## Facts

- Law Research Service, Inc. (LRS) conducted a Regulation A public offering of 100,000 shares, with Blair & Co., Granbery Marache Inc. (Blair) as underwriter.
- Blair participated in preparing and distributing an offering circular to investors.
- The circular highlighted LRS’s contract with Sperry Rand as a major business asset.
- The circular did not disclose that LRS and Sperry Rand were in a serious dispute, that Sperry Rand had curtailed services, and that LRS had sued Sperry Rand.
- Purchasers, including Morton Globus, claimed the omission was material and rendered the circular misleading.
- Plaintiffs sued LRS, its president Ellias C. Hoppenfeld, and Blair under § 17(a) of the Securities Act of 1933, § 10(b) and Rule 10b-5, and for common-law fraud.
- A jury found federal securities violations and awarded compensatory and punitive damages against LRS, Hoppenfeld, and Blair, but found no common-law fraud.
- Blair sought contractual indemnification from LRS under the underwriting agreement; the jury awarded it, but the district court set the indemnity verdict aside as contrary to public policy given the findings against Blair.

## Issues

1. Whether punitive damages are available in a private civil action based on § 17(a) of the Securities Act of 1933.
2. Whether an underwriter may obtain contractual indemnification from the issuer for liability arising from a materially misleading offering circular when the underwriter had actual knowledge of the misstatements or omissions.

## Decision

- The Second Circuit held that punitive damages are not recoverable in private actions based on § 17(a).
- The court affirmed the district court’s refusal to enforce Blair’s indemnification claim against LRS where the underwriter had actual knowledge of the misleading disclosure.
- Punitive damages awards premised on § 17(a) were set aside as legally impermissible.

## Legal Principles

- Implied private causes of action under § 17(a) are limited to compensatory relief; punitive damages are not part of the remedial scheme.
- The structure of the federal securities laws—express civil remedies coupled with SEC enforcement and criminal sanctions—reflects a compensatory model for private recovery rather than punitive awards.
- Contractual indemnification that shifts an underwriter’s liability to the issuer is unenforceable as against federal public policy when the underwriter knowingly disseminated materially misleading offering materials.
- Permitting full indemnity for knowing securities-law violations would weaken the underwriter’s independent disclosure-checking role and reduce the deterrent effect of the securities laws.

## Conclusion

The Second Circuit barred punitive damages in private § 17(a) litigation and held that an underwriter with actual knowledge of material misstatements or omissions in offering documents cannot enforce contractual indemnification against the issuer because it conflicts with the disclosure and deterrence policies of federal securities law.


Globus v. Law Research Serv., Inc., 418 F.2d 1276 (2d Cir. 1969)