue. This unprecedented rule is illogical and impractical to
apply and will impose additional burden and confusion upon
courts confronted with the numerous complex cases brought
under the securities acts. For these reasons, it is of national
importance that the decision be reviewed by this Court.
* The modified opinion only slightly watered down this statement:
“The circumstances may disclose that only then did the market reflect
the true value of the stock, unaffected by what is alleged to have
been the defendants’ continuing fraud” (App. 37).
SPER te Te ae OE ae SELENE et sata ties
pt —— oe
ey pe
CONCLUSION
For the reasons stated, it is respectfully submitted that this
petition for Writ of Certiorari should be granted.
Respectfully submitted
ROBERT S. ALLEN
KATHIANNE KNAUP
611 Olive Street
St. Louis, Missouri 63101
Attorneys for Petitioner American
Investment Company and the
Individual Petitioners
LEWIS, RICE, TUCKER,
ALLEN & CHUBB
Of Counsel
VERYL L. RIDDLE
WILLIAM C. CONNETT, IV
ROBERT F. SCOULAR
LYNN D. HOWARD
500 North Broadway
St. Louis, Missouri 63102
Attorneys for Petitioner
Haskins & Sells
BRYAN, CAVE, McPHEETERS
& McROBERTS
Of Counsel
ec as AF Serer AOE IT EE PINE EL PER Be PEE PVN Be POOL OREN RS YMA oA TG
EER CEI RTE U A MERIRIINT DHPMP OFAN APT (PY) MOMS EUS TA
ates Bit ones
APPENDIX A
Memorandum Opinion of District Court
Myron Harris, Plaintiff,
v.
American Investment Company et al., Defendants.
No, 71C 732 (A).
United States District Court,
E. D. Missouri, E. D.
June 24, 1974,
MEMORANDUM OPINION*
HARPER, District Judge.
All the defendants, American Investment Company (herein-
after referred to as AIC), Barnes, Hartley, Letourneau, Van
Norman, Stuebner, Snow, Rand, McMillian, Kaufmann, Barber,
Derrick, O’Brien and Burns (hereinafter referred to as individu-
ally appearing defendants) and Haskins & Sells, have moved to
dismiss or strike Counts I and II of plaintiff's amended complaint
with prejudice for failure to state a claim for which relief can
be granted and for failure to comply with this Court’s Memo-
randum and Order (hereinafter referred to as Memorandum)
entered in this case on December 29, 1972. AIC and the in-
dividual defendants have moved to dismiss or strike Count III
of the amended complaint for the same reasons as stated for
dismissal of Counts I and II. The individual defendants have
also moved to dismiss or strike Count IV of the amended com-
plaint for failure to state a claim and for failure to comply with
* Reported at 378 F.Supp. 894.
STITH PH Ad NPRM ROY
stoi Will sees
this Court’s Memorandum. Counts I, II and III are challenged
in the motions to dismiss or strike with prejudice for the same
reasons. Accordingly, these motions to dismiss or strike with
prejudice will be dealt with together.
AIC and the individually appearing defendants jointly filed
a motion for summary judgment, and Haskins & Sells filed a
motion for summary judgment on Counts I and II. The motion
of AIC and the individually appearing defendants was supported
by affidavit pursuant to Rule 56 of the F.R.Civ.P. As grounds
for this motion the defendants contend that the pleadings and
answers to interrogatories, together with the affidavit filed, show
that the plaintiff has not suffered any damage as a result of any
alleged wrongdoing of the defendants, AIC and the individually
appearing defendants also jointly filed a motion to dismiss
Counts I through III of the amended complaint as a class action.
Plaintiff, Myron Harris, filed a motion for an order from this
Court finding that this action is maintainable as a class action
under Rule 23 of the F.R. C. P.
Plaintiff, a shareholder of AIC, brought this suit on his own
behalf, as a representative of the class of all present and former
common stockholders of AIC similarly situated, and derivatively
on behalf of AIC against AIC, certain of its officers and directors,
and Haskins & Sells, AIC’s independent auditors. Plaintiff al-
leges that this Court has jurisdiction under Section 22 of the
Securities Act of 1933, 15 U.S.C.A. § 77v, Section 27 of the
Securities and Exchange Act of 1934, 15 U.S.C.A. § 78aa, and
because of diversity of citizenship.
Count I of the amended complaint charges the defendants
with violations of Section 10(b) of the Securities Exchange Act
of 1934, 15 US.C.A. § 78j, and Rule 10(b)-5, 17 CFR
240.10b-5 (1949), promulgated pursuant thereto. Count I al-
leges that beginning on or before June 30, 1968, the defendants
made, or caused to be made, misleading or false statements con-
TO emer eu |
pM AR RET
Pete SN, yee
cerning the financial position and operating results of AIC or
made such omissions of fact as to be misleading. Such state-
ments or omissions were allegedly made in such places as press
releases, statements and reports to stockholders, and reports and
statements filed with the Securities and Exchange Commission
and the New York Stock Exchange.
Count II of the amended complaint incorporates the allega-
tions of Count 1, and charges the defendants with a violation of
Section 18(a) of the Securities Act of 1934, 15 U.S.C.A. § 78r,
for filing reports and documents containing false and misleading
statements or material omissions with the Securities and Ex-
change Commission.
Count III of the amended complaint charges that defendants,
other than Haskins & Sells, violated Section 10(b) and Rule
10(b)-5 and Section A2 of AIC’s listing agreement with the New
York Stock Exchange by failing to advise AIC and its stock-
holders of favorable offers which had been made to the defend-
ants for the stock of AIC in a proposed merger. Count III fur-
ther alleges that these acts constitute fraud and deceit at common
law.
Count IV of the amended complaint (a derivative action)
alleges that the individual defendants who are or were officers
or directors of AIC were guilty of breaching their fiduciary duty
to the corporation and mismanaged and wasted the corporation’s
assets.
In this Court’s Memorandum and Order dated December 29,
1972, this Court found that the allegations of Counts I, II and
IV of the original complaint were too vague to withstand attack
under F.R.C.P. 9(b), which requires that fraud be pleaded with
particularity. Count I of the original complaint and Count II
by incorporation by reference, alleged that “(Beginning on or
before June 30, 1968, and continuing through December 31,
1970, * * * defendants have caused to be circulated and dis-
— * ee
seminated to the public numerous press releases * * * describing
purported actual results of operations of AIC in such a way as
to be misleading and misrepresentative.” Count IV, by incor-
porating Count III by reference alleged that defendants failed
to advise plaintiff “with respect to proposals by other publicly
owned corporations, where AIC would merge, combine with, or
be acquired.”
The Court in granting defendants’ motions at that time
granted plaintiff leave to amend the complaint. Plaintiff filed
an amended complaint which included in Counts I and II,
thirty pages (pp. 7-36) of detailed references to the documents
which contained the false and misleading statements and which
identified the particular statement within each document mis-
represented or omitted.
On page 5 of the Memorandum this Court quoted from
Trussell v. United Underwriters, Ltd., 228 F.Supp. 757, 774
(D.Colo. 1964) as follows:
“The theory of Rule 9(b) is that the defendant in a case
wherein the plaintiff alleges either fraud or mistake—
unlike defendants in other actions—should be rather
specifically apprised by the plaintiff's pleading of the oc-
casion on which and the circumstances under which he
allegedly defrauded a particular plaintiff. * * *
“Rule 9(b) does not, however, require the pleading of
detailed evidentiary matter, nor does it require any par-
ticularity in connection with an averment of intent, knowl-
edge, or condition of mind. It only requires identification
of the circumstances constituting fraud or mistake.”
Plaintiff's obligation is to apprise the defendants of the
occasion on which and the circumstances under which he,
defendant, allegedly defrauded the plaintiff. With particularity,
plaintiff has apprised defendants of the occasions on which
plaintiff alleged he was defrauded. The information respecting
SRE
eee aD |
Rw RI ———
Spee
oa eG
fraud or mistake is set forth with sufficient clarity for the de-
fendants to know what they are required to meet—no
more, no less. Thus, the requirements of Rule 9(b) have been
met in connection with Counts I and II. The motions to dis-
miss Counts I and II for failure to state a claim are overruled.
Count III of the amended complaint is the same as Count
IV of the original complaint except for the allegation that
jurisdiction is based upon the doctrine of pendent jurisdic-
tion and the addition of the names of two publicly owned cor-
porations with whom plaintiff alleges defendants had merger
negotiations. The mere addition of two names in Count III
of the amended complaint does not fulfill the demands of Rule
9(b). The defendants are neither apprised of the occasion on
which or the circumstances under which they allegedly defrauded
the plaintiff, as required by Trussell v. United Underwriters,
Ltd., supra.
All of the defendants, except Haskins & Sells, move this
Court to dismiss Count III for the additional reason that plain-
tiff failed to state a claim upon which relief can be granted
because he failed to plead that he was a shareholder at the time
of the acts complained of in Count III, and hence, could not
have suffered any damage as a result thereof, as required in
order to state a claim under Rule 10(b)-5. Smith v. Murchison,
310 F.Supp. 1709 [sic], 1084 ($.D.N.Y.1970). Count III alleges
that the activity complained of, failure to disclose merger
negotiations, commenced in 1968 and continued into 1969.
Although plaintiff purchased his AIC stock on August 4, 1969,
his pleadings do not state that he was a shareholder of AIC at
the time of the alleged merger negotiations. Therefore, plaintiff
could not have suffered any damage as the result of the acts
complained of in Count, IU.
