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Out-of-pocket Fraud Damages: Proof Required to Determine the Value of Restricted Securities

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  • Posted on: Oct 11 2022

By: Jeffrey M. Haber

Since the early 20th century, a plaintiff alleging fraud in New York can recover only the actual pecuniary loss sustained as a result of a misrepresentation or omission, i.e., the plaintiff’s out-of-pocket damages.1 The damages recoverable under the out-of-pocket rule are intended to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained.2 

The out-of-pocket rule was at issue in Danco Enters., LLC v. Livexlive Media, Inc., 2022 N.Y. Slip Op. 05589 (1st Dept. Oct. 6, 2022) (here). 

[Ed. Note: the background discussion of Danco comes from the parties briefing on appeal.]

Danco involved the purchase of common stock of LiveXLive Media, Inc. f/k/a Loton Corp. (“LXL”), a company that live streams music festivals and events to its paid subscribers.

In June 2016, Wantmcs Holdings invested $1.25 million in LXL, pursuant to two Subscription Agreements (collectively, the “Subscription Agreements”). Under the Subscription Agreements, Wantmcs Holdings received restricted shares of LXL common stock. Subsequently, pursuant to an Asset Purchase Agreement, dated May 5, 2017 (the “APA”), LXL Tickets acquired certain of Wantickets’ assets in exchange for 2,000,000 shares of LXL common stock. Plaintiffs alleged that Defendants made misrepresentations concerning LXL to fraudulently induce Plaintiffs to enter into the foregoing agreements.

Following extensive discovery, Defendants moved for summary judgment to dismiss Plaintiffs’ fraud-based claims. Among other things, Defendants argued that dismissal of Plaintiffs’ fraud-based claims was warranted because they failed to submit evidence establishing their claimed damages. Defendants maintained that to determine the measure of damages, Plaintiffs were required to, among other things, demonstrate the value of the consideration they received, i.e., shares of LXL common stock, at the time they received the consideration, i.e., at the time of the execution of the two Subscription Agreements and/or the APA (collectively, the “Agreements”). Defendants claimed that Plaintiffs failed to come forward with any proof of the value of the consideration they received at the time the Agreements were executed.

Plaintiffs argued that the value of the consideration they received (i.e., the LXL common stock) was the amount of money they received when they sold their LXL shares, years after the execution of the Agreements. According to Plaintiffs, because there was little market for the shares (they were restricted) when Plaintiffs received them, the value of those shares was worth far less than when Plaintiffs were able to sell them in the open market after getting the restrictions lifted. Thus, Plaintiffs maintained, the best evidence of the value of those shares at the time Plaintiffs received them was the price at which those shares were sold, discounted to present value as of the time Plaintiffs received them.

The motion court denied the motion, finding that the case was not one “where damages [were] incapable as a matter of law of calculation”.  Defendants appealed.

The Appellate Division, First Department, unanimously reversed, on the law, and granted Defendants’ motion.

In a pithy decision, the Court held that “Defendants [were] entitled to summary judgment because plaintiffs failed to show the ‘out of pocket’ damages required for a fraud claim3 and failed to submit evidence of the value of the Loton stock they received as of July 2016 (for the Subscription Agreements) and May 2017 (for the APA).4

Although the holding was succinct, the explanation was more developed. 

The Court rejected Plaintiffs’ argument that damages could be approximated. In making that argument, Plaintiffs relied on Spectra Audio Research, Inc. v. Chon, 62 A.D.3d 561, 564 (1st Dept. 2009), and Fresh Del Monte Produce N.V. v. Eastbook Caribe A.V.V., 40 A.D.3d 415, 421 (1st Dept. 2007). In Spectra Audio, for example, the court held that while damages “may not be determined by mere speculation or guess,” evidence showing the “existence and the extent” of a plaintiff’s damages “will suffice, even though the result is only an approximation”.5 The Court said that neither case involved the out-of-pocket rule: Spectra Audio involved negligence damages and Fresh Del Monte involved breach of contract damages.6 

The Court also rejected Plaintiffs’ argument that the out-of-pocket rule measures pecuniary loss using the difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain.7 The Court explained that the measure of damages sought by Plaintiffs was relevant to a holder case (i.e., where the plaintiff is induced to purchase and hold a security), of which Danco was not. Citing to, and quoting, Hotaling v. Leach & Co., 247 N.Y. 84, 87 (1928), the Court said that in a holder case, “[t]he damages awarded must represent the loss which the plaintiff sustained through the purchase and continued ownership of the [security]”.

[Ed. Note: this Blog wrote about the out-of-pocket rule in the context of a holder case, here.]

Moreover, noted the Court, “in Hotaling, the Court of Appeals ‘rejected a measure of damages based on the market value of the bond when the plaintiff purchased it, explaining that such value could not be determined and would have left the plaintiff without any remedy’”.8 The Court explained that, in contrast to Hotaling, deposition testimony “implie[d] that the value of Loton stock as of July 2016 and May 2017 could be calculated by an expert in valuation.”9 


Danco shows that a plaintiff alleging fraud must demonstrate his/her actual pecuniary loss sustained as a result of the alleged wrongful conduct. In the context of a security, the plaintiff must come forward with a valuation showing the amount of the claimed overvaluation of the security on the day of his/her investment, not at some point in the future. The failure to come forward with such evidence, as in Danco, will result in the dismissal of the fraud claim.


  1. Reno v. Bull, 226 N.Y. 546 (1919); see also Continental Cas. Co. v. PricewaterhouseCoopers, LLP, 15 N.Y.3d 264 (2010).
  2. See Lama Holding v. Smith Barney, 88 N.Y.2d 413, 421 (1996); Clearview Corp. v. Gherardi, 88 A.D.2d 461, 468 (2d Dept. 1982) (“the defrauded party is entitled solely to recovery of the sum necessary for restoration to the position occupied before the commission of the fraud”) (citations omitted).
  3. Slip Op. at *1 (citing, Kumiva Group, LLC v. Garda USA Inc., 146 A.D.3d 504, 506 (1st Dept. 2017)).
  4. Id.
  5. Spectra Audio, 62 A.D.3d at 564 (quoting, Hirschfeld v. IC Sec., 132 A.D.2d 332, 336-337 (1st Dept. 1987), lv. dismissed, 72 N.Y.2d 841 (1988), quoting Cristallina v. Christie, Manson & Woods Intl., 117 A.D.2d 284, 295 (1st Dept. 1986)) (internal quotation marks omitted).
  6. Slip Op. at *1 (citing, Spectra Audio, 62 A.D.3d at 562, and Fresh Del Monte, 40 A.D.3d at 415).
  7. Lama, 88 N.Y.2d at 421.
  8. Slip Op. at *1 (citation omitted).
  9. Id. (citing, Continental, 15 N.Y.3d at 271 (“plaintiffs could have come forward with … valuations showing the amount of the claimed overvaluation of the portfolio on the day of their respective investments”)).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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