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Damages Available in Rule 10b5 Action

44. What damages are available to a plaintiff under Section 10(b) and Rule 10(b)(5)?

While both the SEC and a private plaintiff may enforce the antifraud provisions of Section 10 and Rule 10(b)(5), only purchasers or sellers of securities may bring a private action for damages under Rule 10(b)(5). A private plaintiff in a suit under 10(b)(5) may recover for the actual damages suffered as a result of purchasing the security. As part of the action, a buyer must allege specific damages due to the seller’s fraud. The measure of damages is generally the difference between what is paid over the value of the security received. The measure of a defrauded seller’s damages is the difference between the fair value of all that the seller received and the fair value of what he or she would have received had there been no fraud. In an SEC action under 10(b)(5), the civil penalty for gaining illegal profits with nonpublic information is three times the profits gained. The statute of limitation is 5 years from the wrongful transaction.

•    Note: A purchaser may also be entitled to receive consequential damages from the purchase of securities. Consequential damages include lost dividends, brokerage fees, and taxes. The court may also order payment of interest on funds. Punitive damages for the conduct are not available.

•    Discussion: Why do you think the law allows for different calculations of damages for injured shareholders versus damages in actions by the SEC?

•    Practice Question: ABC Corp issues securities last year. The shares sold for $10 each. The S-1 that they filed contained some materially incorrect information supplied by the CEO. Since that time, the shares have dropped to $5 each on the public market, which reflects the real value of the shares at the time of issuance. Amy is a shareholder who purchased 100,000 shares. She and the SEC are bringing an action against ABC under Rule 10(b)(5). What are the potential damages against ABC?

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