Count III of plaintiff's amended complaint also fails to state
a claim for which relief can be granted under § 10(b) of the
+1¥* 7 PRATT TEEN RE TET ae RT INC %
IKE KE! SLA s >
= © oo
Securities Exchange Act of 1934 for other reasons. As discussed
in this Court’s Memorandum and Order entered in this case on
December 29, 1972, § 10(b)-Rule 10(b)-5 liability necessitates
a showing that plaintiff either purchased or sold his stock in re-
liance on a violation of § 10(b)-Rule 10(b)-5. Birnbaum v.
Newport Steel Corp., 193 F.2d 461 (2nd Cir.) cert. denied, 343
U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952).
At that time plaintiff requested leave to amend his com-
plaint to allege purchase of his shares in reliance upon defend-
ants’ alleged misconduct of failing to disclose merger negotia-
tions. Plaintiff has not amended his complaint to show such
reliance and has failed to show that a loss flowed directly from
his purchase of the AIC stock as required by Smith v. Murchison,
supra, in order to state a claim under Rule 10(b)-S.
The plaintiff further alleges in Count III that another basis
for seeking recovery in this count is alleged violations of Sec-
tion A-2 of defendants’ AIC’s listing agreements with the New
York Stock Exchange. In this Court’s previous Memorandum
and Order, it is stated on page 9: “* * * Violation of Section A2
of AIC’s listing agreement with the New York Stock Exchange
* * * rests upon diversity of citizenship,” and invited the atten-
tion of the plaintiff to Snyder v. Harris, 394 U.S. 332, 89 S.Ct.
1053, 22 L.Ed.2d 319 (1969), and Zahn v. International Paper
Company, 469 F. 2d 1033 (2nd Cir. 1972), affirmed 414 U.S.
291, 94 S.Ct. 505, 38 L.Ed.2d 511, with respect to plaintiff's
amended pleadings.
By not complying with the requirements in these two cases
the Court assumes the plaintiff cannot allege facts to support
jurisdiction in a class action based on diversity with respect to
Count III. The amended petition failed to comply with the
Court’s Memorandum. For the above reasons, the defendants’
motions to dismiss for failure to state a cause of action are
ae pom
sustained. Count III will accordingly be dismissed without
prejudice.
The individually appearing defendants have moved the Court
to dismiss or strike Count IV. These defendants contend that
Count IV fails to comply with Rule 23.1 of the F.R.C.P. in that
plaintiff failed to plead that he was a stockholder at the time
of the alleged transactions of which he complains and failed to
allege that he has requested the stockholder of AIC to take ac-
tion, or his redson or excuse for not taking such action.
Turning first to the defendants’ second contention that plain-
tiff failed to allege that he requested the stockholders of AIC
to take action, the case of Heit v. Bixby, 276 F.Supp. 217
(E.D.Mo. 1967) is controlling. In the Heit case, the Court held
that a stockholder’s derivative action against all of the directors
of a corporation for serious willful and negligent breaches of
their fiduciary duties to the corporation should not be dismissed
for plaintiff's failure to demand action on the part of the directors
and stockholders of the corporation. In our present case Count
IV is a stockholders’ derivative action against all of the directors
of AIC for breach of their fiduciary duties to the corporation.
There is no merit to defendants’ second contention.
With respect to the defendants’ first contention, again it
is evident from the pleadings that plaintiff failed to plead that
he was a stockholder at the time of the events complained of in
Count IV as required by Rule 23.1 of the F.R.C.P. In this
Court’s Memorandum, Count V of the original complaint was
dismissed for failure to comply with Rule 23.1 of the F.R.C.P.
There is no difference at all between Count IV of the amended
complaint and Count V of the original complaint. The only
item plaintiff added was a verification of the allegations in
Count IV of the amended complaint. Plaintiff contends that a
complaint is not to be dismissed on the grounds that the claims
actually arose prior to the time plaintiff acquired his stock
ORAS BOR ER te _
sp
where the complaint alleges continuing wrongdoing occurring
at the time plaintiff owns stock. Bateson v. Magna Oil Corpora-
tion, 414 F.2d 128 (Sth Cir. 1969), cert. denied 397 U.S. 911,
90 S.Ct. 909, 25 L.Ed.2d 91 (1970). This Court in Heit v.
Bixby, supra, permitted recovery in a derivative action for
wrongdoing which commenced before the date plaintiff ac-
quired stock but continued after the date plaintiff acquired
stock; however, the recovery was limited to the period the plain-
tiff was a stockholder. With respect to the allegations charged
in Count IV, this Court in its previous Memorandum on page 8
set out the pertinent part of Rule 23.1 of the F.R.C.P. that ap-
plied to this count. In part, the rule says: “The complaint * * *
shall allege (1) that the plaintiff was a shareholder or member
at the time of the transaction of which he complains * * *.”
Plaintiff here simply has not pled when the wrongdoings com-
plained of began nor does plaintiff allege that any of the wrong-
doings continued after August 4, 1969, when he acquired AIC
stock. The motion to dismiss for failure to state a cause of
action as to Count I'V is sustained.
In view of the Court’s prior Memorandum and the failure of
the plaintiff to set out the date of the alleged wrongdoing or that
any of the alleged wrongdoings continued after he acquired his
stock on August 4, 1969, the Court assumes the plaintiff cannot
allege facts to support Count IV. For the above reasons the
motion of the individually appearing defendants to dismiss for
failure to state a cause of action is sustained. Count IV of the
amended petition will accordingly be dismissed without preju-
dice.
The Court now takes up defendants’ motion for summary
judgment on Counts I and II. The undisputed facts relating to
this motion for summary judgment on Counts I and II under
Rule 56 of the F.R.C.P. are as follows: Plaintiff is presently the
owner of one thousand (1,000) shares of AIC common stock
which he purchased on August 4, 1969, at a price of $18%
AEN a Se a a REL LLT EET EFI NE TS EL I nye ymeree RY TED
pias th sts
per share. Since the date of purchase, the stock market price
has fluctuated from a low of $7 to a high of $20. In the
period from August 5, 1969, through May 31, 1971, AIC com-
mon stock sold on the open market at prices of $18% or more
for 47 days. This lawsuit was commenced on April 9, 1971,
and for 18 of the first 30 days thereafter plaintiff could have
sold his AIC stock at the price he paid for it or at a profit
(Exhibit B. Affidavit of Warren E. Van Norman).
The defendants’ contention is that the undisputed facts in this
case disclose that plaintiff has not suffered any damages as a
result of any alleged wrongdoing of the defendants because subse-
quent to plaintiff's purchase of his AIC common stock and subse-
quent to the filing of this lawsuit, plaintiff could have recouped
his investment or sold at a profit on the open market: therefore,
entitling defendants to summary judgment in their favor on
Counts I and II. With this contention the Court agrees.
The facts of this case fall within the holding in Morrow v.
Schapiro, 334 F. Supp. 399 (E.D.Mo.1971). In Morrow, plain-
tiff alleged violations of Section 10(b) and Rule 10(b)-5 in
connection with the purchase and retention of stock of Permaneer
Corporation. The Court sustained defendant’s motion to dis-
miss for failure to state a claim upon which relief could be
granted.
The complaint alleged that plaintiff had acquired 18,650
shares of Permaneer Corporation on the open market; that he
was induced to purchase and retain the stock by misrepresenta-
tion made by defendants; that he paid $582.620 for his stock;
that he subsequently could have sold the sar-s for approxi-
mately $700,000; that he was still the owners he stock. and
that the stock had a value of only $56,000
The Court ruled that plaintiff failed to state a claim as a
purchaser for the reason that subsequent to the purchase of the
BP RE BR TRIE? ORNATE TSE SWE Re RO,
— A-10 —
stock he could have sold it at a profit, and hence, suffered no
damages. On page 401 of the opinion the Court stated:
“But as [the] defendants correctly observe[d], the complaint
on its face shows that the investment was, at least initially,
a profitable one. The stock increased in value from an
original cost of $582,620 to $700,000. Even assuming
that the misrepresentations were made and that plaintiff
relied upon them in connection with the purchase of the
securities, no damage can be shown as a result of such
purchases.”
In order to state a claim under Rule 10(b)-5 it must ap-
pear not only that a purchase or sale took place, but that there
was a loss and that the loss flowed directly from the purchase
or sale. Smith v. Murchison, supra. Plaintiff's loss, if any, did
not flow directly from the purchase or sale of the AIC stock,
but flowed from plaintiff's own investment decision to retain
the AIC stock.
Even in cases of alleged fraud, a plaintiff has a duty to miti-
gate his damages upon discovery of the fraud. Lack Indus-
tries, Inc. v. Ralston Purina Co., 327 F.2d 266 (8th Cir. 1964);
Transport Manufacturing & Equipment Company v. Fruehauf
Trailer Co., 295 F.2d 223 (8th Cir. 1961). Plaintiff in our
present cause had eighteen opportunities to sell his stock at the
price he paid for it or at a profit within the first month after he
filed suit. The only reason plaintiff gives for not selling his AIC
stock is that if he had done so he would have lost his standing
to pursue a derivative action on behalf of the AIC. This was
a personal decision and not the result of any alleged fraud on
the part of any of the defendants.
