Nature of the Case
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Facts
On June 30, 1981, D filed a registration statement and an accompanying prospectus with the SEC for a firm commitment offering of 700,000 units. Each unit sold for $4.75 and consisted of one share of common stock and one warrant to purchase an additional share of stock for $5.75 at a later date. The prospectus contained an erroneous pro forma unaudited financial statement relating to the eight-month period ending March 31, 1981. The prospectus overstated earnings for the eight-month period. D's price had declined to four dollars per unit by October 12, 1981, the day before D revealed the prospectus misstatement to the SEC. The unit price had further declined to $3.25 by November 9, 1981, the day before D disclosed the misstatement to the public. D had reported net sales of $931,301, net income of $211,815, and earnings of seven cents per share. Net sales were restated to $766,301, net income $94,529, and earnings per share three cents. After public disclosure, the price of D rose and reached $3.50 by November 25, 1981, the day this suit commenced. Ps allege that the prospectus error rendered D liable for the stock price decline pursuant to sections 11 and 12(2) of the Securities Act of 1933. D moved for summary judgment on the grounds claiming the misstatement was not material for purposes of establishing liability under section 11 and that the misstatement had not actually caused the price decline for purposes of damages under section 11. D moved for summary judgment on the section 12(2) claims, again arguing that the error was immaterial and also that plaintiffs lacked 'privity,' as required under section 12(2), to maintain a suit against D as an issuer because the offering was made pursuant to a 'firm commitment underwriting.' Ps brought the underwriters into the suit. The underwriters subsequently moved for summary judgment, making substantially the same arguments as had D. The district court held that Ps had established materiality 'as a theoretical matter' for purposes of establishing liability under sections 11(a) and 12(2). The court granted summary judgment to Ds with respect to section 11 because ds had established that the prospectus error did not actually result in any part of the stock price decline and they thereby prevailed pursuant to the affirmative defense set out in that section. The court granted summary judgment to D with respect to section 12(2), holding that Ps lacked the privity required to maintain an action against D as the issuer, not the immediate seller of the securities in question. The court permitted Ps to proceed against their immediate sellers (the underwriters) under section 12(2). P appealed.
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