Bains v. Gardner

Full title: ROBERT REESE BAINS, III, et al., Plaintiffs and Appellants, v. STEPHEN P…

Court: California Court of Appeals, Fourth District, First Division

Date published: Mar 5, 2010

No. D053413 (Cal. Ct. App. Mar. 5, 2010)

Opinion

ROBERT REESE BAINS, III, et al., Plaintiffs and Appellants, v. STEPHEN P. GARDNER, Defendant and Appellant. D053413 California Court of Appeal, Fourth District, First Division March 5, 2010

NOT TO BE PUBLISHED

APPEALS from a judgment and postjudgment order of the Superior Court of San Diego County No. GIC806212, Jeffrey B. Barton, Judge.

O'ROURKE, J.

Defendant Stephen P. Gardner appeals from a judgment in favor of individual plaintiffs¹ who traded Peregrine common stock and options on that stock between May 1997 and June 2002. Following a bench trial in which Gardner did not participate based on his asserted Fifth Amendment rights, the court entered judgment in plaintiffs' favor awarding $26,302,599.95 in compensatory damages (with an approximately $3.7 million offset for prior settlements), $26,302,599.95 in punitive damages, and $112,110.98 in attorney fees and costs. The court later struck the punitive damages award, ruling plaintiffs did not provide evidence of Gardner's financial condition.

1 Plaintiffs are Robert Reese Bains, III, individually and on behalf of the Estate of Marjorie A. Bains; D. Alan Barnes; Cynthia S. Comiskey; Mary R. Ellis; John Ramsay Ellis; John Ramsay Ellis, IRA; Christopher John Fotinos; John T. Green; John T. Green, IRA Rollover; John T. and Emily Green, Traditional IRA; Emily E. Green, Trustee of the John T. Green Profit Sharing Plan; Emily Green, IRA; Christopher C. Greene, Individually and as Trustee of the Christopher C. Greene IRA; Lois J. Greene; Lois J. Greene, Individually and as Representative of the Estate of Siegfried Shmaus; Timothy Henkel; Ronald O. Johns, IRA; Ronald O. and Susan M. Johns; Alexander W. Johns; Connie Lawson; Billy E. Lawson; Alan R. Kay; Deborah L. Kay, IRA; Deborah L. Kay; Timothy C. Killough; William Laggner; George Loredo; Craig Matesky, Individually and as Trustee of the Matesky Family Trust; Chris Migliori, Trustee and Stacey Migliori, Trustee of the Migliori Family Trust; Chris Migliori, Trustee and Stacey Migliori Trustee, Cyclone Productions, Money Purchase and Profit Sharing Plan; Chris Migliori, Trustee and Stacey Migliori Trustee of the Cyclone Productions Pension and Profit Sharing Plan; Mark Ramert on behalf of the Estate of Frank F. Ramert, Sr., Deceased; Joan H. Ramert; Mark M. Ramert; Mark M. Ramert, Trustee of the Frank F. Ramert Family Trust and Executor of the Estate of Frank F. Ramert, Sr.; Mark M. Ramert, Jr.; Rebecca Renee Ramert; Robert P. Ramert; Frederic E. Stresau; Frederic E. Stresau, Individually and as Trustee of the Frederick E. Stresau IRA; Michael S. Stresau; Tamara A. Stresau; and Michael Ventura.

Gardner challenges the judgment on grounds plaintiffs' theory of damages was "erroneous as a matter of law." He maintains plaintiffs' failure to prove their damages requires that the judgment be vacated and a new judgment entered in his favor.

Plaintiffs appeal from the postjudgment order striking their punitive damages award, contending they presented adequate evidence of Gardner's wrongfully gained profits on which to support such an award. They seek reinstatement of the award or an order that the trial court grant them a new trial on punitive damages. As we explain below, we affirm the judgment and postjudgment order.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs are purchasers of Peregrine common stock. Some of the plaintiffs traded options on that stock. Gardner held officer and management positions at Peregrine at various times between 1998 and 2002, including as chairman of Peregrine's board of directors, chief executive officer, president, executive vice president and principal executive officer, and vice president of strategic acquisitions. Between about March 1999 and May 2002, Gardner engaged in various acts of fraud in connection with Peregrine, involving misconduct with respect to its contracts, revenue recognition, and accounting practices.²

2 The trial court found that "plaintiffs have proven by clear and convincing evidence that [Gardner] did engage in fraud which damaged Plaintiffs...." Gardner does not challenge the factual finding as to his liability for fraud, nor does he challenge plaintiffs' reliance on his federal court plea agreement as setting forth the factual basis for his liability.

Plaintiffs sued Gardner, other Peregrine officers and directors, and various entities, and in December 2005 filed a fourth amended complaint asserting causes of action for securities law violations, fraud, breach of fiduciary duty, malpractice, aiding and abetting, conspiracy and negligence. Gardner answered the fourth amended complaint in February 2006 with a general denial, an assertion of his Fifth Amendment right against self-incrimination, and numerous affirmative defenses.

In March 2007, Gardner pleaded guilty in federal district court to conspiracy, securities fraud, and obstruction of justice for his knowing participation in a "fraudulent scheme and conspiracy to misstate and omit material facts from public reports about Peregrine's financial results and condition." In part, he admitted his acts "were intended to provide a false portrait of Peregrine's financial performance in order to inflate and sustain the price of Peregrine stock."

Thereafter, Gardner advised the trial court in the present matter that he would not attend the upcoming trial unless he was ordered to do so. In part, he wrote: "At the direction of counsel, I have asserted my rights under the Fifth Amendment throughout these proceedings and intend to do so in the future. I specifically reserve, and do not intend to waive, the full scope of the Fifth Amendment protections available to me." He asked the court to "safeguard" his due process rights and other "protections,"³ and stated that if he were required to appear for trial under a subpoena, he would assert his Fifth Amendment rights and thus his appearance would not serve any "useful purpose."

3 More fully, Gardner stated, "Specifically, and without limitation, I respectfully ask the Court to safeguard the full scope of the Due Process and other protections available to me, including but not limited to the right to require plaintiffs to present a prima facie case on all elements of each and every claim in the complaint and the right to challenge the legal and factual sufficiency of those.... [¶] I respectfully request that this Court be particularly diligent in requiring plaintiffs to prove up each of the required elements. If Plaintiffs fail in their burden of proving their claims against me, this Court should refuse to grant a judgment in any amount notwithstanding my failure to appear at trial to contest the evidence. As I understand it, with respect to causation, the plaintiffs must prove that the alleged fraud was the proximate cause of any damage they suffered. If the decline in value of the plaintiffs' assets was attributable to some other factor, such as independent market forces, but not the alleged fraud, then no relief should be granted. In addition, I request that the Court take steps to ensure that plaintiffs do not introduce evidence on claims not pleaded or otherwise deviate from the allegations in the complaint."

The matter proceeded to a bench trial on the issues of liability, causation and damages. Plaintiffs submitted documentary evidence of their out-of-pocket losses and "financial distress" damages, accompanied by a deposition transcript and report of expert Ralph Alan Miller, who engaged in a causation and out-of-pocket loss analysis for each plaintiff, and also calculated prejudgment interest. Miller, an expert on the "operations of the securities market, damages, materiality issues, investment banking practices, valuations and related corporate finance matters," assessed whether full and complete disclosures by Peregrine would have affected the prices that the plaintiffs paid on purchases of Peregrine common stock or options made, or the price at which they held the securities, during an "Analysis Period" of April 23, 1999, to August 7, 2003. He stated: "The investing public and the investment community, with respect to companies like Peregrine, are most concerned with the Company's ability to generate revenues, the likely future growth of earnings, and cash flows. Factors which affect earnings and the likely future stream of earnings become important to investment decisions. Obviously, such factors include any information relating to the recent past and likely future levels of revenues and operating results of the Company, as well as factors affecting the financial condition of the Company and its assets. A critical factor in that assessment of Peregrine during the Analysis Period was its ability to generate revenues, future earnings, and future cash flows. These items would therefore be important or material to investors. [¶]... In my opinion the omissions and misstatements about these matters caused the price of Peregrine's securities to reach and be maintained at levels above those at which it would otherwise have traded throughout the Analysis Period."

