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CA Forum Report
Explanation of “Ownership” Basis for
Restitution
Reactions to the
March 15, 2005 Forum Report’s summary of “ownership” injuries as an
alternative to “trading” injuries for Restitution Fund distributions
suggests a need for more attention to the issue.
First, the terms were used to distinguish between two different
types of injuries to investors, as follows:
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“Trading” injuries: Most investors are accustomed to
addressing only the “trading” type of injury, since that is all that can be
recovered in civil class actions under the Private Securities Litigation
Reform Act of 1995 (“PSLRA”). Widely applied by an established community of
specialized professionals with standardized practices, these class actions
are based on securities laws against fraud. The injury to an investor is
viewed essentially as the amount by which his purchase price of securities
was inflated by the fraud, measured generally by the price to which the
securities drop in the marketplace immediately after the fraud is publicly
exposed.
§
“Ownership” injuries: Damage to the intrinsic value of
investment property resulting from management misconduct is often ignored
when the property is owned by public investors. (This may be because there
has been no established equivalent of the PSLRA class action process for
seeking remedies. Observations are very different when an enterprise is
owned by one or a few investors, whose efforts to recover damage to their
property are often vigorous.) Damage to the owner’s property can result
from all kinds of management misconduct, including the fraud that also
cheats investors in the price they pay for the investment.
Example of Conduct Causing Both Types of Injury
An example of how fraudulent conduct generates both “trading”
and “ownership” injuries can be seen in CA’s past practice of executing
contracts after the end of the period for which the sale revenue was
accounted.
This fraud contributed to false reports that inflated the price
investors paid for stock, which is the “trading” injury for which recovery
was obtained in the recently settled PSLRA class action.
But this misconduct also caused significant damage to CA’s
business enterprise, independently of the fraudulent pricing of securities.
In addition to the relatively insignificant direct costs of dispatching
executives on corporate jets to collect falsely dated signatures, the act of
seeking a client’s cooperation in the fraud would have much greater,
enduring effects on the company’s ability to generate profits. Many clients
or prospective clients would be offended by the practice and decide not to
do business with CA. And of those who accepted or ignored the practice, it
must be assumed that at least some knew that they could demand something –
reduced prices or other accommodations – in return for their tolerance.
Similarly, employees or prospective employees who knew about the practice
might not want to work for CA, or, worse, might see cooperation as a corrupt
career opportunity. The resulting lost revenues, increased costs, and
compromised relationships continue to damage the property of CA investors
today, impairing the intrinsic value of their “ownership” interests.
Different Injuries Resulting From Same Misconduct
It should be understood that the “trading” and “ownership” types
of injury are separate, but that they can both result from the same acts.
They can also injure the same investor in different ways, and can of course
have different effects on different investors.
Clearly, an investor who paid a fraudulently inflated price for
CA stock may also be injured, additionally, by the impairment of the
investment’s intrinsic value. Another investor, say a current CA
shareholder who bought the stock in 1990, would not have been injured by a
fraudulently inflated stock price but would have been injured by the damage
to his “ownership” interest.
While the first investor in this example received compensation
for the “trading” injury, he has received nothing for the separate and
potentially greater “ownership” injury. And the long-term investor, who may
have suffered the most injury, has received nothing at all from the PSLRA
class action.
Injuries from Obstruction of Justice
Regarding injuries resulting from management’s obstruction of
justice, it may be legally important that the claims are not based on
securities laws – obstruction of a federal investigation is a “racketeering”
violation – to establish that distributions of the Restitution Fund should
not duplicate the PSLRA class action settlement.
In any event, it should be noted that the obstruction misconduct
continued during a period after the fraud, and, for what is probably the
most clearly defined “ownership” injury to investors’ property, may be
considered the reason for the government’s imposition of a $225 million
penalty to be paid by the corporation.
¨¨¨
Our lack of familiarity with “ownership” injury results from the
absence of any practical process to do something about it, in spite of the
clear evidence of its importance to investors. The CA Restitution Fund
presents an opportunity to correct this unfair and inefficient marketplace
distortion.
Further comments on this important issue will be welcomed.
GL – 3/22/04
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