Plaintiff argues that Travis v. Anthes Imperial Ltd., 473 F.2d
515 (8th Cir. 1973) implicitly limits the holding of the Morrow
v. Schapiro, supra, very narrowly. In the Travis case the defend-
ants through misrepresentation and fraud caused plaintiffs to
— se
believe that they would later receive a tax-free exchange or an
equivalent offer for their stock after a tender offer to Canadian
shareholders had expired and that they, therefore, should hold
onto their Anthes stock. The Eighth Circuit Court of Appeals
in its opinion in the Travis case, at page 521, said:
“Absent defendants’ encouragement, the plaintiffs would
have sold their stock earlier when a market for Anthes
stock existed and the price was higher. The fact that the
sale took place at a time when the plaintiffs were aware
of all the facts, including defendants’ misrepresentations,
is not fatal to the plaintiffs’ claim.”
The Morrow and Travis cases are distinguishable on very
basic and sound grounds. In Travis there was a sale of the stock
involved after the fraud was discovered and the sale was at a
loss. In Morrow, as in our present cause, there was no sale of
the stock. There is an additional fact that distinguishes our
present case from both Morrow and Travis. Unlike the plaintiffs
in Morrow and Travis, the plaintiff in our present cause could
have sold his stock without suffering a loss after he discovered
the alleged fraud.
The courts have repeatedly held that one who retains his
stock cannot bring himself under the provisions of § 10(b); he
must be a defrauded “seller” to qualify. Greenstein v. Paul, 400
F.2d 580 (2nd Cir. 1968); Herpich v. Wallace, 430 F.2d 792
(Sth Cir. 1970); Cooper v. Garza, 431 F.2d 578 (Sth Cir.
1970).
Plaintiff's loss was not in connection with the purchase of
his AIC stock because he had numerous opportunities to sell
without a loss after he discovered the alleged fraud, and plain-
tiffs loss was not in connection with the sale of his AIC stock
because of his investment decision to retain the stock. There-
fore, defendants are entitled to summary judgment in their favor
on Counts I and II.
— A-12 —
For the above stated reasons this Court sustains the motion
of AIC and the individually appearing defendants for summary
judgment on Counts I and II in their favor and against the plain-
tiff.
Turning now to the motion of AIC and the individually
appearing defendants to dismiss Counts I through III of the
amended complaint as a class action, it is fundamental that
the class representative must himself possess a cause of action.
Kansas City, Missouri v. Williams, 205 F.2d 47, 51 (8th
Cir.), cert. denied 346 U.S. 826, 74 S.Ct. 45, 98 L.Ed.
351; Kauffman v. Dreyfus Fund, Inc., 2 Cir., 434 F.2d 727,
734. In view of the Court’s ruling with respect to Counts I, II
and III, the motion of AIC and the individually appearing de-
fendants to dismiss will be sustained. This ruling also disposes
of the defendants’ motion with respect to declaring this a class
action.
The Clerk of the Court will prepare and enter the proper
order carrying out the Court’s rulings as follows: Overruling the
motions of all defendants to dismiss or strike as to Counts I and
II of plaintiff's amended complaint for failure to state a claim for
which relief can be granted; sustaining the motion of AIC and
the individually appearing defendants to dismiss or strike Count
III of plaintiff's amended complaint for failure to state a claim
for which relief can be granted; sustaining the motion of the
individually appearing defendants to dismiss or strike Count IV
of plaintiff's amended complaint for failure to state a claim for
which relief can be granted and dismissing Counts III and IV
ot plaintiffs amended complaint without prejudice; sustaining
the motion of all defendants for summary judgment as to Counts
I and II of plaintiff's amended complaint; and sustaining the
motion of AIC and the individually appearing defendants to dis-
miss Counts I, II and III of the amended complaint as a class
action.
— A-13 —
APPENDIX B
Original Opinion of Court of Appeals
United States Court of Appeals
for the Eighth Circuit
No. 74-1573
Myron Harris, )
Appellant, | Appeal from. the
v. | United States Dis-
. trict Court for the
American Investment | Eastern District of
Company, et al., | Missouri.
Appellees.
Submitted: February 14, 1975
Filed: June 18, 1975
Before Matthes, Senior Circuit Judge; Bright and Stephenson,
Circuit Judges.
Bright, Circuit Judge.
Myron Harris, who holds 1,000 shares of common stock of
American Investment Company (AIC) which he purchased on
August 4, 1969, through a public stock exchange, brings this
action individually and on behalf of the class of all AIC share-
holders similarly situated. He names as defendants AIC, cer-
tain of its officers and directors, and the accounting firm of
Haskins & Sells, and he alleges the following wrongdoing:
a) Counts I and II (against all defendants): Immediately be-
fore and continuing after 1969 the defendants published false
and misleading statements in violation of § 10(b) of [2]* the
* Numbers in boldface in brackets indicate pages of the slip
opinion.
an AR oe
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and
Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1974), and
filed false and misleading information with the Securities and
Exchange Commission in violation of § 18(a) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78r(a) (1970).
[3] b) Count III (against defendants other than AIC and [4]
Haskins & Sells): The individual defendants violated § 10(b) of
the Securities Exchange Act, Rule 10b-5, and AIC’s listing agree-
ment with the New York Stock Exchange and committed fraud
upon AIC shareholders by failing to inform AIC and its share-
holders of merger proposals from other corporations.
c) Count IV (stockholder derivative action): The individual
defendants mismanaged AIC.
On motion of the defendants, the district court granted sum-
mary judgment dismissing Harris’ individual claim for damages
under counts I and II. Then, because Harris no longer possessed
a cause of action himself, the district court also dismissed the
class action in these counts.
1 Harris alleges that these misrepresentations and omissions in-
duced him and others to buy and retain AIC stock and caused an
artificially inflated market value for the stock.
Section 10(b) of the Securities Exchange Act provides as follows:
Regulation of the use of manipulative and deceptive de-
vices.—It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate com-
merce or of the mails, or of any facility of any national securities
exchange—
* * *
(b) To use or employ, in connection with the purchase or
sale of any security registered on a national securities exchange
or any security not so registered, any manipulative or deceptive
device or contrivance in contravention of such rules and regula-
tions as the Commission may prescribe as necessary or appro-
priate in the public interest or for the protection of investors.
[15 U.S.C. §78j(b) (1970).]
Rule 10b-5 provides as follows:
Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce,
— A-15 —
The district court also dismissed count III as an individual
and class action for failure to state a claim, for Harris had failed
to allege that he was a stockholder at the time of the incidents
which formed the basis for the count.
The district court dismissed the derivative action, count IV,
for failure to state a claim for which relief can be granted be-
cause it concluded that Harris had failed, as he had in count
III, to allege that he was a stockholder at the time of the in-
cidents complained of. The court’s dismissal of counts III and
IV was without prejudice.*
or of the mails or of any facility of any national securities ex-
change,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
Statements made, in the light of the circumstances under which
they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any security.
[17 C.F.R. § 240.10b-5 (1974).]
Section 18(a) of the Securities Exchange Act provides as follows:
Liability for misleading statements—(a) Any person who
shall make or cause to be made any statement in any applica-
tion, report, or document filed pursuant to this title or any rule
Or regulation thereunder, or any undertaking contained in a
registration statement as provided in subsection (d) of this
section 15 of this title, which statement was at the time and in the
light of the circumstances under which it was made false or
misleading with respect to any material fact, shall be liable to
any person (not knowing that such statement was false or mis-
leading) who, in reliance upon such statement, shall have pur-
chased or sold a security at a price which was affected by such
statement, for damages caused by such reliance, unless the per-
son sued shall prove that he acted in good faith and had no
knowledge that such statement was false or misleading. A per-
son seeking to enforce such liability may sue at law or in equity
a: court of competent jurisdiction. * * * [15 U.S.C. §78r(a)
(1970).]
* The district court opinion is reported at 378 F. Supp. 894
(E.D. Mo. 1974).
— A-16 —
Harris appeals, contending that the trial court erred in grant-
ing summary judgment on his individual claims in counts [5] I
and II; in dismissing the class allegations in those counts; and in
dismissing the derivative action alleged in count IV. He raises
no question on appeal with respect to the dismissal of count
III. We find it necessary to resolve the merits only with re-
spect to Harris’ individual claims in counts I and II. We re-
verse and remand the cause for further proceedings in the dis-
trict court.
Since this case comes before us after summary disposition, the
record is skeletal at best, limited to the facts alleged in the
pleadings and the facts appearing in defendants’ affidavit in
support of their motion for summary judgment. Nonetheless, we
are able to reconstruct a factual background adequate for pur-
poses of discussion.
AIC stock is publicly traded on the New York Stock Ex-
change. Harris purchased his shares on August 4, 1969, at a
price of $18%. The market for this stock remained fairly con-
stant for a time, but by June 30, 1970, the stock had plunged
to $74. It recovered somewhat thereafter, and by April 8,
1971, the day preceding the filing of the complaint, AIC shares
were sold on the New York Stock Exchange at a high of $16%
and a low of $16%.
Harris contends that in the fall of 1970 he came to believe
that he had been the victim of an on-going scheme of mis-
representation and fraudulent concealment of information. At
that time the market price of AIC stock had fallen to approxi-
mately $9 per share. He contends that he approached his at-
torneys at that time to discuss possible federal securities law
violations. The attorneys prepared a complaint in the winter
of 1970 and, as we have noted, filed it in early April of 1971.
PORE RALERESE ELNINO IPI IR SIE EE AERO TE
sone Beh Das.
[6] I. Damages.
The dispute in this case focuses upon whether the appellant
individually sustained any recoverable damages from the de-
fendants’ alleged violations of §§ 10(b) and 18(a) of the Se-
curities Exchange Act. In granting summary judgment, the
district court ruled that Harris has suffered no damages. The
court reasoned as follows:
The defendants’ contention is that the undisputed facts
in this case disclose that plaintiff has not suffered any
damages as a result of any alleged wrongdoing of the
defendants because subsequent to plaintiff's purchase of
his AIC common stock and subsequent to the filing of
this lawsuit, plaintiff could have recouped his investment
or sold at a profit on the open market: therefore, en-
titling defendants to summary judgment in their favor
on Counts I and II. With this contention the Court
agrees. [378 F. Supp. at 900.]