Miller explained how he calculated each plaintiff's damages on shares purchased during the Analysis Period: (1) "For each share of Peregrine purchased and sold during the Analysis Period, the losses were calculated as the purchase price per share less the sales price per share." (2) "For each share of Peregrine purchased during the Analysis Period and held during the period from September 23, 2002 through August 7, 2003, the losses were the excess of the purchase price per share less $0.08 per share." (3) "For each share of Peregrine held on April 22, 1999, the purchase price for such shares was deemed to be $25.06 per share (or $12.53 per share on a split-adjusted basis). This was the opening price per share of Peregrine on April 23, 1999." (4) "For Plaintiffs who engaged in multiple transactions with respect to Peregrine shares during the Analysis Period, such transactions were matched to the Plaintiffs [sic] earlier transactions and chronologically thereafter to determine damages. In other words, purchases and sales were matched on a first-in, first-out ('FIFO') basis." (5) "Shares that were sold for a profit were eliminated from the calculations." He concluded: "The total losses to all Plaintiffs who purchased or held shares of common stock of Peregrine during the Analysis Period were $14,494,174." Miller made similar calculations as to plaintiffs' options purchased, sold or held during the Analysis period, totaling those losses at $2,828,130. He calculated prejudgment interest at $9,053,745.

Plaintiffs also submitted a declaration from Atanu Saha, Ph.D., who criticized another expert's "event-study" analysis⁴ of the impact of the disclosures regarding Peregrine's accounting fraud. Dr. Saha described the expert's methodology and examined its flaws, corrected for the errors in the analysis, and then reached his own conclusion as to the cumulative effect of the accounting fraud-related disclosures: that "virtually the entire decline in Peregrine's stock price, i.e., $6.09 of $6.53 (or 93%), is explained by the accounting fraud-related disclosures."⁵

4 Dr. Saha explains: "Event study analysis is typically used by financial economists to disentangle the effect of an event or an announcement on a firm's share price from the effects of industry and market factors, which may also concurrently affect the price. This analysis entails, among other steps, undertaking a regression analysis to determine the relationship between the firm's share price changes and the changes in the index of broad market and of comparable firms' prices."

5 Specifically, Dr. Saha stated: "I make three major changes [to the defense expert's event study analysis]: (a) I use a fuller and more comprehensive list of comparable firms in the creation of the industry index...; (b) I use all relevant [accounting fraud-related] disclosure days in the analysis; (c) I use data from April 9, 1997 through April 30, 2002 in the regression analysis to estimate the market-and-industry adjusted price changes on the disclosure days.... [¶] Correcting for [the expert's] errors, I find that all 'relevant' disclosure days were associated with statistically significant and negative price movements. I find material price impact following disclosures on August 29, 2002[,] and February 28, 2003, the two disclosure days [the expert] fails to examine. In particular, after the disclosure on August 29, 2002, Peregrine's share price experienced a market-and-industry-adjusted price decline of about 42%. Additionally, after the disclosure on February 28, 2003, the market-and-industry-adjusted price decline was 22%. [¶] From the corrected event study analysis, I find the cumulative effect of the disclosures to be $6.09, which is the sum of 'Excess Dollar Changes' that are negative and statistically significant, as shown in Panel B of Exhibit 6. Between April 30, 2002[,] and March 3, 2003, Peregrine's stock price declined by $6.53 (from $6.85 to $0.32). Thus, the results of corrected event study demonstrate that virtually all the entire decline in Peregrine's stock price, i.e., $6.09 of $6.53 (or 93%), is explained by the accounting fraud-related disclosures."

In March 2008, the trial court entered judgment against Gardner, finding plaintiffs proved by clear and convincing evidence he had engaged in fraud that damaged them. It awarded plaintiffs $26,302,599.95 in compensatory damages and an identical sum as punitive damages. The court offset the damages award by $3,749,999.70 for previous settlements, for a total damages award of $48,855,200.22.⁶ It awarded plaintiffs $112,110.98 in costs.

6 Our calculation shows a two-cent difference, putting total damages at $48,855,200.20.

Gardner moved to vacate the judgment under Code of Civil Procedure section 663 on grounds plaintiffs had not established proximate causation or damages under a legally cognizable theory, and had not submitted evidence of his financial condition to support any punitive damages award. Relying on Dura Pharmaceuticals, Inc. v. Broudo (2005) 544 U.S. 336 (Dura), he argued plaintiffs "did not offer reliable evidence to establish that the necessary 'causal connection' existed between [his] misconduct and the specific trading losses of any individual plaintiff" or "that it was [his] misconduct, as opposed to other market factors, that caused those losses." He maintained the failure to "disaggregate" the impact of his fraud from the impact of other unrelated or inevitable factors affecting the stock "resulted in a failure of proof on proximate cause...." As for plaintiffs' compensatory damages, he argued plaintiffs presented no evidence of the actual value of Peregrine stock on the date of their purchases, but instead "assumed that 'the [true] value of the Peregrine stock at the time of the acquisition was zero,' then used the purchase prices of Peregrine securities as the baseline for calculating damages for each plaintiff."

Gardner relied on the Restatement (Second) of Torts to posit that the zero value assumption was proper only when a company "collapses before the plaintiffs have disposed of their shares, thus precluding plaintiffs from establish [sic] the portion of the loss attributable to the misrepresentation." He asserted the "high volatility of Peregrine's stock provides a strong, independent evidentiary basis that market forces, unrelated to Gardner's misconduct, were responsible for much of the increase — and decrease — in the price of Peregrine's stock." Gardner further argued that under Dura, supra, 544 U.S. 336, plaintiffs could not recover for any losses predating the disclosure of accounting irregularities. Similarly, he argued the "vast majority" of plaintiffs' options losses resulted from options that expired or were sold long before Peregrine's accounting issues were disclosed, and as a result unrecoverable as a matter of law. Finally, Gardner argued the lack of evidence of his financial condition — on which plaintiffs bore the burden of production — rendered the evidence in support of punitive damages insufficient as a matter of law.

The trial court denied Gardner's request to set aside the economic damages award, ruling plaintiffs' experts had established a causal connection between the wrongful misrepresentations and plaintiffs' damages. However, it granted Gardner's request to set aside the punitive damages judgment and struck that award based on plaintiffs' failure to provide evidence of Gardner's financial condition "by available alternative sources."

Gardner appeals from the judgment awarding compensatory damages. Plaintiffs appeal from the postjudgment order striking the punitive damages award.

DISCUSSION

I. Gardner's Appeal

Gardner contends plaintiffs' theory of damages was erroneous as a matter of law; that instead of awarding plaintiffs their out-of-pocket losses, the court erroneously awarded them the entire amount of their realized trading losses without evidence of the actual value of Peregrine's common stock or options written on that stock on the date of any particular transaction. Gardner more specifically contends (1) plaintiffs' expert's opinion as to the value of Peregrine stock on the date of purchase did not constitute substantial evidence for purposes of damages; (2) the court erred by awarding damages for losses not proximately caused by his conduct; (3) damages awarded for losses suffered before his fraudulent conduct was publicly revealed are "per se" unrecoverable; and (4) plaintiffs were not entitled to recover for their losses in options trading. He asks us to vacate the judgment and enter a new judgment in his favor.

A. Standard of Review

Gardner's attack on the evidence supporting the trial court's findings of proximate cause and damages constitutes a combination of de novo and sufficiency of the evidence arguments. We review independently Gardner's claim that the court awarded the wrong measure of damages. (Toscano v. Greene Music (2004) 124 Cal.App.4th 685, 691 [determination of whether a plaintiff is entitled to a particular measure of damages is a question of law subject to de novo review]; see also Kajima/Ray Wilson v. Los Angeles Metropolitan Transp. Authority (2000) 23 Cal.4th 305, 315.) As for Gardner's attacks on the evidence supporting both proximate causation and damages, "we are bound by the familiar and highly deferential substantial evidence standard of review. This standard calls for review of the entire record to determine whether there is any substantial evidence, contradicted or not contradicted, to support the findings below. We view the evidence in the light most favorable to the prevailing party, drawing all reasonable inferences and resolving all conflicts in its favor." (People ex rel. Brown v. Tri-Union Seafoods LLC (2009) 171 Cal.App.4th 1549, 1567, citing Bickel v. City of Piedmont (1997) 16 Cal.4th 1040, 1053, abrogated on another point in DeBerard Properties, Ltd. v. Lim (1999) 20 Cal.4th 659, 668.) We begin a substantial-evidence review with the presumption that the record contains evidence to sustain every finding of fact. (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881.)

