Elkind v. Liggett & Myers, Inc.

Brief Fact Summary. On behalf of stockholders, Elkind  (Plaintiff), sued Liggett & Myers Inc.(Liggett) (Defendant), after Liggett officers purportedly “tipped†financial analysts employed by Liggett’s regarding expected drops in Liggett stock, causing the selling of said stock the analyst’s clients, while ignorant plaintiff shareholders kept their shares.

Synopsis of Rule of Law. Claiming a loss as a result of selective disclosure of nonpublic quantifiable information, a plaintiff is able to recover the drop in market value of his shares from prior to him being aware of the information or it becoming public, up to the limits of the gain recognized by tippees of such information, in an action under Rule 10b-5 of the Securities
Exchange Act of 1934.

Facts. A diversified company, Liggett & Myers, Inc. (Liggett), had financial analysts in their employ to participate in a public relations operation.  One of the analysts communicated with Liggett’s Director of Corporate Communications via telephone on July 10, 1972, and was met with a noncommittal response to his anticipated revenue inquiry. The analyst sent a wire to his firm’s bureaus, informing them that one of the firms’ customers sold 100 Liggett shares as a result of an adversarialdeduction taken from the Director’s reply. On July 17, an analyst from a different firm question Liggett’s Chief Financial Officer if it was anticipated that revenue would drop. It is purported that the officer responded with a “grudging†confirmation, also stating that it was “confidential.â€Â  Regardless, the analyst reported to his firm and its clients sold 1,800 shares of Liggett. Elkind, on behalf of Liggett’s ignorant shareholders, filed suit against the corporation under Rule 10b-5, promoted under the Securities Exchange Act of 1934 for producing the disclosures, following a July 18 press release containing the information that Liggett put out. Liggett’s per share price was $55 5/8 on July 17 and following the press release, by July 19, dropped to $46 3/8. The district court awarded the damages by taking the difference between what the plaintiff class paid for their stock and what they would have received if there had been a public disclosure, amounting to over $1 million, including the prejudgment interest. Liggett appealed.

Issue. In claiming a loss as a result of selective disclosure of nonpublic quantifiable information, can a plaintiff recover the drop in market value of his shares from prior to him being aware of the information or it becoming public, up to the limits of the gain recognized by tippees of such information, in an action under Rule 10b-5 of the Securities Exchange Act of 1934?

Held. (Mansfield, J.) Yes. When claiming a loss as a result of selective disclosure of nonpublic quantifiable information, a plaintiff can recover the drop in market value of his shares from prior to him being aware of the information or it becoming public, up to the limits of the gain recognized by tippees of such information, in an action under Rule 10b-5 of the Securities Exchange Act of 1934. The district court discovered two “tips†of significant inside information: the statements of July 10 and 17. The lone 10b-5 violation was in the July 17 announcement, and the court reviewed the damage award grounded in this violation. The “out-of-pocket†application of damage awards is unsuitable in this case. While there is secret information, the “value†of the traded stock is imaginary; the application is dependent upon presumptions that (1) a prior disclosure would have the exact effect the later one did, and that (2) the information that was later disclosed was the same as the info that was “tipped.â€Â  The “causation in fact†tactic permits recovery for the degradation of the market price that can be traced to the tippees’ unlawful trading. Due to recovery not being an option for failing to disclose prioer to trading and due to it being almost impossible to demonstrate when and how the tippees’ behavior influenced the market, this is not a permissible formulation.  The “disgorgement measure†is another mention which we accept. Claiming a loss due to selective disclosure of significant private information, a plaintiff may recover the drop in market value of his shares from prior to when he was aware of the information or when it became public, up to the limits of the gain recognized by the tippees of such information, in an action under Rule 10b-5 under the 1934 Act. The difference between the price paid for their shares and the price the shares dropped to within a reasonable timeframe following the press release should have been received by Elkind. They are restricted to recovery of gain recognized by the tippees in selling the 1,800 shares traded following the July 17 communication. Reversed and remanded. 

Discussion. An alteration of the “out-of-pocket†invention which strives to strengthen valuations is called the “disgorgement measureâ€. The objective is to make the calculation less abstract, while not impeding recovery for the severe loss suffered due to the unawareness of a certain class of shareholders, while the “tippee†class profits.