Kaiser-Frazer Corp. v. Otis & Co.

Otis & Co. (defendant) agreed to buy 900,000 shares of unissued stock from Kaiser-Frazer Corp. (Kaiser) (plaintiff), which Otis would resell to the public. Kaiser was to register the stock with the Securities and Exchange Commission (SEC). Kaiser warrantied in the underwriting agreement that the registration statement and prospectus (1) complied with the Securities Act of 1933 (the securities act) and the SEC’s regulations and (2) contained no untrue statements of material fact or omissions of material fact. At the closing, Otis refused to purchase the stock, leading Kaiser to sue Otis for breach of contract. Otis responded that the prospectus was false and misleading because it indicated that Kaiser earned more than $4 million in profit in December 1947 when Kaiser’s actual December profit was less than $1 million. Thus, Otis argued, Kaiser breached its warranty that the prospectus complied with the securities laws and contained no false or misleading statements. Kaiser defended the accuracy of the prospectus and argued that, even if the prospectus did misstate its December profit, Otis waived or was estopped from asserting that Kaiser breached its warranty because Otis knew the actual December profit and even participated in drafting the registration statement and prospectus before signing the underwriting agreement. Kaiser further argued that Otis’s agreement to purchase the shares should be considered in isolation and that selling the stock to Otis would not violate the securities act. After a trial, the district court determined that the prospectus was not misleading and ordered Otis to pay more than $3 million in damages to Kaiser. Otis appealed.