"The substantial evidence rule applies equally to expert and lay testimony. Thus, expert testimony does not constitute substantial evidence when based on conclusions or assumptions not supported by evidence in the record [citation], or upon matters not reasonably relied upon by other experts [citation]. Further, an expert's opinion testimony does not achieve the dignity of substantial evidence where the expert bases his or her conclusion on speculative, remote or conjectural factors. [Citation.] When the trial court accepts an expert's ultimate conclusion without critically considering his or her reasoning, and it appears the conclusion was based on improper or unwarranted matters, we must reverse the judgment for lack of substantial evidence. [Citation.] On the other hand, the trial court is free to reject testimony of a party's expert, so long as the trier does not do so arbitrarily." (People ex rel. Brown v. Tri-Union Seafoods LLC, supra, 171 Cal.App.4th at pp. 1567-1568.) Nevertheless, a substantial evidence review is not properly a challenge to the weight and credibility of the testimony presented, and this court may not reweigh evidence or reappraise the credibility of witnesses. (Eidsmore v. RBB, Inc. (1994) 25 Cal.App.4th 189, 195; see OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 866.) Further, the trial court is not required to reject all of a witnesses' testimony, even if parts of it were inconsistent or conflicting: "It is well settled that the trier of fact may accept part of the testimony of a witness and reject another part even though the latter contradicts the part accepted." (Stevens v. Parke, Davis & Co. (1973) 9 Cal.3d 51, 67.)

Ultimately, " '[t]he trier of fact may accept the evidence of any one expert or choose a figure between them based on all of the evidence.' [Citation.] There is insufficient evidence to support a verdict 'only when "no reasonable interpretation of the record" supports the figure....' " (San Diego Metropolitan Transit Development Bd. v. Cushman (1997) 53 Cal.App.4th 918, 931.)

B. Effect of Gardner's Absence at Trial

Preliminarily, we point out that Gardner's absence at trial impacts the issues he may raise on appeal. In a footnote, Gardner maintains his inability to participate in the trial "did not diminish the trial court's duty to ensure that the plaintiffs introduced sufficient evidence to establish each element of their claims by preponderance [sic] of evidence" and that the court had a "duty to 'act as gatekeeper, ensuring that only the appropriate claims get through.' "

For this proposition, Gardner relies on Heidary v. Yadollah (2002) 99 Cal.App.4th 857. Heidary involved a situation in which the respondents, who had improperly obtained a default judgment against the appellants, sought a type and amount of damages that was not specified in their cross-complaint. (Id. at p. 862.) Emphasizing the principle that a court cannot permit a plaintiff to prove different claims or different damages at a default hearing than those pleaded in the complaint (id. at p. 868),the court observed the need for a trial court in a default case to "take the time to analyze the complaint at issue and ensure that the judgment sought is not in excess of or inconsistent with it" and also "compare the properly pled damages for each defaulting party with the evidence offered in the prove-up." (Ibid.)

Heidary is inapposite here because Gardner answered plaintiffs' complaint and had notice of the trial, but elected not to appear. That his absence was the result of his purported assertion of Fifth Amendment rights does not alter its consequences on our appellate review.⁷ Gardner's failure whatsoever to contest the admission of plaintiffs' expert evidence serves to eliminate several of Gardner's contentions. For example, to the extent Gardner's appellate arguments challenge the reliability, foundation or qualifications for plaintiffs' expert's testimony on damages, he has forfeited those challenges by failing to bring a pretrial motion or make a timely objection. (Evid. Code, §§ 353, 803;⁸ see In re Powell (1988) 45 Cal.3d 894, 905-906; Waller v. Southern Pac Co. (1967) 66 Cal.2d 201, 210-211; Leonardini v. Shell Oil Co. (1989) 216 Cal.App.3d 547, 584; Cramer v. Morrison (1979) 88 Cal.App.3d 873, 877, fn. 2 [in limine motion is an appropriate way of resolving the issue of admissibility, particularly where it relates to the admissibility of an expert opinion on a material issue in the case]; In re Marriage of Hargrave (1985) 163 Cal.App.3d 346, 352 [by failing to object in trial court, wife waived her appellate challenge to admissibility of husband's opinion on value of property on grounds it was not based on matter on which an expert may reasonably rely in forming an opinion]; People v. Nwafor (1996) 46 Cal.App.4th 39, 47 [failure to object to expert's qualifications at trial renders appellate challenge to qualifications frivolous and untimely]; People v. Newberry (1962) 204 Cal.App.2d 4, 8-9 [same]; People v. Valdez (1997) 58 Cal.App.4th 494, 505 [failure to object to gang expert opinion as unnecessary, inappropriate or improper caused forfeiture of appellate contention that the opinion involved merely subjective opinion on an ultimate issue or was based on extensive inadmissible hearsay]; Parlier Fruit Co. v. Fireman's Fund Ins. Co. (1957) 151 Cal.App.2d 6, 15 [by failing to make a specific objection, defendant forfeited challenge to expert opinion about origin of fire on the theory the opinion was not based on all of the essential facts].)

7 Gardner correctly points out that a person can invoke his or her Fifth Amendment rights in a civil action. (See Kastigar v. United States (1972) 406 U.S. 441, 444-445.) However, "[t]he only way the privilege can be asserted is on a question-by-question basis, and thus as to each question asked, the party has to decide whether or not to raise his Fifth Amendment right." (Doe ex rel. Rudy-Glanzer v. Glanzer (9th Cir. 2000) 232 F.3d 1258, 1263; see also Garcia-Quintero v. Gonzales (9th Cir. 2006) 455 F.3d 1006, 1019.) We question, but need not resolve, whether Gardner's blanket assertion of the privilege was proper or sufficient to preserve the constitutional issue.

8 Evidence Code section 803 provides in part: "The court may, and upon objection shall, exclude testimony in the form of an opinion that is based in whole or in significant part on matter that is not a proper basis for such an opinion." Evidence Code section 801 provides in part: "If a witness is testifying as an expert, his testimony in the form of an opinion is limited to such an opinion as is:... [¶] (b) Based on matter (including his special knowledge, skill, experience, training, and education) perceived by or personally known to the witness or made known to him at or before the hearing, whether or not admissible, that is of a type that reasonably may be relied upon by an expert in forming an opinion upon the subject to which his testimony relates, unless an expert is precluded by law from using such matter as a basis for his opinion."

Further, to the extent Gardner's arguments merely amount to an attack on the persuasiveness of plaintiffs' expert's opinions, those arguments similarly must fail. The weight and persuasiveness of the evidence is a matter exclusively for the trier of fact, and as long as the plaintiffs' expert's opinions are not insufficient as a matter of law, we must uphold the trial court's decision to accept those opinions. (See, e.g., Howard v. Owens Corning (1999) 72 Cal. App.4th 621, 631.)

C. OCM Principles Fund L.P. v. CIBC World Markets Corp.

Our assessment of Gardner's claims is assisted by an overview of the proper measure of damages to which plaintiffs were entitled as well as the type of evidence that would support an award of such damages. We do this primarily by reviewing in detail the facts of OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp., supra, 157 Cal.App.4th 835 (OCM) and the holdings of that case. OCM involved similar fraud, misrepresentation, and securities laws claims by plaintiff investment funds against an investment bank, in which the plaintiffs claimed that the bank had induced them to purchase registered notes by misrepresenting the success of a fragrance company's business strategy and growth plan, and concealed its failed marketing strategy and weak financial condition, causing them to suffer investment losses. (Id. at pp. 842-846.)The fragrance company, RCI, sold its products to retailers on consignment and permitted them to return unsold product for full credit, though accounting rules allowed RCI to "book" sales to retailers upon shipment as long as it maintained a certain level of reserves based on a reasonable estimate of returns. (Id. at p. 846.) RCI needed loans and used CIBC, an investment bank, to assist it in obtaining financing. (Id. at p. 847.)

In late 1996, CIBC provided a loan on the condition that RCI would refinance it via unregistered notes, the issuance of which CIBC would oversee and control. (OCM, supra, 157 Cal.App.4th at p. 847.) CIBC, which functioned as an initial purchaser of the notes, prepared an offering memorandum and also organized meetings between RCI executives and potential buyers. (Ibid.) RCI's sales during the 1996 Christmas season, however, were weaker than projected. (Ibid.) It responded by engaging in a tactic ("stuffing the channel" or loading retailers with product knowing it would be returned unsold) that permitted it to boost its sales and revenue figures for that fiscal year, but would likely drain its cash reserves in the long term. (Id. at p. 848.) The evidence at trial showed CIBC knew of RCI's weak third quarter performance and also that RCI's forecast for its 1996 fiscal year was suspect and deserved scrutiny. (Id. at pp. 848-849, 857.) CIBC nevertheless sold the unregistered notes in early 1997, and after RCI issued a registration statement, CIBC issued several favorable investment opinions on the subsequently registered notes, predicting increases in RCI's sales and cash flow. (Id. at pp. 850-852.) The evidence showed CIBC (1) had reliable third party nonpublic information that disconfirmed RCI's 1996 financial forecasts; (2) knew RCI was likely to employ its offering memorandum as a basis for the registration statement and initial distribution of the registered securities; and (3) reaffirmed misrepresentations from the offering memorandum and registration statement in its investment opinions. (Id. at p. 857.)

