Chapter 16 - § 16.7 • DAMAGES UNDER RULE 10b-5

• Jurisdiction: Colorado

§ 16.7 • DAMAGES UNDER RULE 10b-5

It is important to note that a plaintiff who proves the defendant's liability under Rule 10b-5 is not necessarily entitled to an award of damages. In Tse v. Ventana Medical Systems, Inc.,¹⁸¹ shareholders of an acquired corporation unsuccessfully alleged securities fraud when the court found that they failed to establish that the corporation's conduct caused them any economic loss.

Damages under § 10(b) and Rule 10b-5 are generally designed to compensate the plaintiff and to punish the defendant when liability is shown. Section 28 of the 1934 Act specifies that any rights created by the Act will not preempt any other rights or remedies a plaintiff has in law or equity, but also provides that "no person permitted to maintain a suit for damages under the provisions of this title shall recover . . . a total amount in excess of [his actual damages] on account of the act complained of."

Thus, punitive damages under the 1934 Act are not allowed.¹⁸² However, § 28 provides a "flexible limit" that is not exceeded even when the damages awarded "place a § 10(b) plaintiff in a better position than he would have been in absent the fraud."¹⁸³ The damages must be attributable to the wrong, however. In Randall v. Loftsgaarden,¹⁸⁴ the Supreme Court said, '"[I]t is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them.'" Similarly, in SEC v. J.T. Wallenbrock & Associates,¹⁸⁵ the SEC and the courts rejected claims from the defendants that they should be given credit for "business expenses" of $36 million to reduce a disgorgement order for more than $164 million. The court declared that it would be "unjust to permit the defendants to offset against the investor dollars they received the expenses of running the very business they created to defraud those investors."¹⁸⁶ In assessing the appropriateness of a sentencing determination (not civil liability), the Eighth Circuit found that the trial court could ignore profits that the initial Ponzi victims received for the purposes of determining total scheme losses and the appropriate prison term under the sentencing guidelines.¹⁸⁷

The courts have not allowed recovery when the plaintiff's losses are attributable to events beyond the defendant's fraud. The deterrent effect of potential liability under Rule 10b-5 would be "ill-served by a too rigid insistence on limiting the plaintiffs to recovery of their 'net economic loss.'"¹⁸⁸

In...