Grand v. Nacchio – 11/24/2006

December 1, 2006

Arizona Court of Appeals Division Two Exercises Special Action Jurisdiction to Clarify Tender and Loss Causation Rules in Securities Actions Brought Under Arizona Law.

Plaintiff purchased shares of Defendants’ stock, the majority of which Plaintiff had sold when it was disclosed that Defendants may have engaged in questionable accounting practices that had inflated its revenue. After the disclosure, Plaintiff sold its remaining shares. Plaintiff subsequently filed a multi-count securities fraud action against Defendants, asserting various statutory and common law claims. Defendant moved for partial summary judgment, claiming that Plaintiff could not show causation for damages relating to the shares sold pre-disclosure. Defendant further claimed the Trust could not rescind the transaction because it had sold the shares and could not tender them as required by law. The trial court granted summary judgment in favor of Defendants on all claims involving the stock sold pre-disclosure. The court then granted Plaintiff’s motion to dismiss, without prejudice, its remaining claims regarding the other shares so that the Plaintiff could file an appeal.

In a lengthy opinion, the Court of Appeals affirmed in part, reversed in part, and remanded. As a threshold matter, the Court concluded that it lacked appellate jurisdiction. A party may not obtain appellate review of an adverse partial summary judgment ruling by having all remaining claims dismissed without prejudice, regardless of whether the trial court’s ruling includes “Rule 54(b)” language. Ultimately, however, the Court treated Plaintiff’s appeal as a petition for special action and accepted special action jurisdiction

On the merits, the Court held that in an action for true rescission under A.R.S. § 44-2001(A), a plaintiff may substitute tender by purchasing and delivering the securities to the defendant before trial. But mere sale on the open market will not suffice. Because true rescission is not a damages remedy, a plaintiff need not prove loss causation in order to obtain rescission of a securities transaction under A.R.S. § 44-2001(A) or the common law. However, a plaintiff must generally prove loss causation to obtain damages in a securities action brought under either A.R.S. § 44-1991(A)(1) or (3). An exception applies if the plaintiff claims “rescissory damages” and there is a showing of sufficient equitable reasons for having the tender requirement waived.

Judge Brammer authored the opinion; Judges Eckerstrom and Espinosa concurred.