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The pleading standard for loss causation in the 2d U.S. Circuit Court of Appeals requires plaintiffs in a securities fraud case to allege a concealment of risk and to show that this concealment, which was later exposed, caused the plaintiff’s loss, a federal judge has ruled. In Amy Liu v. Credit Suisse First Boston, No. 04 Civ 3757, Judge Shira Scheindlin of New York’s southern district reviewed the history of loss causation cases in the 2d Circuit. In seeking to define a standard from a half-dozen decisions handed down since 1986, she wrote that, on their face, the rulings appeared to create an “ambiguous” precedent. The decision comes on the heels of the U.S. Supreme Court’s April decision in Dura Pharmaceuticals v. Broudo, which also involved loss causation. In Dura, the court ruled that to prove fraud, plaintiffs must provide a direct link between a fall in a company’s stock price and the alleged fraud or misrepresentation. Loss causation often comes into play in the earliest parts of a securities class action, when plaintiffs must show during the pleadings stage that the defendant’s actions caused the alleged losses. The unanimous Supreme Court opinion rejected the looser standard applied by the 9th Circuit, which allowed plaintiffs to prove loss causation without showing a direct link between a plunge in a company’s stock price and misrepresentation or fraud. Under that standard, plaintiffs could fulfill their obligations at the pleading stage by making allegations that a stock price was inflated without the need for a direct link to a loss. No final word The Supreme Court also tacitly sided with the stricter standard for loss causation established by the 2d Circuit, Scheindlin said. However, that tacit approval failed to offer the final word on the boundaries of loss causation. “ Dura did not establish what would be a sufficient loss causation pleading standard,” Scheindlin wrote, “it merely established what was not.” Previous 2d Circuit’s decisions on the issue-what one appellate panel described as “somewhat inconsistent”-led Scheindlin to attempt to reconcile the circuit’s loss causation standard. In January, a circuit panel that included judges Dennis Jacobs, Sonia Sotomayor and Barrington D. Parker Jr. ruled on loss causation in Lentell v. Merrill Lynch & Co., and acknowledged that “different formulations of the loss causation standard” existed. “[O]ver time, the Second Circuit has advanced several different standards for pleading loss causation,” Scheindlin wrote, “including ‘direct causation,’ ‘materialization of risk,’ and ‘corrective disclosure,’ all of which are referenced in Lentell.”

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