In early February 1998, the market value of the registered notes fell to approximately half of their purchase price after RCI announced that its 1997 Christmas season sales were lower than expected, attributing the condition to a change in its "business environment" but expressing confidence in its long-term business strategy. (OCM, supra, 157 Cal.App.4th at p. 853.) In response to the drop, the plaintiff investment funds, who sought out fundamentally sound companies in financial distress, began buying the notes based on a review of CIBC's offering memorandum, the registration statement and CIBC's investment opinions. (Id. at pp. 852-853.) In February 1998, CIBC issued additional investment opinions recommending that investors "hold" the registered notes, warning that RCI's earning capacity was difficult to assess but estimated a high cash flow with "operational fixes" and attributed problems to vague "prior year events" and a "difficult year in the industry." (Id. at p. 854.) Plaintiffs purchased another $53.8 million of registered notes between February and July 1998. (Ibid.) In August 1998, they learned that RCI had no cash to continue operations, and loaned it $2 million to forestall liquidation. However, after obtaining access to RCI's finances, they learned the company was worthless. (Ibid.)

The plaintiffs sued CIBC alleging violations of the Corporations Code and federal securities law, as well as misrepresentation and fraud in connection with the issuance and sale of the notes. (OCM, supra, 157 Cal.App.4th at pp. 843-844.) Applying an out-of-pocket measure of damages, they sought and obtained a damages verdict of $51,971,156, equaling the total amount they had paid for the registered notes ($53,803,900) and their net losses from the loans they had made to RCI ($1,300,505), with a $3,133,250 reduction for interest payments they had received as holders of the notes. (Id. at pp. 875-876.)

On appeal, CIBC contended plaintiffs did not show that its conduct was the proximate cause of the registered notes' decline in value after purchase, or present sufficient evidence to support the amount of their damages under the "out-of-pocket" measure for a defrauded party. (OCM, supra, 157 Cal.App.4th at p. 870.) On the latter point, it argued no evidence supported the jury's implied finding that the registered notes were worthless when the plaintiffs purchased them. (Id. at p. 876.)

The Court of Appeal disagreed on both issues. It looked to sections 548A and 549 of the Restatement Second of Torts, which address the application of the out-of-pocket rule to damages of which a fraudulent misrepresentation is a legal cause, and the comments to those sections, which "clarify the role of proximate causation in determining (1) the entitlement to damages and (2) their amount" in connection with the sale of public securities. (OCM, supra, 157 Cal.App.4th at p. 872.) It rejected CIBC's argument that plaintiffs had not shown that the notes' decline in value was proximately caused by its fraud, under the Restatement principle that if a security's decrease in market price has a "causal 'connection with or relation to the matter [fraudulently] represented' " (Rest.2d Torts, § 549, com. c, p. 111), then "the investor may recover damages, even though 'subsequent changes in financial or business conditions are factors which, in conjunction with the falsity of the misrepresentation, contribute[d] to diminish or increase the market price of the securities.' " (Id. at p. 873, italics added, quoting Rest.2d Torts, § 549, com. c, p. 111.)

The OCM court held the evidence showed that despite plaintiffs' knowledge of RCI's distressed condition, they nevertheless were led to believe it had considerable assets based on CIBC's representations in the offering memorandum and investment opinions. (OCM, supra, 157 Cal.App.4th at p. 873.) The court stated that these facts, combined with other evidence concerning plaintiffs' experience in identifying undervalued companies, "support the reasonable inference that if RCI had possessed the assets represented in the offering memorandum and investment opinions, it probably would not have collapsed as it did." (Ibid.) Thus, plaintiffs had shown proximate cause: that RCI's collapse had the requisite " 'connection or relation to the matter[s]' that CIBC had fraudulently misrepresented and concealed." (OCM, at p. 873-874, citing Rest.2d Torts, § 549, com. c, p. 111.)

CIBC further argued that proof of proximate cause was absent because the omissions in RCI's offering memorandum never became publicly known before RCI's liquidation; that the worthlessness of the registered notes flowed exclusively from the demise of RCI's business plan and its secured creditor's impatience. (OCM, supra, 157 Cal.App.4th at p. 874.) The OCM court rejected that argument as "misapprehend[ing] the principles" explained in the Restatement: "We see no requirement in the comments that respondents were obliged to show that public knowledge of CIBC's concealment played a role in RCI's collapse, or that the public was fully aware of all the factual details that CIBC had concealed." (OCM, at p. 874.) The court acknowledged that under comment c of the Restatement, the basic measure of the actual value of a security for purposes of the out-of-pocket rule is the " 'price at which it could be resold in an open market... if its quality or other characteristics that affect its value were known.' " (OCM, at p. 874, citing Rest.2d Torts, § 549, com. c, p. 110.) According to the court, "the fact that the public never knew the details of CIBC's concealment prior to RCI's collapse does not render the final market price of the registered notes an inadequate measure of their actual value when respondents bought them. The price of the notes fell precipitously in 1998 due to public awareness that RCI was struggling to survive the downturn in the mass fragrance market; due to CIBC's concealment, the public never became fully aware that RCI's business plan had failed much earlier. Because the concealed aspects of RCI's condition, if revealed, would only have accelerated the fall in the notes' market price, the ultimate market value of the notes — namely, zero — is evidence of their actual value when purchased by respondents." (Id. at pp. 874-875.)

As to the amount of damage, the OCM court explained based on its prior discussion of proximate cause that "the final value placed on the notes by the market — that is, no value at all — is properly viewed as their actual value when purchased by respondents." (OCM, supra, 157 Cal.App.4th at p. 876.) The court further observed that three plaintiff witnesses — managing directors and a vice president — each testified that (1) the notes were worthless between February and July 1998 and their positive market price only reflected the public's ignorance of RCI's dire condition; (2) the notes were worthless when issued because RCI's business plan had already failed and RCI prolonged its existence solely by channel stuffing to secure loans; and (3) RCI was dying or dead when the unregistered notes were issued. (Ibid.)

The OCM court concluded: "In view of this evidence, the jury could properly have concluded that the registered and unregistered notes were always worthless — in the sense that there was never an appreciable chance that they would be repaid — and thus the registered notes held by respondents were valueless when purchased." (OCM, supra, 157 Cal.App.4th at p. 876.)

D. Evidence of Proximate Cause

Gardener contends plaintiffs did not prove he proximately caused the awarded damages. While he concedes they proved some connection between his wrongful misrepresentations and their losses, he maintains there was no evidence of a " 'complete causal relationship' " between the fraud and all of their realized trading losses. Gardener argues: "Instead of disaggregating the losses caused by the fraud from those losses attributable to other market factors, plaintiffs' damages expert simply assumed that Mr. Gardener's conduct caused all of the losses." He points to evidence that the price of Peregrine stock declined from a high of $79.50 per share in March 2000 to $2.57 per share on May 3, 2002, before the fraud was disclosed. He maintains this constitutes "undisputed evidence that other factors were responsible for all of plaintiffs' trading losses, at least until the time the fraud was announced."

The fundamental flaw in Gardner's argument is the fact that he did not present evidence below demonstrating that market factors or some other "subsequent event" purportedly causing Peregrine's stock's value to decline, were entirely independent of —or had no "connection with or relation" to — Peregrine's financial condition. (Rest.2d Torts, § 548A, com. b; see also Dura, supra, 544 U.S. at p. 343 [explaining that a stock's decrease in price might reflect "not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price"].) Of course, contentions or theories raised for the first time on appeal are not entitled to consideration. (City of San Diego v. D.R. Horton San Diego Holding Co., Inc. (2005) 126 Cal.App.4th 668, 685.)