The district court noted that following Harris’ purchase of
the stock its price exceeded $18%—his purchase price—for
47 days through May 31, 1971. Included in this period were
18 days out of the 30 days immediately subsequent to the
commencement of this action. However, the record shows
that between the fall of 1970, when plaintiff asserts that he
first suspected fraud, and the filing of the lawsuit, the stock
at no time equaled or exceeded the purchase price.
The validity of the district court's holding rests upon its
legal determination that the defendants may be absolved from
liability by showing that the plaintiff could have recouped his
loss by selling his stock subsequent to his discovery of their
alleged fraud, including sale after [7] the institution of the law-
suit. We disagree with this determination. We hold that on
the record presented in this case it cannot be concluded, for
purposes of summary judgment, that plaintiff has suffered no
damages.
— A-18 —
A. Date for fixing damages.
Although the federal securities laws in several instances of-
fer greater protection to buyers and sellers of securities than
do common law fraud concepts, see 3 L. Loss, Securities Reg-
ulation 1435-36 (2d ed. 1961), common law fraud concepts
underlie the securities laws and provide guidance as to their
reach and application, particularly where, as here, Congress
has not specified the remedies available to a defrauded buyer.*
In cases arising under §10(b) and Rule 10b-S the federal
courts employ an out-of-pocket rule of damages borrowed
from the tort action of deceit. See Madigan, Inc. v. Good-
man, [8] 498 F.2d 233, 239 (7th Cir. 1974); Wolf v. Frank,
477 F.2d 467, 478-79 (Sth Cir.), cert. denied, 414 U.S. 975
(1973); Estate Counseling Service, Inc. v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 303 F.2d 527, 533 (10th Cir.
1962); see generally 6 L. Loss, Securities Regulation 3922-23
(Supp. 1969); Note, Measure of Damages in Rule 10b-5 Cases
Involving Actively Traded Securities, 26 Stan. L.Rev. 371,
* Although Congress in §18(a) has expressly authorized recovery
of damages resulting from false or misleading statements in filed
documents, it did not specify how and when the damages are to be
measured. Compare §11(e) of the Securities Act of 1933, 15 U.S.C.
$77k(e) (1970) (civil liabilities on account of false registration
statement). Thus, to the extent that $18(a) is silent with respect
to the measurement of damages we view it in the same light as we
view §10(b), which is silent with respect to remedies altogether.
Unless otherwise indicated, our discussion therefore applies equally
to $$10(b) and 18(a).
+ One commentator has described this rule in the following terms:
[The out-of-pocket rule] allows recovery of the difference be-
tween the actual value of what the injured party gave and what
he received. In contrast with restitution damages, the plaintiff
recovers what he has lost, rather than what the defendant has
gained. The injured investor is given nothing for the loss of the
benefit that he would have enjoyed had defendant’s representa-
tions been true. [Note, Measurement of Damages in Private
Actions under Rule 10b-5, 1968 Wash. U.L.Q. 165, 172.]
See also W. Prosser, Law of Torts $110 at 733-34 (4th ed. 1971).
— A-19 —
383-85 (1974). But see Ohio Drill & Tool Company v. John-
son, 498 F.2d 186, 190-91 (6th Cir. 1974) (proper measure
of damages is disgorgement of profits by defrauding seller);
Zeller v. Bogue Electric Manufacturing Corp., 476 F.2d 795,
801-03 (2d Cir.), cert. denied, 414 U.S. 908 (1973) (same).
The Restatement of Torts (1938), at § 549, measures dam-
ages under this rule as
(a) the difference between the value of the thing bought,
sold or exchanged and its purchase price or the value
of the thing exchanged for it * * *.
Thus, actual pecuniary loss rather than loss of bargain is the
measure of damages:
Under the [out-of-pocket] rule stated in * * * Clause
[(a)] the recipient of a fraudulent misrepresentation is
entitled to recover from its maker only the actual loss
which be- [9] cause of its falsity he sustains by his action or
inaction in reliance upon it. If notwithstanding the falsity
of the representation the thing which a vendee acquires
is of equal or greater value than the price paid and he
has suffered no harm through using it in reliance upon
its being as represented, he has suffered no loss and can
recover nothing. [Restatement of Torts § 549, comment
b at 110.)
The federal courts have identified two dates at which dam-
ages under the out-of-pocket rule may be ascertained. Quot-
ing from Sigafus v. Porter, 179 U.S. 116, 125 (1900), Judge
Aldrich of the First Circuit has Suggested that damages for
a defrauded purchaser of securities coming within the cover-
age of § 10(b) and Rule 10b-5 should be fixed as of the date
of purchase:
[T]he damages are to be reckoned solely by “the differ-
ence between the real value of the property at the date
— A-20 —
of its sale to the plaintiffs and the price paid for it, with
interest from that date, and, in addition, such outlays as
were legitimately attributable to the defendant’s conduct,
but not damages covering ‘the expected fruits of an un-
realized speculation’ [Smith v. Bolles, 132 U.S. 125, 130
(1889)].” [Janigan v. Taylor, 344 F.2d 781, 786 (lst
Cir.), cert. denied, 382 U.S. 879 (1965).]
Accord, Occidental Life Insurance Co. v. Pat Ryan & Asso-
ciates, 496 F.2d 1255, 1264-65 (4th Cir.) (semble), cert.
denied, 419 U.S. 1023 (1974); Wolf v. Frank, supra, 477
F.2d at 478-79; Estate Counseling Service, Inc. v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., supra, 303 F.2d at 533
(dictum); Gottlieb v. Sandia American Corp., 304 F. Supp.
980, 991 (E.D. Pa. 1969), aff'd in part, rev'd in part on
other grounds, 452 [10] F.2d 510 (3d Cir.), cert. denied, 404
U.S. 938 (1971). The typical fact situation in these cases
discloses an alleged fraudulent concealment or misrepresenta-
tion by a seller directed at the buyer-plaintiff only and not
the public at large. Hence, the actual worth of the securities
at the time of purchase by the plaintiff is readily ascertain-
able. But see Gottlieb v. Sandia American Corp., supra, 304
F. Supp. at 989-90.
The Restatement of Torts observes that there may be diffi-
culty ascertaining the value of the article transferred in con-
nection with a misrepresentation where the misrepresentation
affects the market price of the article. This is particularly true
with respect to publicly-traded securities:
The value of the article is normally determined by the
price at which it could be resold in an open market or
by private sale if its quality or other characteristics which
affect its value were known. However, the price which
determines the value of the article is not necessarily the
price which it would bring at the time the sale is made.
— A-21 —
In many cases this price is due to the widespread belief
of other buyers in misrepresentations similar to that made
to the person seeking recovery, as where the market price
of securities, such as bonds or shares, is the result of widely
spread misrepresentations of those who issue or market
them. The fact that the market price is inflated or de-
pressed by such misrepresentations is the important factor
which makes the price fictitious * * *. [Restatement of
Torts § 549, comment ¢ at 111.]
Thus, where a defendant’s fraudulent conduct is alleged, [11]
as it is in this case, to have caused an artificial market of long
duration, damages have been fixed, consistently with the Re-
statement's position, not at the date of purchase but rather at
the date of discovery of the fraud. See Esplin v. Hirschi, 402
F.2d 94, 104-05 (10th Cir. 1968), cert. denied, 394 US. 928
(1969); see also Chasins v. Smith, Barney & Co., 306 F. Supp.
177, 178 (S.D. N.Y. 1969) (failure by broker to disclose his
position as a market-maker).
Although the Tenth Circuit has fixed damages as of the date
that the buyer actually discovered, or should have discovered,
the seller's fraud, Richardson v. MacArthur, 451 F.2d 35, 43-
44 (10th Cir. 1971); Esplin v. Hirschi, supra, 402 F.2d at 104,
we believe that in the instant case the public discovery of the
fraud is the proper date at which to ascertain damages. It is
only then that the market can reflect the true value of the stock,
unaffected by what is alleged to have been the defendants’ con-
tinuing fraud:
[VJalue is determined by their [i.e., the securities’] market
price after the fraud is discovered when the price ceases to
be fictitious and represents the consensus of buying and
selling opinion of the value of the securities as they
actually are.
« x *
Oe ne Mae eee ge ee eee Dee Dee ee eee oe RTPA OY La uA a ave ~ 9
oe. pee
In the majority of stock transactions the person seeking
recovery discovers the falsity of the misrepresentations at
the same time that it becomes known to the investing
public and, therefore, at a time when the price of the stock
is no longer inflated or depressed by the same or similar
misrepresentations. It may be, however, that he discovers
the falsity of the representations either earlier or later than
the general public. In the first situation, his loss is deter-
mined by the actual value of the securities in question
shown by their [12] market price after the public discovery
of the fraud brings the price into accord with the actual
value. In the second situation, where the person seeking
recovery does not learn of the falsity of the facts repre-
sented until sometime after the general public has dis-
covered it, the value of the securities is fixed by the price
at which they are selling at the time of his and not of the
public’s discovery. [Restatement of Torts § 549, com-
ment c at 111, 112-13.]°
The American Law Institute’s Federal Securities Code draft
adopts in principle this same reasoning:
The measure of damages * * * is
(A) if the plaintiff is a buyer, the difference between
the amount that he paid and the value of the security
determined as of the time specified in section 1402
(e)(1) [i.e., when, inter alia, all material facts be-
came generally available to the investing public.]
