OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835 involved 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, contributed 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 matters' 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 "misapprehending 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.) 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, " ' "it 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.) In short, the court held that the defendant was liable to investment funds on a theory of negligent misrepresentation in connection with the issuance and sale of promissory notes. The reason was that, when the defendant prepared the offering memorandum, it had access to reliable nonpublic information that disproved its client's representation of its financial forecast and thus, the defendant "cannot be viewed as playing only a 'secondary role' in preparing the offering memorandum." (Ibid.)