In any event, Gardner's "complete causal relationship" argument is misplaced. A similar contention was made and rejected in OCM, supra, 157 Cal.App.4th 835, in connection with the defendant's challenge to the evidence of actual reliance. (Id. at pp. 863-864.)There, CIBC argued the plaintiffs had not established a " 'complete causal relationship' " between its alleged misrepresentations and the resulting harm; it maintained the evidence showed that the "immediate cause" of plaintiffs' decision to buy the unregistered notes was the fall in the notes' price in early 1998. (Id. at p. 864.) The OCM court found the argument "misapprehends the required showing," explaining, " ' "[i]t is not... necessary that [a plaintiff's] reliance upon the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor in influencing his conduct.... It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision." ' " (Ibid.) The court found ample evidence that the plaintiffs had relied on CIBC's offering memorandum, RCI's registration statement and CIBC's investment opinions in deciding that the market had undervalued the notes and "[Plaintiffs] would not have bought the notes had they known about RCI's disastrous 1996 Christmas season and channel stuffing." (Ibid.) Here, Gardner does not present any appellate challenge to the evidence of plaintiffs' reliance on his misrepresentations or the trial court's implicit findings on that element.

For purposes of assessing proximate cause of damage, OCM and the Restatement, as we have detailed above, explains that as long as there is a "causal 'connection with or relation to the matter [fraudulently] represented,' " an investor may recover damages even though other factors, in conjunction with the falsity of the misrepresentation, contributed to diminish the security's market price. (OCM, supra, 157 Cal.App.4th at p. 873; Rest.2d Torts, § 549, com. c.) Indeed, where investors are induced to purchase shares of a company by false statements of the amount of its capital or assets — the evidence of which Gardner does not dispute here — " 'the fact that the insolvency of the corporation was in part due to the depressed condition of the industry in question does not prevent the investor from recovering his entire loss from the promoter, since if the corporation had had the capital and assets that it was represented as having, its chance of surviving the depression would have been greatly increased.' " (OCM, at p. 873, quoting Rest.2d Torts, § 549, com. c.)

Here, Gardner's claim of the absence of a causal relationship between his fraud and plaintiffs' damages fails on the grounds expressed in OCM. As plaintiffs point out, Gardner ignores the factual basis of the trial court's implied liability finding, namely, his plea agreement in which he admitted to fraudulent conduct — including backdating contracts and deceptively avoiding material adverse disclosures — with respect to company information and metrics that influenced the price of Peregrine stock.⁹ Specifically, Gardner admitted "[t]he price of Peregrine stock was influenced by such factors as Peregrine's reported revenues, earnings, cash flow, and various other metrics used by securities analysts to gauge Peregrine's financial health"; that "Peregrine's management provided guidance to the investing public regarding its anticipated results, and such guidance was closely followed by securities analysts and investors"; and "Peregrine's senior executives knew that if Peregrine announced financial results that failed to meet or exceed their guidance or analysts' expectations, the price of the company's stock would sharply decline." These admissions provide the requisite facts from which to reasonably infer a causal connection or relation between the fraud and plaintiffs' trading losses in order to support a finding of proximate cause.

9 In part, Gardner admitted to backdating contracts in order "to make it appear as if the contracts had been executed before the end of the fiscal quarter," allowing Peregrine to "improperly recogniz[e] revenue from these transactions in the prior quarter, thereby fraudulently increasing its reported revenues and allowing the company to meet its quarterly financial targets." He also admitted to engaging in deceptive practices to avoid making material adverse disclosures of Peregrine's aging accounts receivables, which Gardner "understood... would require Peregrine either to write-off large amounts of receivables or to restate previously recorded revenue." Gardner admitted he "understood that a write-off of bad debts or a restatement would have a significant negative impact on Peregrine's stock price."

Further, expert Miller opined that the omissions and misstatements about Peregrine's ability to generate revenues, and its future earnings and cash flows "caused the price of Peregrine's securities to reach and be maintained at levels above those at which it would otherwise have traded throughout the Analysis Period." Dr. Saha similarly stated that "had Peregrine not falsified its financials, its revenue for fiscal years 2000 through 2002 would have been much lower than it claimed; as a result, the run[-]up in its share price would likely have been much less than it actually was." He concluded that it was "evident from [the other defense expert's] own analysis that Peregrine's share price dropped to $0.89 by May 6, 2002 as a direct consequence of the revelation of the accounting fraud, and is not explained by industry or market factors."¹⁰

10 Dr. Saha was retained to rebut the defense expert's analysis and demonstrate why the defense approach produced an artificially low damage figure. He did not purport to create his own damage analysis (which he acknowledged Miller had done), and he explained that his own "but-for" prices were depicted only to show the fallacy of the defense damage analysis. Thus, Dr. Saha's reliance on an 89 cent share price does not contradict Miller's conclusions.

Both experts' opinions support a conclusion that Peregrine's stock price was artificially inflated even before it finally began disclosing its fraud, and that due to the inflation, plaintiffs purchasing, selling and holding the stock throughout the Analysis Period lost opportunities to sell, and otherwise suffered losses upon the ultimate sale, when Peregrine's price fell dramatically after the fraud was revealed. And, as in OCM, supra, 157 Cal.App.4th at p. 873, a reasonable inference may be drawn that if Peregrine had possessed the revenues, earnings and cash flow represented by Peregrine's management, it would not have failed as badly as it did even in the face of other market conditions. Of course, "[s]ubstantial evidence includes circumstantial evidence and the reasonable inferences flowing therefrom." (Conservatorship of Walker (1989) 206 Cal.App.3d 1572, 1577.)

Neither Dura nor In re Daou Systems, Inc. (9th Cir. 2005) 411 F.3d 1006 (Daou), relied upon by Gardner, change our conclusion. In Dura, the U.S. Supreme Court decided that merely alleging loss as a result of artificially inflated prices was not sufficient for a plaintiff in a private securities fraud action to plead loss causation.¹¹ The court noted that the complaint did not allege the share prices "fell significantly after the truth became known" and reasoned that an inflated purchase price does not itself constitute or proximately cause the relevant economic loss. (Dura, supra, 544 U.S. 336, 342, 347.) Rather, a plaintiff in such an action is required to "adequately allege and prove the traditional elements of [proximate] causation and loss." (Id. at p. 346.) The court expressly refused to consider any "other proximate cause or loss-related questions." (Ibid.) The OCM court observed that Dura and other loss causation cases in the context of claims under SEC rule 10b-5 did not disturb its conclusions; they "do not reach the precise issues regarding proximate causation presented here, and their discussions are otherwise consistent with our analysis of these issues." (OCM, supra, 157 Cal.App.4th at p. 875.) That is the case here.

11 A plaintiff pleading a private damages action involving publicly traded securities under section 10(b) of the Exchange Act must allege that (1) defendants made a material misrepresentation or omission; (2) the misrepresentation was in connection with the purchase or sale of a security; (2) the misrepresentation caused plaintiff's loss; (4) plaintiff relied on the misrepresentation or omission; (5) defendants acted with scienter; and (6) plaintiff suffered damages. (In re Maxim Integrated Products, Inc. Securities Litigation (2009) 639 F.Supp.2d 1038, 1044, citing Dura, supra, 544 U.S. at pp. 341-342.) "To adequately plead loss causation, a plaintiff must allege a causal connection between the defendant's material misrepresentation and the plaintiff's loss; that is, the 'misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.' " (Maxim, at p. 1044.)

And Daou, supra, 411 F.3d 1006, supports our conclusion. In analyzing the sufficiency of the class plaintiffs' pleadings as to proximate causation on their section 10b-5 action, the Ninth Circuit explained that "[a] plaintiff is not required to show 'that a misrepresentation was the sole reason for the investment's decline in value' in order to establish loss causation. [Citation.]' As long as the misrepresentation is one substantial cause of the investment's decline in value, other contributing forces will not bar recovery under the loss causation requirement' but will play a role 'in determining recoverable damages.' " (Daou, at p. 1025.) Daou held that the plaintiffs' third amended complaint survived a motion to dismiss under federal particularity requirements where they alleged that certain disclosures of a company's true financial health (reflected by deteriorating operating expenses and margins, missed projected earnings, and prematurely recognized revenue) lead to a " 'dramatic, negative effect on the market, causing Daou's stock to decline to $3.25 per share, a staggering 90% drop from the Class Period high of $34.375 and a $17 per share drop from early August 1998.' " (Daou, supra, 411 F.3d at p. 1026, italics omitted.) The Ninth Circuit, however, pointed out the pleading did not allege any revelation of Daou's true financial health prior to August 1998, and "as the [third amended complaint] reads now," any loss suffered before the revelations began in August 1998 could not be considered causally related to the alleged fraudulent accounting methods. (Id. at pp. 1026-1027.) We do not read Daou, a case limited to the specific pleadings and facts at issue, to announce a per se rule in all circumstances that stock losses incurred prior to disclosure of fraud are not recoverable.

