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The U.S. Supreme Court has made it easier for companies to resist class actions by shareholders seeking compensation for stock market losses. Shareholders will now have to prove a clear connection between a company’s misrepresentations and subsequent loss in stock value before they can recover damages in fraud-on-the-market litigation. Dura Pharmaceuticals Inc. v. Broudo, No. 03-932. The justices unanimously rejected the looser standard adopted by the 9th U.S. Circuit Court of Appeals that would have allowed lawsuits to proceed simply by a showing that the price of a stock was inflated at the time it was bought because of company misrepresentations. Because a “tangle of factors” can cause stocks to go down in price, Justice Stephen G. Breyer said on behalf of the court, more than an inflated purchase price is needed to prove a connection between a company’s misrepresentation and the stockholder’s later losses. “That lower price may reflect not the earlier misrepresentation but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions or other events,” Breyer wrote. The decision comes as a relief to companies facing stockholder lawsuits, including some lingering from the collapse of Internet stocks, which, defendant companies claim, was caused by general economic conditions, not company misrepresentations. “There will be a fair number of motions to dismiss or motions for summary judgment after today,” said William Sullivan of Paul, Hastings, Janofsky & Walker’s San Diego office, who argued on behalf of Dura. But Patrick Coughlin of Lerach Coughlin Stoia Geller Rudman & Robbins, also of San Diego, who represented the Dura investors, also claimed victory. He said that Breyer had articulated a “pleading rule” that will make it relatively easy for investors to file suits without detailing the specific link between a company’s misrepresentations and the stock price decline. The case was a key test of the Private Securities Litigation Reform Act of 1995, aimed at making it harder for shareholders to sue companies. The law codified the long-standing “loss causation” principle that requires plaintiffs to prove that the harm they are seeking damages for was actually caused by the defendant. The 9th Circuit had interpreted the requirement broadly, allowing damages if a company misrepresentation merely “touches upon” the reasons for the losses suffered. Dura had allegedly boosted the price of its stock to $53 a share in 1997 with inflated claims about the success of its business. When it later announced that the Food and Drug Administration had not approved one of its devices, the stock price fell to $9.75 a share. Dura said that the price decrease was the result of an expected revenue shortfall that it had announced, not any misrepresentations. Dura, joined by the Bush administration, argued that, if upheld, the 9th Circuit’s standard would legitimize far too many lawsuits against companies whose stock prices fall for reasons unrelated to any wrongdoing. Consumer and stockholder groups countered that overturning the 9th Circuit would make it much harder for stockholder victims to receive compensation.

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