{[ALI, Federal Securities Code § 1402(f)(1)(A)
(Tent. Draft No. 2, 1973).]
° The Restatement (Second) of Torts retains this formulation of
the date for fixing damages. /d. §549, comment c at 30-32 (Tent.
Draft No. 11, 1965).
PORE AO aes LORIE ALGER LL EE OO, LOOP GIES CP AOL P IG LALOR OF OEE PE ERG OID IE A
=—
This proposed codification incorporates the common law rule
for the date of ascertaining damages. ALI, Federal Securities
Code § 1402(f)(1), comments (1)(b), (4)(b), (5) (b).*
[13] Thus, the value of Harris’ AIC stock, for purposes of com-
puting damages, must be measured by the market price after
the fraud had been discovered by the general public, i.e., when
all material facts had become known to the public such that the
market price had ceased to be fictitious. Since the record does
not address itself to when public discovery occurred, the district
court erred in granting summary judgment for the defendants.
It may very well be that the plaintiff ferreted out the defendants’
alleged fraud prior to its discovery by the general public and
that public discovery, consequently, coincided with or immedi-
ately followed the institution of the lawsuit. In such an event
plaintiff would have sustained little or no compensable injury.
The proof may show, however, that public discovery preceded
the suit, when the market value of the stock was much lower.
In such an event plaintiff's damages could prove substantial.
These matters are for the trial court to determine on remand.
B. Mitigation of damages.
A defrauded buyer of securities may maintain an action for
damages under § 10b, and, presumably, § 18(a), even though
he continues to hold the securities. Pfeffer v. Cressaty, 223 F.
Supp. 756, 758 (S.D. N.Y. 1963); see Occidental Life Insur-
° The appellees urge that Morrow v. Schapiro, 334 F.Supp. 399
(E.D. Mo. 1971), calls for the conclusion that the plaintiff in this
case has suffered no compensable injury. We do not read Morrow
to reach the issue presented here. In Morrow, the court assumed
that the market value of the plaintiff’s securities, which was greater
than the purchase price, reflected—contrary to market value in the
instant case—nothing other than the actual value of the securities
and it reasoned that the plaintiff had therefore sustained no loss by
misrepresentations that might have induced his purchase. /d. at 401.
ome,” ee
‘ance Co. v. Pat Ryan & Associates, supra, 496 F.2d at 1264-65;
Wolf v. Frank, supra, 477 F.2d at 478; Sackett v. Beaman, 399
F.2d 884, 891 (9th Cir. 1968); Johns Hopkins University v.
Hutton, 326 F. Supp. 250, 262 [14] (D. Md. 1971), aff'd in
part, rev'd in part on other grounds, 488 F.2d 912 (4th Cir.
1973), cert. denied, 416 U.S. 916 (1974). At common law, a de-
frauded purchaser of securities is under no duty to sell them
prior to maintaining an action for deceit but may hold them for
investment purposes if he chooses. See Hindman v. First Na-
tional Bank, 112 F. 931, 935-36 (6th Cir.), cert. denied, 186
U.S. 483 (1902); Hotaling v. A. B. Leach & Co., 247 N.Y. 84,
159 N.E. 870, 872 (1928); Stephens v. Wheeler, 193 Wis. 164,
213 N.W. 464, 468 (1927). Thus, Harris was under no duty
to sell his AIC stock, for mitigation of damages or any other
purpose, prior to commencing this action.
Where one has bought securities for long-term investment,
it would be inappropriate to apply a rule requiring him to sell
them prematurely for the benefit of the defrauding defendant.
Inasmuch as we have held that Harris’ damages are to be meas-
ured as of the date of public discovery of the fraud,
[t}he plaintiff will not be able to avail himself of any fur-
ther decrease in the value of the security after that date.
So also the defendant should not be able to avail itself of
any increase in the value of the stock after that date. This
is the only method in which a consistent measure of dam-
ages can be obtained. [Cant v. Becker & Co., 379 F. Supp.
972, 975 (N.D. Ill. 1974).]
Accord, O’Hara v. Derschug, 241 App. Div. 513, 272 N.Y.S.
189, 198 (1934). See also Beecher v. Able, No. 66 Civ. 3471,
CCH Fed. Sec. L. Rep. €95,016 at 97,561 (S.D. N.Y. Mar 17,
1975) (no need for plaintiff to mitigate damages in action
under Section 11(a) of the Securities Act of 1933, 15 U.S.C.
§77k(a) (1970), by selling stock after statutory date for meas-
urement of damages).
SES PP OE Ce EE Ee
FRILL MENS OIE BIT IMO NILE BIBLE LIP GERI IE A yee
— A-25 —
[15] Consequently, we reject the appellees’ contention that
Harris was under a duty, after discovery of the fraud, to sell his
AIC stock for the benefit of the appellees. By continuing to hold
the stock after that date Harris has, in effect, made a second in-
vestment decision unrelated to his initial decision to purchase the
stock. As the court observed in Cant v. Becker & Co., supra,
379 F. Supp. at 975, what happens after this second decision
has no bearing whatsoever on the measure of plaintiff's damages.
II. Other Issues
Harris requests that, if we should reverse the district court’s
ruling on damages, we should also certify counts I and II as a
class action. He contends that he is entitled as a matter of law
to bring this case as a class action. We decline the invitation
to decide at this juncture of the case whether it should proceed
as a class action.
The district court dismissed the class action with respect to
counts I and II because it had determined that Harris could
recover no damages on his individual claims under these counts
and therefore could not adequately represent all defrauded
purchasers of AIC stock. Until the district court can recon-
sider Harris’ adequacy as a representative of a proper class, we
deem it inappropriate to evaluate the propriety of a class action.
Accordingly, the appeal on this issue is dismissed.
Harris also seeks our review of the district court’s order dis-
missing without prejudice the allegations contained in count
IV, a derivative action. As we have noted, this dismissal rested
upon the failure of the appellant to plead specifically, as re-
quired by Fed. R. Civ. P. 23.1(1), that he [16] was a stockholder
at the time of the commission of the alleged wrongs by the direc-
tors and officers of the corporation.
According to Harris’ contention, he has discussed certain of
the events referred to in count IV in detail in other counts of
— A-26 —
his complaint. He contends that by reference to these allega-
. tions in other counts, count IV should be construed as alleging
that he held stock at the time that defendants were guilty of
misconduct in managing AIC.
We do not reach the merits of this contention. The district
court dismissed count IV without prejudice. Such a dismissal
does not constitute an appealable final order under 28 U.S.C.
$1291 (1970). See, e.g., Azar v. Conley, 480 F.2d 220, 223 (6th
Cir. 1973) (dismissal of complaint without prejudice); Amer-
ican Broadcasting Co. v. Wahl Co., 121 F.2d 412, 413 (2d Cir.
1941) (dismissal of count of complaint with leave to amend);
cf. Olson v. Rembrandt Printing Co., 511 F.2d 1228, 1230-31
(8th Cir. 1975); Piel v. Harvard Interiors Manufacturing Co.,
490 F.2d 1272 (8th Cir. 1974). If these wrongs in fact occurred
after Harris acquired his stock, it would be proper on remand
for Harris to seek leave to amend his complaint to bring count
IV squarely within the prescription of Rule 23.1(1).
III. Summary.
In summary, we reach no issue on this appeal other than
that of damages. We reverse the grant of summary judgment on
Harris’ individual claims under counts I and II. Lest our opinion
be misunderstood, we do not hold that plaintiff has made
out a case entitling him to damages if he is able [17] to prove
fraudulent misrepresentations or omissions by the defendants.‘
* In order to recover any damages Harris must, on remand,
prove all the elements for recovery under §10(b) and Rule 10b-5,
see, e.g., Myzel v. Fields, 386 F.2d 718, 733-37 (8th Cir. 1967),
cert. denied, 390 U.S. 951 (1968), or §18(a), see Heit v. Weitzen,
402 F.2d 909, 914-16 (2d Cir. 1968), cert. denied, 395 U.S. 903
(1969). Among these elements is reliance by Harris upon the de-
fendants’ omissions and misrepresentations, more accurately charac-
terized as causation in fact. E.g., Clegg v. Conk, 507 F.2d 1351,
1361 n.14 (10th Cir. 1974), petition for cert. filed, 43 U.S.L.W.
3531 (U.S. Mar. 4, 1975) (No. 74-1096). See also Affiliated Ute
RELA AEDES LIME LEE BEEP EPMA:
— A-27 —
We hold only that on the record before us it cannot be said
as a matter of law that Harris cannot collect damages even
if he should establish the existence of the alleged fraudulent
misrepresentations and omissions.
A true copy.
Attest:
Clerk, U.S. Court of Appeals, Eighth Circuit.
Citizens v. United States, 406 U.S. 128, 153-54 (1972); Schlick v.
Penn-Dixie Cement Corp., 507 F.2d 374, 380-81 (2d Cir. 1974);
Globus v. Law Research Service, Inc., 418 F.2d 1276, 1291-92 (2d
Cir. 1969), cert. denied, 397 U.S. 913 (1970); Werfel v. Kramarsky,
61 F.R.D. 674, 681 (S.D. N.Y. 1974); Shapiro v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 353 F. Supp. 264, 274-79 (S.D. N.Y.