The fact Peregrine's stock may have lost value before the fraud was revealed to the public does not preclude a finding of proximate cause, nor does it make those losses "per se invalid," as Gardner contends. Again, we follow the OCM court's reasoning that the pertinent comments in the Restatement include no requirement, for purposes of proving proximate cause, that plaintiffs show the public's knowledge of the concealment played a role in the company's collapse, or that the public was fully aware of all the factual details that the company had concealed. (OCM, supra, 157 Cal.App.4th at p. 874.) As the court noted, the basic measure of the actual value of a security for purposes of the out-of-pocket rule is the " 'price at which it could be resold in an open market... if its quality or other characteristics that affect its value were known.' " (Id. at p. 874, italics added, quoting Rest.2d Torts, § 549, com. c, p. 110.) "Because this hypothetical price may be difficult to assess, the defrauded investor is permitted to establish the actual value of a security at the time of purchase by reference to its market price when the misrepresented or concealed 'matter' becomes publicly known, provided this underlying 'matter' played a causal role in the decrease in market price." (OCM, at p. 874.) Further, Gardner's argument disregards settled California Supreme Court authority recognizing a cause of action for plaintiffs who have actually relied on material misrepresentations to hold their stock and recover losses incurred due to their inaction. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 180, 184.) As stated, Gardner does not challenge the sufficiency of the evidence as to plaintiffs' actual reliance on Peregrine's management's omissions and misrepresentations.

Here, plaintiffs presented testimony from two experts who attributed both inflation and depression of Peregrine's stock price during the Analysis Period to the omissions and misstatements about Peregrine's ability to generate revenues, likely future growth of earnings and cash flows.¹² The Restatement makes it clear that such inflation or depression "is the important factor making the price fictitious." (Rest.2d Torts, § 549, com. c.) And, "if the recipient of the misrepresentation, in reliance upon it, retains the securities either as a permanent or temporary investment, their value is determined by their market price after the fraud is discovered when the price ceases to be fictitious and represents the consensus of buying and selling opinion of the value of the securities as they actually are. If the plaintiff has resold the securities in the interim, however, his loss is the difference between the price paid and that received." (Ibid., italics added.) Plaintiffs fall within these circumstances and, having established a sufficient connection between the fraud and change in stock price, are entitled to recover proven losses from interim sales, i.e., sales that occurred before the fraud was discovered.

12 Dr. Saha criticized the other defense expert's conclusions as to fair market value as of May 6, 2002, (after the accounting fraud related disclosures were made) and his assessment of the artificial inflation of the stock price stemming from the concealment. Dr. Saha looked at Peregrine's revenue restatements for fiscal years 1994 through 2005, and found they demonstrated two points: "(a) had Peregrine not falsified its financials, its revenue for fiscal years 2000 through 2002 would have been much lower than it claimed; as a result, the run[-]up in its share price would likely have been much less than it actually was; (b) in the absence of the accounting fraud and related disclosures battering its stock price, Peregrine's share price would likely have fallen some, but certainly not to the $0.89 level." Dr. Saha found the plaintiffs' combined losses on purchase and sale of the stock was over 40 times higher than the defense estimate, approximately 80 percent of the plaintiffs' actual out-of-pocket loss.

E. Plaintiffs' Experts' Opinions Provide Sufficient Evidence of the Value of Peregrine's Stock for Purposes of Calculating Plaintiffs' Out-of Pocket Losses

Gardener's contentions are substantially identical to those made by the defendant in OCM. He faults the trial court for awarding damages in the "full amount of plaintiffs' realized trading losses," maintaining that such an award shows the court used a "legally improper measure" for compensatory damages. More specifically, he argues plaintiffs failed to introduce any evidence of the actual value of Peregrine common stock or options at the time of plaintiffs' purchase, a necessary component to calculate out-of-pocket damages.

In making these contentions, however, Gardener acknowledges that plaintiffs' expert Miller opined that Peregrine's securities were worthless at all times — i.e., that they had essentially zero value for purposes of assessing plaintiffs' damages. He proceeds to attack Miller's opinion on grounds it is "unreliable," "uncorroborated," "unsubstantiated," and based on "unfounded assumptions" or " 'vague generalities' " because Miller pointed only to his own expertise, the factors he believed would be important to investors, and his general understanding about the behavior of the financial markets." Gardener also purports to argue that Miller's opinion conflicts with the record evidence. Without citing to the record, he argues it shows Peregrine's common stock had "substantial value based on its legitimate sales of real products, its receipt of actual revenues from those sales and its substantial profits." Gardner, however, points to no evidence reflecting Peregrine's sales of products, sales revenues or positive profits. The sole record evidence to which Gardener points (cited in a footnote) is the fact that Peregrine's stock price was $1.59 on May 23, 2002, assertedly after the "full extent" of the fraud was disclosed.

Importantly, while " 'the fact of damage must be clearly established, the amount need not be proved with the same degree of certainty but may be left to reasonable approximation or inference. Any other rule would mean that sometimes a plaintiff who had suffered substantial damage would be wholly denied recovery because the particular items could not, for some reason, be precisely determined.'... It is particularly applicable in fraud cases.... [¶] Thus, once a plaintiff holder can show that a portion of the loss is attributable to fraud, difficulty in proving the amount of the damages will not bar a cause of action. Proof will, of course, often require expert evidence. Such evidence is commonplace in securities fraud actions. [Citation.] Experts may disagree — they often do — but that is no reason to reject a holder's cause of action." (Small v. Fritz Companies, Inc., supra, 30 Cal.4th at p. 191 (conc. opn. of Kennard. J.); see also 6 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 1551, p. 1024.)

Having these principles in mind, we conclude Gardner's arguments fail on several grounds. At best, Gardener's arguments attributing value to Peregrine's stock point to a competing damages theory based on facts that he could have presented at trial, but did not. As we have stated, contentions or theories raised for the first time on appeal are not entitled to consideration. (City of San Diego v. D.R. Horton San Diego Holding Co., Inc., supra, 126 Cal.App.4th at p. 685.) A party should not be required to defend against a new theory on appeal where — as here — " ' " 'the new theory contemplates a factual situation the consequences of which are open to controversy and were not put in issue or presented at the trial.... ' " ' " (Ibid.) As for the fact Peregrine's stock retained some value on May 23, 2002, the trial court could have equally attributed such value to the artificial inflation reported by expert's Miller and Saha, or the public's ignorance of the full extent of Peregrine's fraud, as opposed to unspecified market factors or value that Gardner did not prove in any event.¹³

13 In her concurring opinion in Small v. Fritz Companies, Inc., supra, 30 Cal.4th 167, Justice Kennard acknowledged the rule that "[i]n a securities fraud case, the loss is calculated by using the 'market price after the fraud is discovered when the price ceases to be fictitious [i.e., based on false data] and represents the consensus of the buying and selling opinion of the value of the securities.' " (30 Cal.4th at p. 187.) Justice Kennard clarified however, "This rule does not necessarily mean that damages must be computed on the basis of the market price of the stock on the day the possible fraud is revealed; the market may take longer to digest and react to the news." (Ibid.)

Further, contrary to Gardner's contention, Miller described his valuations by stating the purchase prices he applied to Peregrine stock for various periods of time, reaching values of the actual purchase price per share (supported by charts attached to his report showing for each plaintiff the shares bought and sold on a trade-by-trade basis, or treating the value as $25.06 per share (or $12.53 per share on a split-adjusted basis) for shares held on April 22, 1999. He opined that Peregrine's management's omissions and misstatements inflated the price of Peregrine's securities during the analysis period, explained why that was the case, and set out calculations based upon an entirely fictitious purchase value, consistent with Dr. Saha's conclusions that the omissions and misrepresentations, as opposed to market factors, affected Peregrine's stock price. Miller based his valuations on not only his qualifications and experience in the field, which is a proper basis for expert opinion (see Evid. Code, § 801; In re Lockheed Litigation Cases (2004) 115 Cal.App.4th 558, 563), but also data concerning Peregrine's daily common stock prices, and trading volume, quotes and valuations of Peregrine's options on selected dates, press releases and brokerage firm analyst reports on Peregrine, data from stock price indices, Peregrine's proxy statements and 10-K reports from 1999 to 2001, and plaintiffs' trade activity data. Expert opinions are purely conclusory if they are not accompanied by a reasoned explanation that connects the factual predicates to the ultimate conclusion, thus having no evidentiary value. (See Jennings v. Palomar Pomerado Health Systems, Inc. (2003) 114 Cal. App.4th 1108, 1117.) Miller's conclusions about plaintiffs' losses were grounded in his general knowledge about the importance to investors of company reports of revenues, future earning and cash flows, as well as his review of specific Peregrine materials and industry stock price data, all of which provide a reasonable basis for his opinions. Because Miller's opinions are not based on unsupported factual assumptions or sheer speculation and conjecture, we reject Gardner's sufficiency of the evidence argument.

