Akerman v. Oryx Communications, Inc.
810 F.2d 336 (1987)
Rule of Law:
Under Section 11(e) of the Securities Act of 1933, a defendant can defeat liability for a material misstatement in a registration statement by carrying the burden of proving that the plaintiff's loss in value was caused by factors other than the misstatement.
Facts:
- Oryx Communications, Inc. conducted an initial public offering of securities on June 30, 1981, with units offered at $4.75.
- The prospectus for the offering contained an erroneous unaudited financial statement that overstated net sales, net income, and earnings per share for an eight-month period.
- The error was the result of an innocent bookkeeping mistake, where a subsidiary's sales revenue was incorrectly recorded in March instead of April.
- By October 12, 1981, before the error was disclosed, the unit price had declined from $4.75 to $4.00.
- Oryx disclosed the misstatement to the Securities and Exchange Commission (SEC) on October 13, 1981.
- By November 9, 1981, the unit price had further declined to $3.25.
- Oryx publicly disclosed the misstatement on November 10, 1981.
- Following the public disclosure, the price of Oryx units rose to $3.50 by November 25, 1981.
Procedural Posture:
- Morris Akerman and other plaintiffs sued Oryx Communications, Inc. and its underwriters in the U.S. District Court for the Southern District of New York, alleging violations of Sections 11 and 12(2) of the Securities Act of 1933.
- Defendants moved for summary judgment.
- The district court held that the misstatement in the prospectus was 'material as a theoretical matter' for establishing liability.
- However, the district court granted summary judgment to all defendants on the Section 11 claim, ruling that they had successfully established the affirmative defense under Section 11(e) by proving the misstatement did not cause the stock's price decline.
- The district court also granted summary judgment to Oryx on the Section 12(2) claim, holding that the plaintiffs lacked the required privity with the issuer in a firm commitment underwriting.
- The plaintiffs (appellants) appealed the district court's grants of summary judgment to the United States Court of Appeals for the Second Circuit.
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Issue:
Does a defendant in a Section 11 securities claim successfully establish the affirmative defense of 'negative causation' under Section 11(e) by demonstrating with market evidence that a stock's price decline was caused by factors other than the material misstatement in the registration statement?
Opinions:
Majority - Meskill, Circuit Judge
Yes, a defendant can successfully establish the affirmative defense of negative causation under Section 11(e) by proving the stock's price decline resulted from factors other than the material misstatement. The court reasoned that while the misstatement was 'theoretically material,' the defendants met their heavy burden under Section 11(e) to prove it did not cause the plaintiffs' loss. The most compelling evidence was the market's reaction; after the error was publicly disclosed, the stock price did not fall but actually rose slightly. The price decline that occurred before public disclosure cannot be attributed to the misstatement. Plaintiffs failed to provide any credible evidence of insider trading during the period between SEC disclosure and public disclosure, and their statistical studies were deemed unreliable because they failed to control for other variables influencing stock prices. Given that the defendants' evidence was strong and the plaintiffs' was not 'significantly probative,' no genuine issue for trial existed.
Analysis:
This case clarifies the application and strength of the 'negative causation' affirmative defense under Section 11(e) of the Securities Act of 1933. It establishes that defendants can defeat a Section 11 claim at the summary judgment stage, even where a misstatement is technically material, if they can produce strong evidence that the misstatement did not cause the investor's damages. The court's focus on the actual market reaction to the corrective disclosure provides a key evidentiary path for defendants. This ruling underscores that causation is a critical element for damages and that speculative theories or flawed statistical analyses are insufficient to overcome concrete market data showing a lack of adverse impact.
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