1972), aff'd, 495 F.2d 228, 238-41 (2d Cir. 1974). See generally
Note, Reliance Requirement in Private Actions under SEC Rule
10b-5, 88 Harv. L. Rev. 584, 587-96 (1975).
— A-28 —
APPENDIX C
Order on Petitions for Rehearing
United States Court of Appeals for the Eighth Circuit
No. 74-1573
Myron Harris, )
Appellant, Appeal from the
VS. United States District
Court for the Eastern
American Investment Company, et al., District of Missouri.
Appellees. )
Order
In response to the appellees’ petitions for rehearing or for
rehearing en banc, the opinion of June 18, 1975, is modified
as follows:
Pages 7 through 17 are withdrawn and replaced by new
pages 7 through 17 attached hereto and by reference made
a part of this order.
In all other respects the petitions for rehearing or for re-
hearing en banc are denied.
Dated this 11th day of August 1975.
A true copy.
Attest:
Clerk, U. S. Court of Appeals, 8th Circuit.
Oa aa
— A-29 —
APPENDIX D
Modified Opinion of Court of Appeals
United States Court of Appeals
for the Eighth Circuit
No. 74-1573
Myron Harris, >
Appellant, | Appeal from the
v. United States Dis-
trict Court for the
American Investment Eastern District of
Company, et al., Missouri.
Appellees. |
Submitted: February 14, 1975
Filed: June 18, 1975
Modified: August 11, 1975
Before Matthes, Senior Circuit Judge; Bright and Stephenson,
Circuit Judges.
Bright, Circuit Judge.
Myron Harris, who holds 1,000 shares of common stock of
American Investment Company (AIC) which he purchased on
August 4, 1969, through a public stock exchange, brings this
action individually and on behalf of the class of all AIC share-
holders similarly situated. He names as defendants AIC, cer-
tain of its officers and directors, and the accounting firm of
Haskins & Sells, and he alleges the following wrongdoing:
Counts I and II (against all defendants): Immediately be-
fore d continuing after 1969 the defendants published false
and ... eading statements in violation of § 10(b) of [2]* the
* Numbers in boldface in brackets indicate pages of the slip
opinion.
PES Bee WOW ERLE A ALOR el AA
— A-30 —
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and
Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1974), and
filed false and misleading information with the Securities and
Exchange Commission in violation of § 18(a) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78r(a) (1970).!
[3] b) Count III (against defendants other than AIC and [4]
Haskins & Sells): The individual defendants violated § 10(b) of
the Securities Exchange Act, Rule 10b-5, and AIC’s listing agree-
ment with the New York Stock Exchange and committed fraud
upon AIC shareholders by failing to inform AIC and its share-
holders of merger proposals from other corporations.
c) Count IV (stockholder derivative action): The individual
defendants mismanaged AIC.
' Harris alleges that these misrepresentations and omissions in-
duced him and others to buy and retain AIC stock and caused an
artificially inflated market value for the stock.
Section 10(b) of the Securities Exchange Act provides as follows:
Regulation of the use of manipulative and deceptive de-
vices.—It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate com-
merce or of the mails, or of any facility of any national securities
exchange—
* od ~
(b) To use or employ, in connection with the purchase or
sale of any security registered on a national securities exchange
or any security not so registered, any manipulative or deceptive
device or contrivance in contravention of such rules and regula-
tions as the Commission may prescribe as necessary or appro-
priate in the public interest or for the protection of investors.
[15 U.S.C. § 78j(b) (1970).]
Rule 10b-5 provides as follows:
Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce,
or of the mails or of any facility of any national securities ex-
change,
(a) To employ any device, scheme, or artifice to defraud
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
EPO PGI ES PL eI OND POLE NEE, LIAO AYE Mey AES OLLIE PE
sin i men
On motion of the defendants, the district court granted sum-
mary judgment dismissing Harris’ individual claim for damages
under counts I and II. Then, because Harris no longer possessed
a cause of action himself, the district court also dismissed the
Class action in these counts.
The district court also dismissed count III as an individual
and class action for failure to state a claim, for Harris had failed
to allege that he was a stockholder at the time of the incidents
which formed the basis for the count.
The district court dismissed the derivative action, count IV,
for failure to state a claim for which relief can be granted be-
cause it concluded that Harris had failed, as he had in count
III, to allege that he was a stockholder at the time of the in-
statements made, in the light of the circumstances under which
they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any security.
(17 C.F.R. § 240.10b-5 (1974)].
Section 18(a) of the Securities Exchange Act provides as follows:
Liability for misleading statements.—(a) Any person who
shall make or cause to be made any statement in any applica-
tion, report, or document filed pursuant to this title or any rule
Or regulation thereunder, or any undertaking contained in a
registration statement as provided in subsection (d) of this
section 15 of this title, which statement was at the time and in the
light of the circumstances under which it was made false or
misleading with respect to any material fact, shall be liable to
any person (not knowing that such statement was false or mis-
leading) who, in reliance upon such statement, shall have pur-
chased or sold a security at a price which was affected by such
statement, for damages caused by such reliance, unless the per-
son sued shall prove that he acted in good faith and had no
knowledge that such statement was false or misleading. A per-
son seeking to enforce such liability may sue at law or in equity
in any court of competent jurisdiction. * * * [15 U.S.C. § 78r(a)
(1970).]
— A-32 —
cidents complained of. The court’s dismissal of counts III and
IV was without prejudice.”
Harris appeals, contending that the trial court erred in grant-
ing summary judgment on his individual claims in counts [5] I
and IT; in dismissing the class allegations in those counts; and in
dismissing the derivative action alleged in count IV. He raises
no question on appeal with respect to the dismissal of count
III. We find it necessary to resolve the merits only with re-
spect to Harris’ individual claims in counts I and II. We re-
verse and remand the cause for further proceedings in the dis-
trict court.
Since this case comes before us after summary disposition, the
record is skeletal at best, limited to the facts alleged in the plead-
ings and the facts appearing in defendants’ affidavit in support
of their motion for summary judgment. Nonetheless, we are
able to reconstruct a factual background adequate for pur-
poses of discussion.
AIC stock is publicly traded on the New York Stock Ex-
change. Harris purchased his shares on August 4, 1969, at a
price of $18%. The market for this stock remained fairly con-
stant for a time, but by June 30, 1970, the stock had plunged
to $7%. It recovered somewhat thereafter, and by April 8,
1971, the day preceding the filing of the complaint, AIC shares
were sold on the New York Stock Exchange at a high of $16%
and a low of $16%.
Harris contends that in the fall of 1970 he came to believe
that he had been the victim of an on-going scheme of mis-
representation and fraudulent concealment of information. At
that time the market price of AIC stock had fallen to approxi-
mately $9 per share. He contends that he approached his at-
* The district court opinion is reported at 378 F. Supp. 894
(E.D.Mo. 1974).
Ta ers 4. auch ss, inks Lis Mas ees ba melee os san ce Nes tot Ga a Sahemanibioat nck coi aa han ie iach Ti ne a I Sat as ai I hdl ae
— A-33 —
torneys at that time to discuss possible federal securities law
violations. The attorneys prepared a complaint in the winter
of 1970 and, as we have noted, filed it in early April of 1971.
[6] I. Damages.
The dispute in this case focuses upon whether the appellant
individually sustained any recoverable damages from the de-
fendants’ alleged violations of §§ 10(b) and 18(a) of the Se-
curities Exchange Act. In granting summary judgment, the
district court ruled that Harris has suffered no damages. The
court reasoned as follows:
The defendants’ contention is that the undisputed facts
in this case disclose that plaintiff has not suffered any
damages as a result of any alleged wrongdoing of the
defendants because subsequent to plaintiff's purchase of
his AIC common stock and subsequent to the filing of
this lawsuit, plaintiff could have recouped his investment
or sold at a profit on the open market: therefore, en-
titling defendants to summary judgment in their favor
on Counts I and II. With this contention the Court
agrees. [378 F. Supp. at 900. ]
The district court noted that following Harris’ purchase of
the stock its price exceeded $18%—his purchase price—for
47 days through May 31, 1971. Included in this period were
18 days out of the 30 days immediately subsequent to the
commencement of this action. However, the record shows
that between the fall of 1970, when plaintiff asserts that he
first suspected fraud, and the filing of the lawsuit, the stock
at no time equaled or exceeded the purchase price.
The validity of the district court's holding rests upon its
legal determination that the defendants may be absolved from
liability by showing that the plaintiff could have recouped his
loss by selling his stock subsequent to his discovery of their
alleged fraud, including sale after [7] the institution of the law-
— A-34 —
suit. We disagree with this determination. We hold that on the
record presented in this case it cannot be concluded, for pur-
poses of summary judgment, that plaintiff has suffered no dam-
ages.
A. Possible daies for fixing damages.
Although the federal securities laws in several instances offer
greater protection to buyers and sellers of securities than do
common law fraud concepts, see 3 L. Loss, Securities Regula-
tion 1435-36 (2d ed. 1961), common law fraud concepts un-
derlie the securities laws and provide guidance as to their reach
and application, particularly where, as here, Congress has not
specified the remedies available to a defrauded buyer.*
In cases arising under §10(b) and Rule 10b-5 the federal
courts employ an out-of-pocket rule of damages borrowed from
the tort action of deceit.4 See Madigan, Inc. v. Goodman, 498
3 Although Congress in §18(a) has expressly authorized recovery
of damages resulting from false or misleading statements in filed
documents, it did not specify how and when the damages are to be
measured. Compare §11(e) of the Securities Act of 1933, 15 U.S.C.
