## Facts

- Douglas Aircraft Company, Inc. (Douglas) issued and sold $75 million of 4¾% convertible subordinated debentures due July 1, 1991 under a registration statement and prospectus that became effective July 12, 1966.
- Purchasers of the debentures filed several actions in 1966 alleging violations of § 11 of the Securities Act of 1933, naming Douglas and other defendants connected to the offering (including individuals and offering participants).
- The actions were consolidated in the Southern District of New York, and the court bifurcated trial of the § 11 claims into liability and damages phases.
- On liability, plaintiffs challenged, among other disclosures, Douglas’s prospectus statement predicting that the company would “break even” for the relevant fiscal year (understood as roughly a small profit or small loss).
- Plaintiffs also challenged the prospectus description of the intended use of offering proceeds, contending it created a misleading impression because Douglas in fact used essentially all proceeds to repay short-term bank debt.
- The court found the “break-even” prediction materially misleading because it lacked adequate support in the company’s then-known conditions and omitted facts needed to make the prediction not misleading.
- The court also found the “use of proceeds” disclosure materially misleading in light of how Douglas actually planned to (and did) apply the proceeds.
- For damages under § 11(e), the parties disputed how to determine the debentures’ “value” at the time suit was brought:
  - Plaintiffs argued the debentures’ true value was below their trading price because Douglas was experiencing a financial crisis not fully reflected in the market.
  - Douglas argued the debentures’ true value was above their trading price based on prospects for recovery, and it sought a reduction for value declines allegedly caused by later events, including a release of poor third-quarter earnings that Douglas claimed triggered panic selling.

## Issues

1. Whether the registration statement/prospectus contained untrue statements of material fact or omitted material facts necessary to make the statements not misleading, creating liability under Securities Act § 11.
2. Whether Douglas’s “break-even” earnings prediction was materially misleading under § 11 when issued without a reasonable basis and without disclosure of facts needed to assess the prediction.
3. Whether Douglas’s description of the use of offering proceeds was materially misleading under § 11 when the proceeds were substantially used to repay short-term bank debt.
4. How damages should be measured under § 11(e), including how to determine the security’s “value” at the time suit was brought and whether market price is conclusive of that value.
5. To what extent defendants may reduce § 11(e) damages by proving that some or all of the price decline resulted from causes other than the actionable misstatements or omissions (negative causation), including later earnings disclosures and market reactions.

## Decision

- The court held that Douglas’s prospectus contained a materially false and misleading “break-even” prediction and that the registration materials omitted facts necessary to make the prediction not misleading, establishing § 11 liability.
- The court also held that the prospectus materially misstated or misleadingly described the planned use of proceeds from the debenture offering, further supporting § 11 liability.
- The court rejected the issuer’s attempt to avoid liability through a § 11 “due diligence” showing, because that statutory defense is not available to an issuer.
- On damages, the court applied § 11(e)’s statutory framework and determined “value” at the time suit was brought using the evidentiary record rather than treating the debentures’ trading price as automatically controlling.
- The court recognized that § 11(e) permits a negative causation reduction if defendants prove that some portion of the decline in value was attributable to other causes (such as later disclosed bad news or market conditions), and it evaluated Douglas’s arguments (including alleged panic selling after earnings news) under that standard.

## Legal Principles

- § 11 imposes civil liability when a registration statement contains an untrue statement of a material fact or omits a material fact required to be stated or necessary to make statements not misleading; a purchaser need not prove scienter.
- Materiality is assessed by whether a reasonable investor would consider the misstated or omitted information important in making an investment decision.
- Forward-looking statements, including earnings projections, can be actionable under § 11 when they imply a factual basis that is not reasonably supported or when material adverse facts are withheld such that the projection becomes misleading.
- An issuer is strictly liable under § 11 for material misstatements or omissions in its registration statement; the statutory “due diligence” defense is unavailable to the issuer.
- Under § 11(e), damages generally are measured by the difference between the amount paid (subject to statutory limits) and the security’s value at the time suit was brought (or applicable statutory alternatives if the security was disposed of before suit).
- Market price may be relevant evidence of “value” under § 11(e), but the court may determine value based on the record where the evidence shows market price does not reliably reflect value.
- § 11(e) allows a negative causation defense: defendants may reduce or eliminate damages by proving that some or all of the loss was caused by factors other than the misstatement or omission.

## Conclusion

Beecher held Douglas Aircraft liable under § 11 for selling debentures pursuant to offering materials that materially misled investors through an unsupported “break-even” forecast and a misleading use-of-proceeds disclosure, and in a later opinion the court set § 11(e) damages by determining the debentures’ value at the time suit was brought without treating market price as conclusive while allowing reductions only to the extent Douglas proved loss from other causes.


Beecher v. Able, 374 F. Supp. 341 (1974), 435 F. Supp. 397 (1975)