## Facts

- Leasco Data Processing Equipment Corporation sought to acquire Reliance Insurance Company through an exchange offer in which Reliance shareholders would receive Leasco preferred stock plus warrants.
- The exchange offer required a registration statement under the Securities Act of 1933.
- Reliance, as a regulated insurer using statutory accounting, held a large excess surplus that could potentially be released over time (described by the court as “surplus surplus”), representing assets not required to operate the insurance business.
- Leasco’s management viewed the possibility of gaining control of a very large amount of these releasable assets as a major economic driver of the acquisition.
- The registration statement provided extensive financial data and narrative disclosure but did not plainly disclose that a central motivation and potential consequence of the transaction was access to Reliance’s potentially releasable surplus assets.
- Dudley Feit, a Reliance shareholder who exchanged stock in the offer, sued on behalf of a class alleging the registration statement was materially misleading under § 11 due to the omission.

## Issues

1. Whether the registration statement omitted a material fact by failing to disclose the substantial possibility that Leasco could gain control over a large amount of Reliance’s releasable surplus assets, rendering the statement misleading under Securities Act § 11.
2. What level of candor federal securities law requires in a registration statement for an exchange offer used to effect a takeover.
3. Whether Leasco and other defendants (including underwriters and associated individuals) established § 11 defenses such as reasonable investigation, reasonable grounds for belief, or reliance on experts given the handling of the surplus-related information.

## Decision

- The court held Leasco’s registration statement was materially misleading and imposed liability under Securities Act § 11 for the omission of the substantial possibility of accessing Reliance’s releasable surplus assets.
- The court found the omitted surplus-related information was material because a reasonable investor would consider it important in deciding whether to exchange Reliance shares for Leasco securities.
- The court rejected the argument that uncertainty about the precise amount or timing of releasable surplus excused non-disclosure; defendants were required to disclose the existence and significance of the possibility with appropriate cautionary explanation.
- The court largely rejected asserted § 11 defenses, concluding the investigation and disclosure judgments were not “reasonable” in light of the centrality of the omitted matter to the transaction.

## Legal Principles

- A registration statement violates Securities Act § 11 if it omits a material fact necessary to make the disclosed statements not misleading.
- Materiality is assessed from the viewpoint of a reasonable investor and includes qualitative, transaction-defining information, not only numerical data.
- In takeover exchange offers, the registration statement must fairly present the economic substance of the deal, including key motives and expected benefits known to those responsible for the issuance.
- Voluminous disclosure does not cure a strategic omission; extensive data cannot substitute for clear disclosure of a critical transaction feature.
- Uncertainty about magnitude or outcome does not justify silence about a central economic possibility; disclosure may be made with warnings and limits on precision.
- Section 11 due-diligence defenses require a rigorous showing of reasonable investigation and reasonable belief in the statement’s completeness; reliance on technical accounting or formal compliance is insufficient when a key economic fact is omitted.

## Conclusion

The court held that an exchange-offer registration statement must disclose, in clear terms, major economic drivers and consequences of the transaction; Leasco’s failure to disclose the substantial possibility of accessing Reliance’s releasable surplus assets was a material omission under § 11, and the defendants’ asserted due-diligence defenses did not avoid liability.


Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544 (E.D.N.Y. 1971)