§77k(e) (1970) (civil liabilities on account of false registration
statement). Thus, to the extent that §18(a) is silent with respect
to the measurement of damages we view it in the same light as we
view §10(b), which is silent with respect to remedies altogether. Un-
less otherwise indicated, our discussion therefore applies equally to
§§10(b) and 18(a).
4 One commentator has described this rule in the following terms:
[The out-of-pocket rule] allows recovery of the difference be-
tween the actual value of what the injured party gave and what
he received. In contrast with restitution damages, the plaintiff
recovers what he has lost, rather than what the defendant has
gained. The injured investor is given nothing for the loss of the
benefit that he would have enjoyed had defendant’s representa-
tions been true. [Note, Measurement of Damages in Private
Actions under Rule 10b-5, 1968 Wash.U.L.Q. 165, 172.]
See also W. Prosser, Law of Torts §110 at 733-34 (4th ed. 1971).
FR MAE OS
— A-35 —
F.2d 233, 239 (7th Cir. 1974); Wolf v. Frank, 477 F.2d 467,
478-79 (Sth Cir.), cert. denied, 414 U.S. 975 (1973); Estate
Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 303 F.2d 527, 533 (10th Cir. 1962); see gener-
ally 6 L. Loss, Securities Regulation 3922-23 (Supp. 1969);
Note, Measure of Damages in Rule 10b-5 Cases Involving Ac-
tively Traded Securities, 26 Stan. L.Rev. 371, 383-85 (1974).
But see Ohio Drill & Tool Co. v. Johnson, [8] 498 F.2d 186,
190-91 (6th Cir. 1974) (proper measure of damages is disgorge-
ment of profits by defrauding seller); Zeller v. Bogue Electric
Manufacturing Corp., 476 F.2d 795, 801-03 (2d Cir.), cert.
denied, 414 U.S. 908 (1973) (same).
és
7
¥
®
4
‘
&
.
$
The Restatement of Torts (1938), at §549, measures dam-
ages under this rule as
(a) the difference between the value of the thing bought,
sold or exchanged and its purchase price or the value of
the thing exchanged for it * * *.
Thus, actual pecuniary loss rather than loss of bargain is the
measure of damages:
Under the [out-of-pocket] rule stated in * * * Clause
[(a)] the re- [9] cipient of a fraudulent misrepresentation is
entitled to recover from its maker only the actual loss which
because of its falsity he sustains by his action or inaction
in reliance upon it. If notwithstanding the falsity of the
representation the thing which a vendee acquires is of
equal or greater value than the price paid and he has
suffered no harm through using it in reliance upon its
being as represented, he has suffered no loss and can re-
cover nothing. [Restatement of Torts $549, comment b
at 110.)
The federal courts have identified two dates at which dam-
ages under the out-of-pocket rule may be ascertained. Quoting
— A-36 —
from Sigafus v. Porter, 179 U.S. 116, 125 (1900), Judge Ald-
rich of the First Circuit has suggested that damages for a de-
frauded purchaser of securities coming within the coverage of
$10(b) and Rule 10b-5 should be fixed as of the date of pur-
chase:
[T]he damages are to be reckoned solely by “the difference
between the real value of the property at the date of its
sale to the plaintiffs and the price paid for it, with interest
from that date, and, in addition, such outlays as were
legitimately attributable to the defendant’s conduct, but
not damages covering ‘the expected fruits of an unrealized
speculation’ [Smith v. Bolles, 132 U.S. 125, 130 (1889)].”
[Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir.), cert.
denied, 382 U.S. 879 (1965).]
Accord, Occidental Life Insurance Co. v. Pat Ryan & Associ-
ates, 496 F.2d 1255, 1264-65 (4th Cir.) (semble), cert. de-
nied, 419 U.S. 1023 (1974); Wolf v. Frank, supra, 477 F.2d
at 478-79; Estate Counseling Service, Inc. v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., supra, 303 F.2d at 533 (dictum);
[10] Gottlieb v. Sandia American Corp., 304 F. Supp. 980, 991
(E.D. Pa. 1969), aff'd in part, rev'd in part on other grounds,
452 F.2d 510 (3d Cir.), cert. denied, 404 U.S. 938 (1971).
The typical fact situation in these cases discloses an alleged
fraudulent concealment or misrepresentation by a seller di-
rected at the buyer-plaintiff only and not the public at large.
Hence, the actual worth of the securities at the time of purchase
by the plaintiff is readily ascertainable. But see Gottlieb v. San-
dia American Corp., supra, 304 F. Supp. at 989-90.
The Restatement of Torts observes that there may be diffi-
culty ascertaining the value of the article transferred in connec-
tion with a misrepresentation where the misrepresentation affects
the market price of the article. This is particularly true with
respect to publicly-traded securities:
oo
The value of the article is normally determined by the price
at which it could be resold in an open market or by private
sale if its quality or other characteristics which affect its
value were known. However, the price which determines
the value of the article is not necessarily the price which it
would bring at the time the sale is made. In many cases
this price is due to the widespread belief of other buyers
in misrepresentations similar to that made to the person
seeking recovery, as where the market price of securities,
such as bonds or shares, is the result of widely spread mis-
representations of those who issue or market them. The
fact that the market price is inflated or depressed by such
misrepresentations is the important factor which makes the
price fictitious * * *. [Restatement of Torts § 549, com-
ment c at 111.]
Thus, where a defendant's fraudulent conduct is alleged, [11]
as it is in this case, to have caused an artificial market of long
duration, damages have been fixed, consistently with the Re-
Statement’s position, not at the date of purchase but rather at
the date of discovery of the fraud. See Esplin v. Hirschi, 402
F.2d 94, 104-05 (10th Cir. 1968), cert. denied, 394 U.S. 928
(1969); see also Chasins v. Smith, Barney & Co., 306 F. Supp.
177, 178 (S.D. N.Y. 1969) (failure by broker to disclose his
position as a market-maker).
Although the Tenth Circuit has fixed damages as of the date
that the buyer actually discovered, or should have discovered,
the seller’s fraud, Richardson v. MacArthur, 451 F.2d 35, 43-
44 (10th Cir. 1971); Esplin v. Hirschi, supra, 402 F.2d at 104,
we believe that under the allegations made in the instant case
the public discovery of the fraud may be the proper date at
which to ascertain damages. The circumstances may disclose
that only then did the market reflect the true value of the stock,
unaffected by what is alleged to have been the defendants’ con-
tinuing fraud:
re DELL SCOOPS
— A-38 —
[VJalue is determined by their [i.e., the securities’] market
price after the fraud is discovered when the price ceases to
be fictitious and represents the consensus of buying and
selling opinion of the value of the securities as they ac-
tually are.
* * *
In the majority of stock transactions the person seeking
recovery discovers the falsity of the misrepresentations at
the same time that it becomes known to the investing public
and, therefore, at a time when the price of the stock is no
longer inflated or depressed by the same or similar mis-
representations. It may be, however, that he discovers the
falsity of the representations either earlier or later than the
general public. In the first situation, his loss is de- [12]
termined by the actual value of the securities in question
shown by their market price after the public discovery of
the fraud brings the price into accord with the actual value.
In the second situation, where the person seeking recovery
does not learn of the falsity of the facts represented until
sometime after the general public has discovered it, the value
of the securities is fixed by the price at which they are sell-
ing at the time of his and not of the public’s discovery.
[Restatement of Torts § 549, comment c at 111, 112-13]°
The American Law Institute’s Federal Securities Code draft
adopts in principle this same reasoning:
The measure of damages * * * is (A), if the plaintiff is
a buyer, the difference between the amount that he paid
and the value of the security determined as of the time
specified in section 1402(e)(1) [i.e., when, inter alia, all
material facts became generally available to the investing
public.} [ALI, Federal Securities Code § 1402(f)(1)(A)
(Tent. Draft No. 2, 1973).]
* The Restatement (Second) of Torts retains this formulation of
the date for fixing damages. Jd. $549, comment c. at 30-32 (Tent.
Draft No. 11, 1965).
ee
F ———
7 —_ tt eae at LESS EIS ELT OO x Rae *
FER LEBEL LILLE CL LOLOL, ILE COE ee
— A-39 —
This proposed codification incorporates the common law rule for
the date of ascertaining damages. ALI, Federal Securities Code
§$ 1402(f)(1), comments (1)(b), (4)(b), (5) (b).*
[13] Thus, assuming, arguendo, the truth of Harris’ claims that
the actua] value of the securities cannot be established at or near
the date of purchase due to an artificially inflated market price of
long duration attributable to defendants’ fraudulent misrepre-
sentations, Harris may be able at the trial to establish an alternate
basis for recovery by introducing evidence of his damages as of
the date of public discovery of the fraud.
If Harris cannot make out a case justifying this rule of dam-
ages, he may nevertheless be able to prove at trial that the actual
value of the securities at the time of purchase was less than the
market price that he paid for them.
The district court did not purport to rely on these damage
rules in dismissing the action. We cannot say on the abbrevi-
ated record before us that plaintiff sustained no loss under either
of these rules for ascertainment of damages. These matters will
be before the district court upon the trial of this case. With this
background, we turn to the issue of mitigation of damages, the
basis on which the district court dismissed the case.
B. Mitigation of damages.
A defrauded buyer of securities may maintain an action [14]
for damages under § 10(b) and, presumably, § 18(a), even though
he continues to hold the securities. Pfeffer v. Cressaty, 223 F.
