An investor suing his investment advisor for profits he allegedly lost as a result of bad investment advice cannot use the Standard & Poor's 500 Index to calculate those damages, according to a recent decision from the United States District Court for the Southern District of New York. In so holding, the Court determined that the plaintiff's lost profits model, which was based on how his investment should have performed had he invested in a diversified, objective stock index, was too speculative to justify lost profits damages under his breach of contract, breach of fiduciary duty and negligence theories.
The Situation
In February 1995, plaintiff David Levy placed 257,530 shares of Corning, Inc. valued at $33 per share in an investment management account at Bessemer Trust Co., N.A. ("Bessemer"), and retained Bessemer as his investment advisor. At that time, and on several subsequent occasions, Levy directed Bessemer account representatives to take steps to protect his stock's value against any possible downward movement. The Bessemer representatives allegedly informed Levy that the shares could not be immediately price-protected because they were subject to a one-year transfer restriction, which would not expire until February 1996.
In August 1995, Levy learned from another investment advisor that hedging strategies were in fact available to protect against downward price movement, even though the shares were restricted. Levy then dismissed Bessemer as his investment advisor, suspended his Bessemer account, and retained the investment advisory services of Merrill Lynch. Merrill then sold Levy a two-year European option collar on 125,000 of the Corning shares, which had plummetted from an April 1995 high of $37 per share to $27.75. Using the collar, Levy protected himself from downward movement in the stock's price through the purchase of a put option from Merrill Lynch at the put price of $24.75 per share, while limiting the upside gain he could realize on any surge in his shares' value by selling a call option to Merrill Lynch at the call price of $31.90 per share.
Had Levy purchased the collar in April 1995 when he placed his investment in the account at Bessemer and the shares were trading at $37 per share, however, he would have been able to secure an upside value of about $44 per share. On October 6, 1997, the collar's exercise date, Corning's stock was trading at $55 per share. Merrill Lynch called the shares at $31.90. Rather than deliver the shares, Levy chose to settle his position by paying Merrill Lynch approximately $3 million.
The Lawsuit
Levy then instituted suit against Bessemer, alleging claims for breach of contract, negligence, and breach of fiduciary duty, among others, and seeking compensatory damages, including lost profits. To measure his lost profits, Levy asserted that he was entitled to damages equal to the difference between the amount he would have made had he invested in a diversified, objective fund, such as a fund pegged to the S&P 500 Index, and the amount he actually made. Bessemer moved for summary judgment on the issue of damages, arguing that Levy was limited to out-of-pocket losses equal to the difference in the price of the Corning stock on the day Levy opened his Bessemer account and the price on the day he suspended that account.
The Court held that Levy was limited to his out-of-pocket losses on his claims because his proposed method for calculating lost profits thereon was legally insufficient. While noting that lost profits may be recoverable on such claims under New York law, the Court stated that a plaintiff must prove such damages with "reasonable certainty." The Court found that Levy's S&P 500 damage model did not meet the "reasonable certainty" standard because it could take several different forms depending on the assumptions made in calculating the loss. In fact, the Court observed that under the possible assumptions laid out by Levy's own damages expert, Levy's damages could range anywhere from $4.1 million to $8.58 million. As such, the Court concluded that Levy's damages model "fail[ed] to meet the requirement of reasonable certainty because it [was] based on nothing but speculative assumptions and conjecture." The Court thus granted summary judgment to Bessemer on the claim for lost profits, but denied summary judgment on the method to be used to calculate Levy's out-of-pocket losses. Levy v. Bessemer Trust Co., N.A., No. 97 Civ. 1785, 1999 WL 199027 (S.D.N.Y. Apr. 8, 1999).