[authors: William M. Regan, Dean N. Razavi]

The US District Court for the Southern District of California last week denied summary judgment to securities fraud defendants based on the plaintiffs’ expert testimony regarding damages. Plaintiffs, former interest holders in the limited partnership Sav-On (a self storage facility company), sued Tony Luciani, the majority holder of Sav-On. Plaintiffs alleged that Luciani had induced them to sell him their interests by falsely undervaluing Sav-On and failing to disclose the upcoming sale of Sav-On property.

Luciani moved for summary judgment on the grounds that plaintiffs had not come forward with sufficiently reliable evidence of damages. Luciani’s expert witness testified that that the fair market value of a 1% interest in Sav-On was $34,000, and thus plaintiffs—who received $45,000 per 1%—had suffered no out-of-pocket loss. Plaintiffs’ expert witness countered that plaintiffs had sold a combined 28.69% interest in Sav-On. He then summed the values of (1) 28.69% of Sav-On’s historic revenues, excluding revenues generated from the property sold and (2) 28.69% of the $8.3 million sale price to arrive at a value of $3 million—which was $1.7 million less than defendants had paid to plaintiffs and thus was their recoverable damages.

Luciani attacked plaintiffs’ expert witness for, among other things, relying on an economic valuation of the partnership, rather than the market value. The court noted that because the partnership interests were relatively illiquid, an economic valuation would suffice as a measurement of damages, “[o]therwise, no cause of action for securities fraud could ever be brought for transactions involving illiquid securities.” The court found that plaintiffs’ expert analysis was sufficiently reliable on the issue of damages and therefore that there was a fact issue that could only be resolved at trial. Luciani v. Luciani, No. 3:10-cv-2583-JM (S.D. Cal. Oct. 17, 2012).