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Causation in fact is an essential element of a private cause of action for securities fraud under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j and Rule 10b-5, 17 C.F.R. § 240.10b-5. In order to prevail in an action for securities fraud under § 78j and Rule 10b-5, a plaintiff must show some causal nexus between the defendant's wrongful conduct and the plaintiff's loss. Under the materiality element of the causation factor, a plaintiff must show that the misrepresentation or omission would likely have influenced in reasonable or objective contemplation the seller's decision to sell.
Defendants were a corporation and its officers. Plaintiffs were the executors for the estate of a former officer and a shareholder of defendant corporation. After the former officer died, the corporation exercised its option to purchase stock owned by the deceased. The wife of the deceased accepted the offer of purchase, but plaintiff executors objected when defendant corporation went public shortly after the purchase. Plaintiffs instituted an action involving violations of securities fraud under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j and Rule 10b-5, 17 C.F.R. § 240.10b-5, common law fraud, and breach of fiduciary duty. According to the plaintiffs, the decision to go public was made by a tightly knit group of insiders within the company's management hierarchy before the company purchased the stock. Plaintiffs alleged that their stock was purchased in furtherance of a fraudulent scheme on the part of the inside group to enhance the price at which the company's stock was to be offered to the public and to maintain and preserve their control of company management after public ownership. After a nonjury trial, the court held that the option was unenforceable under Delaware law and was fraudulently exercised by the defendants to the detriment of the plaintiffs in order to increase the per share earnings of the corporation’s stock prior to the public offering and to maintain management control.
Under the circumstances, did the defendant purchase the stock in furtherance of a fraudulent scheme, thereby rendering the option unenforceable?
The court held that defendant was entitled to purchase the stock under the stock restriction that was part of defendant's incorporation certificate. The court did not find fraud on the part of defendants. There was no causation. Any loss that plaintiffs experienced was caused by events unrelated to fraud. Because of the stock restriction and the death of the shareholder, plaintiffs were obligated to sell their stock to defendant.