Law School Case Brief
Akerman v. Oryx Commc'ns, Inc. - 810 F.2d 336 (2d Cir. 1987)
Section 12(2) of the Securities Act of 1933 imposes liability on persons who offer or sell securities and only grants standing to the person purchasing such security from them. 15 U.S.C.S. § 77l(2). This provision is a broad anti-fraud measure and imposes liability whether or not the purchaser actually relied on the misstatement.
On June 30, 1981, Oryx Communications, Inc. (Oryx) conducted an initial public offering. Oryx filed a registration statement and an accompanying prospectus dated June 30, 1981, with the Securities and Exchange Commission (SEC) for a firm commitment offering of 700,000 units. Each unit sold for $4.75 and consisted of one share of common stock and one warrant to purchase an additional share of stock for $5.75 at a later date. The prospectus contained an erroneous pro forma unaudited financial statement relating to the eight month period ending March 31, 1981. It reported net sales of $931,301, net income of $211,815, and earnings of seven cents per share. Oryx, however, had incorrectly posted a substantial transaction by its subsidiary to March instead of April when Oryx actually received the subject sale's revenues. The prospectus, therefore, overstated earnings for the eight month period. Oryx’s price subsequently declined, and, after a public disclosure of the mistake, the price rose. Thereafter, plaintiffs, Morris and Susan Akerman and Dr. Lawrence Kuhn, instituted an action alleging that the prospectus error rendered Oryx liable for the stock price decline pursuant to sections 11 and 12(2) of the Securities Act of 1933. In July 1982, Oryx moved for summary judgment on the grounds that the misstatement was not material for purposes of establishing liability under section 11 and that the misstatement had not actually caused the price decline for purposes of damages under section 11. Oryx also moved for summary judgment on the section 12(2) claims, again arguing that the error was immaterial and also that plaintiffs lacked privity as required under section 12(2), to maintain a suit against Oryx as an issuer because the offering was made pursuant to a firm commitment underwriting. The district court held that the plaintiffs had established materiality as a theoretical matter for purposes of establishing liability under sections 11(a) and 12(2). The court, however, granted summary judgment in favor of Oryx with respect to section 11 because it had established that the prospectus error did not actually result in any part of the stock price decline. The district court also granted summary judgment to Oryx with respect to section 12(2), holding that plaintiffs lacked the privity required to maintain an action against Oryx as the issuer, not the immediate seller of the securities in question.
Was the grant of summary judgment in favor of Oryx proper?
The Court affirmed the summary judgment in favor of Oryx with regard to Section 11 of the Securities Act of 1933. According to the Court, Oryx established that the error in the prospectus did not cause the stock price decline. The misstatement was an innocent bookkeeping error, and the prospectus had expressly stated that the issuer expected the subsidiary's sales to decline. As regards Section 12 of the Securities Act of 1933, the Court affirmed that the plaintiffs lacked privity to maintain an action against defendant issuer because § 12(2) of the Securities Act granted standing only to the person who purchased securities from the seller.
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