8 The appellees urge that Morrow v. Schapiro, 334 F. Supp. 399
(E.D. Mo. 1971), calls for the conclusion that the plaintiff in this
case has suffered no compensable injury. We do not read Morrow
to reach the issue presented here. In Morrow, the court assumed
that the market value of the plaintiff's securities, which was greater
than the purchase price, reflected—contrary to market value in the
instant case—nothing other than the actual value of the securities
and it reasoned that the plaintiff had therefore sustained no loss by
misrepresentations that might have induced his purchase. /d. at 401.
—
Supp. 756, 758 (S.D. N.Y. 1963); see Occidental Life Insur-
ance Co. v. Pat Ryan & Associates, supra, 496 F.2d at 1264-
65; Wolf v. Frank, supra, 477 F.2d at 478; Sackett v. Beaman,
399 F.2d 884, 891 (9th Cir. 1968); Johns Hopkins University
v. Hutton, 326 F. Supp. 250, 262 (D. Md. 1971), aff'd in part,
rev'd in part on other grounds, 488 F.2d 912 (4th Cir. 1973),
cert. denied, 416 U.S. 916 (1974). At common law, a de-
frauded purchaser of securities is under no duty to sell them
prior to maintaining an action for deceit but may hold them for
investment purposes if he chooses. See Hindman v. First Na-
tional Bank, 112 F. 931, 935-36 (6th Cir.), cert. denied, 186
U.S. 483 (1902); Hotaling v. A. B. Leach & Co., 247 N.Y. 84,
159 N.E. 870, 872 (1928); Stephens v. Wheeler, 193 Wis. 164,
213 N.W. 464, 468 (1927). Thus, Harris was under no duty
to sell his AIC stock, for mitigation of damages or any other
purpose, prior to commencing this action.
Where one has bought securities for long-term investment,
it would be inappropriate to apply a rule requiring him to sell
them prematurely for the benefit of the defrauding defendant.
As we have noted, Harris’ damages may be measured as of the
date of public discovery of the fraud. Under those circum-
stances,
(t]he plaintiff will not be able to avail himself of any fur-
ther decrease in the value of the security after that date.
So also the defendant should not be able to avail itself of
any increase in the value of the stock after that date. This
is the only method in which a consistent measure of dam-
ages can be obtained. [Cant v. Becker & Co., 379 F. Supp.
972, 975 (N.D. Ill. 1974).]
[15] Accord, O'Hara v. Derschug, 241 App. Div. 513, 272
N.Y.S. 189, 198 (1934). See also Beecher v. Able, No. 66 Civ.
3471, CCH Fed. Sec. L. Rep £95,016 at 97,561 (S.D. N.Y.
Mar. 17, 1975) (no need for plaintiff to mitigate damages in ac-
tion under §11(a) of the Securities Act of 1933, 15 U.S.C. §77k
PEGI OIE EL BIS PB LE LIEN Oe ie REPT SITE ESL
— |
(a) (1970), by selling stock after statutory date for measure-
ment of damages).
Consequently, we reject the appellees’ contention that Harris
was under a duty, after discovery of the fraud, to sell his AIC
stock for the benefit of the appellees. By continuing to hold the
stock after that date Harris has, in effect, made a second in-
vestment decision unrelated to his initial decision to purchase
the stock. As the court observed in Cant v. Becker & Co.,
supra, 379 F. Supp. at 975, what happens after this second de-
cision has no bearing whatsoever on the measure of plaintiff's
damages.
II. Other Issues
Harris requests that, if we should reverse the district court’s
ruling on damages, we should also certify counts I and II as a
class action. He contends that he is entitled as a matter of law
to bring this case as a class action. We decline the invitation
to decide at this juncture of the case whether it should proceed
as a class action.
The district court dismissed the class action with respect to
counts I and II because it had determined that Harris could
recover no damages on his individual claims under these counts
and therefore could not adequately represent all defrauded pur-
chasers of AIC stock. Until the district court can reconsider
Harris’ adequacy as a representative of a proper class, we deem
it inappropriate to evaluate the [16] propriety of a class action.
Accordingly, the appeal on this issue is dismissed.
Harris also seeks our review of the district court's order dis-
missing without prejudice the allegations contained in count IV,
a derivative action. As we have noted, this dismissal rested
upon the failure of the appellant to plead specifically, as re-
—
quired by Fed. R. Civ. P. 23.1(1), that he was a stockholder at
the time of the commission of the alleged wrongs by the direc-
tors and officers of the corporation.
According to Harris’ contention, he has discussed certain of
the events referred to in count IV in detail in other counts of
his complaint. He contends that by reference to these allega-
tions in other counts, count IV should be construed as alleging
that he held stock at the time that defendants were guilty of
misconduct in managing AIC.
This contention was apparently not presented to the district
court, for the court stated that “the failure of the plaintiff to
set out the date of the alleged wrongdoing or that any of the
alleged wrongdoings continued after he [Harris] acquired his
stock on August 4, 1969, * * * [caused the court to assume
that] plaintiff cannot allege facts to support Count IV.” [378 F.
Supp. at 899.] Since the trial court entered this dismissal of
count IV without prejudice, Harris is free to present this con-
tention to the district court on remand and to seek leave to
amend count IV to show that acts of misconduct by the directors
and officers occurred after he had become a stockholder. Under
these circumstances, we do not reach the merits of this issue
raised by appellant-Harris.
{17} III. Summary
In summary, we reach no issue on this appeal other than that
of damages. We reverse the grant of summary judgment on
Harris’ individual claims under counts I and II. Lest our opin-
ion be misunderstood, we do not hold that plaintiff has made
out a case entitling him to damages if he is able to prove fraudu-
lent misrepresentations or omissions by the defendants.* We
* In order to recover any damages Harris must, on remand, prove
all the elements for recovery under $10(b) and Rule 10b-5, see, e.g.,
GEOR SEAS SAG OSI DET MEINE
—
Se SS eal iat ae tele ee Eee
on file
hold only that on the record before us it cannot be said as a
matter of law that Harris cannot collect damages even if he
should establish the existence of the alleged fraudulent mis-
representations and omissions.
A true copy.
Attest:
Clerk, U.S. Court of Appeals, Eighth Circuit
Myzel v. Fields, 386 F.2d 718, 733-37 (8th Cir. 1967), cert. denied,
390 U.S. 951 (1968), or §18(a), see Heit v. Weitzen, 402 F.2d 909,
914-16 (2d Cir. 1968), cert. denied, 395 U.S. 903 (1969). Among
these elements is reliance by Harris upon the defendants’ omissions
and misrepresentations, more acurately characterized as causation in
fact. E.g., Clegg v. Conk, 507 F.2d 1351, 1361 n.14 (10th Cir.
1974), petition for cert. filed, 43 U.S.L.W. 3531 (U.S. Mar. 4, 1975)
(No. 74-1096). See also Affiliated Ute Citizens v. United States,
406 U.S. 128, 153-54 (1972); Schlick v. Penn-Dixie Cement Corp.,
507 F.2d 374, 380-81 (2d Cir. 1974); Globus v. Law Research
Service, Inc., 418 F.2d 1276, 1291-92 (2d Cir. 1969), cert. denied,
397 U.S. 913 (1970); Werfel v. Kramarsky, 61 F.R.D. 674, 681
(S.D. N.Y. 1974); Shapiro v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 353 F. Supp. 264, 274-79 (S.D. N.Y. 1972), aff'd, 495 F.2d
228, 238-41 (2d Cir. 1974). See generally Note, Reliance Require-
ment in Private Actions under SEC Rule 10b-5, 88 Harv. L. Rev.
584, 587-96 (1975).
EASA IDOLE ET ADELE LEI TEL LA LE ALLL LALO ATLA LILIA IE AELEL DS AED IAN a
ener eo
APPENDIX E
Section 10(b), Securities Exchange Act of 1934, 15 U.S.C.
§ 78j(b)
Manipulative and deceptive devices
It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any national
securities exchange—
* * * - * nd *
(b) To use or employ, in connection with the purchase
or sale of any security registered on a national securities
exchange or any security not so registered, any manipula-
tive or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may prescribe
as necessary or appropriate in the public interest or for the
protection of investors.
Section 18(a), Securities Exchange Act of 1934, 15 U.S.C.
§ 78r(a)
Liability for misleading statements
(a) Any person who shall make or cause to be made any
statement in any application, report, or document filed
pursuant to this chapter or any rule or regulation there-
under or any undertaking contained in a registration state-
ment as provided in subsection (d) of section 780 of this
title, which statement was at the time and in the light of the
circumstances under which it was made false or misleading
with respect to any material fact, shall be liable to any per-
son (not knowing that such statement was false or mislead-
ing) who, in reliance upon such statement, shall have pur-
chased or sold a security at a price which was affected by
eae
aay, pen
such statement, for damages caused by such reliance, unless
the person sued shall prove that he acted in good faith and
had no knowledge that such statement was false or mis-
leading. A person seeking to enforce such liability may
sue at law or in equity in any court of competent juris-
diction. In any such suit the court may, in its discretion,
require an undertaking for the payment of the costs of such
suit, and assess reasonable costs, including reasonable at-
torneys’ fees, against either party litigant.
Reg. § 240.10b-5 (Rule 10b-5), Employment of Manipu-
lative and Deceptive Devices
Reg. § 240.10b-5. It shall be unlawful for any person,
directly or indirectly, by the use of any means or instru-
mentality of interstate commerce, or of the mails, or any
facility of any national securities exchange,
(a) to employ any device, scheme, or artifice to defraud,
(b) to make any untrue statement of a material fact or
to omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances under
which they were made, not misleading, or
(c) to engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person,
in connection with the purchase or sale of any security.
eS
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.