Gardner relies heavily on Fragale v. Faulkner (2003) 110 Cal.App.4th 229, a case that was found to be factually distinguishable in OCM, supra, 157 Cal.App.4th at p. 877. In Fragale, "the trial court declined to admit testimony from a homeowner about the hypothetical value his house would have had if certain defects been remedied. [Citation.] The court in Fragale affirmed, reasoning that the homeowner failed to show that he had any familiarity with information bearing on this value. [Citation.] That is not the case here." (OCM, supra, at p. 877.) The OCM court's reasoning applies here. Fragale does not convince us that plaintiffs' damages are unsupported by substantial evidence.

Finally, for the reasons set forth above, Gardner has forfeited his challenge to the adequacy of expert Miller's (or Dr. Saha's) opinions by failing to object to the trial court's consideration of them on grounds they assertedly lacked sufficient foundation, were uncorroborated, or were not accompanied by "reliable analysis...." In substance, these attacks are to the weight we should accord the experts' opinions, a matter that is beyond our purview on a sufficiency of the evidence analysis.

F. Plaintiffs' Options Losses

Gardner advances the same challenges to the evidence of plaintiffs' options losses, asserting plaintiffs did not show the options' actual value, did not connect their losses to his misconduct, and applied a legally incorrect measure of damage. We find no basis to distinguish the evidence of plaintiffs' losses from Peregrine stock versus their options, or reach any different conclusion as to the sufficiency of the evidence. As plaintiffs point out, options are deemed to be securities under California law (see Corp. Code, § 25019), and Miller's opinions encompassed plaintiffs' purchases and sales of Peregrine options in addition to stock. Gardner relies on the same flawed approach as with his challenge to the evidence of plaintiffs' stock losses: he argues factual matters and advances theories that he did not present at trial, namely, that "options are written by third parties, not the company, and thus are only loosely connected to the value of the common stock." We will not entertain such new factual theories for the first time on appeal.

His authorities do not compel any different conclusion. He cites to Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Millar (W.D. Pa. 2003) 274 F.Supp.2d 701 and Laventhall v. General Dynamics Corporation (8th Cir. 1983) 704 F.2d 407 (Laventhall) for the general propositions that options trading is a "high risk arena" (Millar, 274 F.Supp.2d at p. 709), or trading in options "can be far more speculative than the purchase of common stock or other securities" and "[e]ven though the stock price may increase, options may expire worthless." (Laventhall, 704 F.2d at p. 410.) But in Millar, the court pointed out based on evidence presented in the record that a broker had, unbeknownst to the plaintiffs and contrary to their wishes, placed their shares of stock in a "call [option]" strategy: the "high risk arena of options trading." (Millar, at pp. 703, 709.) And in Laventhall, the court of appeal expressly noted that the record contained evidence explaining options trading. (Laventhall, 704 F.2d at p. 410 ["The record contains several documents explaining options trading"].)That is not the case here, as we have pointed out. In any event, we note federal courts disagree about the inherently speculative nature of options trading. (See Tolan v. Computervision Corp. (D.Mass 1988) 696 F.Supp. 771, 776 [noting disagreement]; In re Adobe Systems, Inc. Securities Litigation (N.D.Cal. 1991) 139 F.R.D. 150, 154-155 [recognizing standing of options holders to bring Rule 10b-5 claims in cases involving affirmative misrepresentations].)

In Miller v. Commodities Futures Trading Commission (9th Cir. 1999) 197 F.3d 1227, the Ninth Circuit faulted the Commodities Futures Trading Commission (Commission) for making assumptions from evidence pertaining to seven of the defendant's customers to determine gains and losses from the defendant's fraud to all 347 of his customers. (Id. at pp. 1235-1236.) The appellate court pointed out why the losses of seven witnesses in their options trading were not representative, noted that they were otherwise not a statistically significant group, and concluded the Commission's assumptions effectively transferred the burden of proof to the defendant to prove he had not defrauded the other customers and that his fraud had not caused them substantial loss. (Ibid.) Here, unlike Miller, the trial court relied upon plaintiffs' detailed trade-by-trade evidence of all of their stock and options transactions, preventing it from making similar assumptions as did the Commission in Miller.

II. Plaintiffs' Appeal of Postjudgment Order Striking Punitive Damages

A. Contentions

Plaintiffs contend the trial court misapplied the standard of Adams v. Murakami (1991) 54 Cal.3d 105 when it granted Gardner's motion to vacate the punitive damage award on grounds they had not presented evidence of his financial condition "by alternative sources." Relying on Mike Davidov Co. v. Issod (2000) 78 Cal.App.4th 597 and Cummings v. Medical Corp. v. Occupational Medical Corp. (1992) 10 Cal.App.4th 1291, they argue the court's original $26.3 million award was sufficiently supported by Gardner's admission in his plea agreement that he profited in excess of $12 million from his fraud, consisting of his salary and bonuses ($4 million) as well as his net profit on stock options ($8.2 million).¹⁴ They point out that their inability to present additional financial evidence was solely due to Gardner's assertion of his Fifth Amendment rights and suggest they should not have had to bear the burden of proving a sufficient basis for punitive damages.¹⁵ Plaintiffs argue the trial court's ruling sets a "dangerous precedent" encouraging defendants to avoid punitive damages by refusing to participate in discovery or trial. Finally, plaintiffs argue the court erred in vacating the punitive damages award outright; that under Lara v. Cadag (1993) 13 Cal.App.4th 1061 and Washington v. Farlice (1991) 1 Cal.App.4th 766, 777, it should have simply reversed the award and remanded the matter for a new trial on that issue.

14 Gardner admitted in his plea agreement that, "By the time [he] left Peregrine in May 2002, [he] had been paid approximately $4 million in salary and bonuses, and had been granted and exercised stock options with a gross value of approximately $14 million, and with a net value (after tax withholding and payment of the exercise price) of approximately $8.2 million." He admitted that "[m]uch of [his] compensation was tied directly to Peregrine's purported financial success."

15 Though plaintiffs do not make this argument expressly, we glean it from their citation to Morris v. Williams (1967) 67 Cal.2d 733 for the proposition that "fairness and policy may sometimes require a different allocation" of the burden of proof "[w]here the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties...." (Id. at p. 760.) There is no indication that plaintiffs asked the trial court for such a burden shift below, and while plaintiffs point out they unsuccessfully sought a stay of proceedings (which they requested in September 2007), they did not appeal from the order denying the stay. Even if they had, plaintiffs did not base the stay request on their inability to obtain evidence of Gardner's financial condition; rather, the request was specifically based on the unavailability of at least eight key witnesses who assertedly were present "at Board meetings, audit committee meetings, compensation committee meetings and other informal meetings" and could testify "concerning specifics on Peregrine's fraudulent revenue recognition, accounting practices, falsified SEC filings, backdated contracts, side agreements with channel partners, and material misrepresentations in SEC filings and public statements." Plaintiffs sought only to stay the matter "for a period of time that allows for the sentencing of key witnesses." As Gardner points out, Morris does not address the circumstances where a defendant asserts his or her Fifth Amendment right against self-incrimination as a basis for refusing to respond to discovery.

In response, Gardner emphasizes that plaintiffs do not dispute that they presented no evidence of his financial condition. He argues their cross-appeal is frivolous; that a plaintiff seeking a punitive damages award must show a defendant's ability to pay and consideration of income alone is insufficient to support such an award because it accounts for only assets and not liabilities. He asserts there is no authority that required the trial court to elevate plaintiffs' right to obtain financial evidence over his proper invocation of his Fifth Amendment privilege, and thus the burden remained on plaintiffs to demonstrate that imposition of punitive damages would sufficiently deter the conduct, but not destroy him financially. He maintains plaintiffs had numerous other avenues to obtain evidence of his financial condition, including from his former employer, the record of his criminal case, his tax preparers, and financial institutions or other government agencies.

