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(The article featured
below is a selection from Federal
Securities Law Reporter, which is available to subscribers of that
publication.)
5th Circuit: No Section 13(d) Money
Damages Remedy for Issuers
A 5th Circuit panel followed the lead
of earlier decisions from the 2nd and 11th Circuits and found that no private
cause of action for money damages existed for violations of Exchange Act Section
13(d). The case, Motient Corp. v. Dondero, arose from a failed attempt by
Highland Capital Management, an investment fund, and its affiliates, to take
over Motient Corp., an Illinois-based wireless communications company. The
litigation in federal court on the 13(d) violations was one of several actions
involving Motient and James Dondero, the principal of the investment fund group
and a Motient director.
As alleged, the investment group
filed Schedule 13D amendments "containing false, incomplete, and misleading
information about the company, its management, and its board." Motient
sought a declaratory judgment, an order that the investment group immediately
amend the Schedule 13D amendments, injunctive relief preventing the buyers from
taking further actions to purchase or sell Motient securities or solicit
shareholder votes, and compensatory damages.
The appellate panel agreed with the
district court's finding that the claims for money damages were not actionable.
The court observed that "[t]he Williams Act was enacted to protect
shareholders who are forced to make decisions between bidders and management.
Since any material misstatement or omission to an investor who purchases or
sells the security and actually relies on that information gives rise to a
private cause of action under Section 18(a) of the Exchange Act." This
section, concluded the court, "provides the sole basis for a private right
of action for damages resulting from a violation of Section 13(d)" and
"Motient provides no compelling reason for recognizing a private right of
action in favor of issuers for money damages."
The court also concluded that the
requests for equitable relief were moot because the proxy fight was over and the
investment fund had sold its Motient securities. "We decline to issue an
advisory opinion forbidding Highland from soliciting shareholder votes for a
tender offer or engaging in a contest for control, on the assumption that such
activity might take place in the future," concluded the court.
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