Here’s a good law school exam question — does a finding of liability under Rule 10b-5 in a private securities case require a reward of damages? The U.S. Court of Appeals for the Fourth Circuit submitted an essay answer today in the form of an opinion in Miller v. Asensio & Co., Inc., No. 03-1225 (4th Cir. April 14, 2004).
Asensio was a short seller that publicized negative statements about Chromatics Color Sciences Int., Inc. (“CCSI”), a company in which it had a significant short sell interest. Stockholders of CCSI sued Asensio alleging that the statements were material misrepresentations, “which Asensio initiated to defraud the market for its benefit, and which caused their CCSI stock to decline in value resulting in substantial losses to them.” After a trial, the jury returned a verdict finding Asensio liable, but awarding $0.00 in damages. On appeal, the stockholders argued that the finding of liability required the award of damages in some amount.
The Fourth Circuit disagreed (after noting that the issue was one of first impression). Courts “often refer to the fact of proximately caused damage and the amount of proximately caused damage as involving separate, although related, inquiries.” To establish Rule 10b-5 liability, a plaintiff only has to prove that the defendant’s misrepresentation was a “substantial cause of the loss” by showing a “direct or proximate relationship between the loss and the mispresentation.” Accordingly, a jury could find that “(1) the plaintiff proved the defendant’s fraud constituted a substantial cause of plaintiff’s loss and so find the defendant liable but (2) the plaintiff failed to provide a method to discern, by just and reasonable inference, the amount of plaintiff’s loss solely caused by defendant’s fraud, and so refuse to award the plaintiff any damages.”
Applying these principles to the case in hand, the Fourth Circuit found that “the evidence at trial provided the jurors with a sound basis on which to reach the result they did.”
Quote of note: “In the vast majority of cases, a finding of the fact of proximately caused loss will result in the award of some amount of damages. However, it would seem contrary to Congress’ mandate that a plaintiff prove that the defendant ’caused the loss,’ 15 U.S.C. § 78u4(b)(4), and that no plaintiff ‘shall recover . . . a total amount in excess of his actual damages on account of the act complained of,’ 15 U.S.C. § 78bb(a), to direct a jury that it must award damages, even if faced, as here, with a record from which it cannot do so.”