B. The Trial Court Did Not Err in Striking the $26.3 Million Punitive Damages Award

The parties dispute the applicable standard of review. We need not decide the matter, because whether we review the question under an abuse of discretion standard or undertake de novo review, we hold the trial court did not err in vacating its $26.3 punitive damages award in view of the absence of evidence of Gardner's ability to pay. Our conclusion is compelled by this court's prior decisions, particularly Kenly v. Ukegawa (1993) 16 Cal.App.4th 49 and, more recently, Kelly v. Haag (2006) 145 Cal.App.4th 910 (Kelly), both fraud cases in which the plaintiffs did not present meaningful evidence of the defendant's financial condition or ability to pay. (Kenly v. Ukegawa, at p. 56; Kelly, at p. 917.)

In Kenly v. Ukegawa, this court expressly rejected the plaintiff's argument that the punitive damages award in that case could be based solely on the defendant's alleged profit: "An award based solely on the alleged 'profit' gained by the defendant, in the absence of evidence of net worth, raises the potential of its crippling or destroying the defendant, focusing as it does solely on the assets side of the balance sheet without examining the liabilities side of the balance sheet. [¶] Without evidence of the entire financial picture, an award based on 'profit' could leave a defendant devoid of assets with which to pay his other liabilities." (Kenly v. Ukegawa, supra,16 Cal.App.4th at p. 57.) We made it clear that our holding did not preclude such a showing in all cases, however, as long as there was some evidence to demonstrate that the defendant would not be crippled by the award. (Id. at p. 57, fn. 7.)

In Kelly, after reviewing the pertinent legal principles relating to punitive damages awards, we explained a $75,000 punitive damages award lacked evidentiary support because an award of punitive damages could not be sustained without meaningful evidence of a defendant's financial condition, net worth or ability to pay, on which the plaintiff bore the burden of proof. (Kelly, supra, 145 Cal.App.4th at pp. 915-916.) There, the plaintiff only produced evidence of the defendant's statements about certain properties and assets without evidence that he still owned them at the time of trial, and produced no evidence of the defendant's liabilities, requiring the trial court to speculate as to any liabilities.¹⁶ (Id. at p. 917.)

16 We observe that in Johnson v. Ford Motor Company (2005) 35 Cal.4th 1191, the California Supreme Court rejected the plaintiffs' use of an "aggregate disgorgement theory" for purposes of calculating punitive damages, which the court "distinguished from simple return of ill-gotten gains earned from an individual plaintiff." (Id. at pp. 1208-1209.) Citing Cummings Medical Corp. v. Occupational Medical Corp., supra, 10 Cal.App.4th at p. 1300 and other cases in a footnote (Johnson, 35 Cal.4th at p. 1208, fn. 8), the court noted that a " 'gain-based measure of this sort sends a clear signal to defendants that such misconduct does not pay and, thus, serves the deterrent function of punitive damages.' " (Johnson, 35 Cal.4th at p. 1208.) However, it stated that "an approach calculating punitive damages in an individual tort case by the profits made through similar torts against hundreds or thousands of other individuals creates possibilities for unfairness — to the defendant and other possible claimants both — which may be of constitutional dimension." (Id. at pp. 1208-1209.) We do not read Johnson as permitting a punitive damages award solely based on profits gained from the wrongdoing; its citation to Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. 1, 22, in the footnote indicates that our state's high court views the defendant's profitability as but one factor — among others including the " 'financial position' " of the defendant (Pacific Mut. Life, at p. 22)— in deciding whether a particular award is greater than reasonably necessary to punish and deter.

The evidence here fails for the same reasons. "An award of punitive damages hinges on three factors: the reprehensibility of the defendant's conduct; the reasonableness of the relationship between the award and the plaintiff's harm; and, in view of the defendant's financial condition, the amount necessary to punish him or her and discourage future wrongful conduct." (Kelly, supra, 145 Cal.App.4th at pp. 914-915.) Plaintiffs bore the burden of proving Gardner's financial condition or ability to pay for purposes of the award. (Adams v. Murakami, supra, 54 Cal.3d at p. 119; Baxter v. Peterson (2007) 150 Cal.App.4th 673, 680; Kelly, at p. 916.) A punitive damages award should be based on "some evidence of the defendant's actual wealth. Normally, evidence of liabilities should accompany evidence of assets, and evidence of expenses should accompany evidence of income." (Baxter v. Peterson, at p. 680.)

Here, while the trial court had before it evidence of Gardner's income as of May 2002 and the net value of his stock options, it had no evidence of Gardner's liabilities. There was no indication of Gardner's income at the time of trial, the critical point in time (see Kelly, at p. 915), and there nothing to show whether Gardner possessed any other assets, had liabilities, or whether he owned or owed money on a house, car or any other item. (Accord, Lara v. Cadag, supra, 13 Cal.App.4th at p. 1063 [concluding plaintiff did not present meaningful evidence of the defendant's financial condition; that evidence of the defendant's income, standing alone, was "wholly inadequate"].) Absent meaningful evidence of Gardner's ability to pay, the court was unable to "assure that the award punishes but [would] not cripple or bankrupt [him]." (Kenly v. Ukegawa, supra, 16 Cal.App.4th at p. 57; see also Baxter v. Peterson, supra, 150 Cal. App.4th at p. 681 [though record showed the defendant owned substantial assets, it was silent with regard to her liabilities, and thus insufficient for a reviewing court to evaluate her ability to pay $75,000 in punitive damages].)

We are not persuaded by plaintiffs' complaint that Gardner's nonparticipation prevented them from obtaining evidence of his net worth and that they lacked any meaningful resource to obtain evidence of Gardner's financial condition or net worth other than his own discovery responses. Importantly, plaintiffs have not shown that after he asserted blanket objections to plaintiffs' interrogatories, they sought an order that Gardner produce evidence of his finances, or a continuance for the express purpose of obtaining such information. (See Civ. Code, § 3295, subd. (c) [trial court at any time may enter an order permitting discovery of a defendant's profits and/or financial condition, if plaintiffs have established a substantial probability they can prevail on a claim on which such an award can be based]; Mike Davidov Co. v. Issod, supra, 78 Cal.App.4th at pp. 608-609 [defendant waived any challenge to complain about the lack of evidence of net worth for purposes of punitive damages because he did not comply with a court order to produce his financial records]; Caira v. Offner (2005) 126 Cal.App.4th 12, 40-41 [trial court ordered defendant to produce a current financial statement; court of appeal held any insufficiency in the record as to his financial condition was attributable solely to defendant's failure to comply with a court order].) Plaintiffs' failure to subpoena documents or witnesses for trial on the issue did not preclude them from later obtaining a court order requiring Gardner to produce evidence of his financial records. (Davidov, at p. 609.)

Nor can we say that the court erred by declining to find this an appropriate case to award punitive damages to plaintiffs in the amount of Gardner's ill-gotten profits. (See, e.g., Cummings Medical Corp. v. Occupational Medical Corp., supra, 10 Cal.App.4th at p. 1294 [basing punitive damages on the total profit in the fraudulent transaction].) In Kenly v. Ukegawa, supra, 16 Cal.App.4th at p. 57, this court disagreed with the Cummings court's rationale that an award based on the profit reaped from a defendant's fraud can never be excessive. Further, even if we were to consider an award based on Gardner's profits from his fraud, plaintiffs' evidence — his plea agreement — only established that Gardner had been granted approximately $8.2 million from the exercise of his stock options, a sum that is vastly short of the trial court's original $26.3 million punitive damage award. Plaintiffs presented no evidence to establish that those transactions left Gardner with $8.2 million in available resources. (Accord, Kenly v. Ukegawa, at p. 58.) As stated in Kenly v. Ukegawa: "We accept the logic of taxing a fraudulent profiteer to the extent of his ill-gotten gains, assuming he has the ability to pay the award. Lacking ability the purpose of punitive damages is not served when the award is based solely on high paper profit from the fraudulent transaction.... Although we may surmise that the defendants' assets were in the millions, we could just as easily assume that their debts were equally high. Without evidence of the actual total financial status of the defendants, it is impossible to say that any specific award of punitive damages is appropriate." (Kenly v. Ukegawa, supra, 16 Cal.App.4th at p. 57.) We conclude the trial court did not err in vacating the $26.3 million punitive damage award.

Plaintiffs having had a full and fair opportunity to present their case for punitive damages, we do not find any basis to remand the matter for retrial. (See Kelly, supra, 145 Cal.App.4th at p. 920.)

DISPOSITION

The judgment and postjudgment order vacating the punitive damage award are affirmed. The parties shall bear their own costs.

WE CONCUR, HUFFMAN, Acting P. J., McDONALD, J.