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In a much-awaited decision, the U.S. Supreme Court reversed the 9th U.S. Circuit Court of Appeals and made clear that a “private plaintiff who claims securities fraud must prove that the defendant’s fraud caused an economic loss.” Dura Pharmaceuticals Inc. v. Broudo, 125 S. Ct. 1627, 1629 (2005). In Dura, the plaintiffs alleged that they suffered losses because they paid artificially inflated prices for common stock. The 9th Circuit reversed the district court’s dismissal of the complaint for failure to plead loss causation, holding that the plaintiffs ” ‘establish loss causation if they have shown that the price on the date of purchase was inflated because of the misrepresentation.’ ” Id. at 1630. Rejecting the 9th Circuit’s standard, the Supreme Court noted that private federal securities fraud actions are implied causes of action that “resemble” the common law torts of deceit and misrepresentation. The court noted that the 9th Circuit’s standard was at odds with the common law because the common law expressly requires the plaintiffs to show that the defendant’s deception was the proximate cause of their injuries. Plaintiffs must plead and prove loss causation The Supreme Court also noted that to prevail on a federal securities fraud claim, a plaintiff must plead and prove, in part, economic loss and loss causation. It is insufficient to show that a misrepresentation “touches upon” a later economic loss. Id. at 1632. The Supreme Court defined loss causation as “a causal connection between the material misrepresentation and the loss.” Id. at 1631. It concluded that the plaintiff’s complaint was deficient because it failed to sufficiently allege economic loss and loss causation. The court stated that “as a matter of pure logic, at the moment the transaction takes place, the plaintiff has suffered no loss; the inflated purchase payment is offset by ownership of a share that at the instant possesses equivalent value.” Id. In addition, the court noted that the link between the inflated share price and a plaintiff’s economic loss is “not invariably strong” because the lower price at which the purchaser resells the shares may reflect among other things, “changed economic circumstances.” Id. at 1631-2. Moreover, it reasoned that adopting the 9th Circuit’s standard would be inconsistent with the objectives and express provisions of the federal securities statutes. The federal securities statutes do not insure investors against market losses. Rather, the federal securities laws serve to protect investors against losses that the “misrepresentations actually cause.” Id. at 1633. The Supreme Court held that the plaintiffs’ complaint in Dura failed to sufficiently plead loss causation under Rule 8(a)(2) of the Federal Rules of Civil Procedure. The court assumed “for argument’s sake” that with respect to loss causation, a plaintiff need only plead a “short and plain statement of the claim showing that the pleader is entitled to relief.” Id. at 1634. Nevertheless, a “plaintiff who has suffered an economic loss” still must “provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind.” Id. Because the complaint solely contained allegations that the plaintiffs overpaid for the securities, the court reasoned that Dura Pharmaceuticals was afforded no “notice of what the relevant economic loss might be or of what the causal connection might be between that loss and the misrepresentation at issue.” Id. As a result, the court found the plaintiffs’ complaint legally deficient. Dura is a victory for those defending securities fraud lawsuits because courts will now uniformly be required to dismiss lawsuits when there is no indication of the causal relationship between the misrepresentation and the losses suffered. Several leading securities plaintiffs’ attorneys, however, have heralded Dura as a victory for investors in circuits that have previously rejected the position that allegations of artificial price inflation are sufficient to plead and prove loss causation. They rely upon the part of the decision where the court assumes “for argument’s sake” that a plaintiff need only satisfy the requirements of Rule 8(a)(2) to adequately plead loss causation. 2d Circuit’s ‘Lentell’ ruling is consistent with ‘Dura’ Some plaintiffs may also contend that recent pronouncements by the 2d Circuit in Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005), regarding the standard for pleading and proving loss causation, impose a stricter standard for pleading loss causation than suggested by Dura. This is because Lentell appears to state that a plaintiff must allege “both that the loss be foreseeable and that the loss be caused by the materialization of the concealed risk [a corrective disclosure].” Id. at 173. Plaintiffs may contend that Dura does not require a plaintiff to plead that his or her loss was caused by the materialization of the concealed risk, but only needs to plead some causal connection between the loss and the misrepresentation. However, the 2d Circuit does not require a plaintiff to plead a specific corrective disclosure in every securities fraud claim. Rather, the 2d Circuit’s requirement in Lentell that the plaintiffs plead a corrective disclosure was based on the facts of the case. Lentell, therefore, is entirely consistent with Dura. Like Dura, the 2d Circuit in Lentell equated the concept of loss causation to the common law concept of proximate cause. It also rejected the 9th Circuit standard, stating that allegations of artificial price inflation do “not speak to the relationship between the fraud and the loss of the investment.” Id. at 174. Moreover, like the Supreme Court, the 2d Circuit recognized that certain intervening events, as opposed to the alleged misrepresentations or omissions, could have caused the plaintiffs’ losses. The 2d Circuit also reiterated its long-standing rule that to plead and prove loss causation, a plaintiff must “‘demonstrate a causal connection between the content of the alleged misstatements or omissions and ‘the harm actually suffered.’ ” Id. at 174. There is nothing inconsistent between this statement and the standard articulated in Dura. The materialization of the concealed risk referred to in Lentell is not inconsistent with causal connection referred to in Dura and the 2d Circuit’s earlier decision in Emergent Capital Investment Management LLC v. Stonepath Group Inc., 343 F.3d 189, 197-198 (2d Cir. 2003) (a plaintiff must “allege a causal connection between the defendants’ nondisclosures and the subsequent decline in the value” of a security). The Lentell court stated that “[l]oss causation is a fact-based inquiry and the degree of difficulty in pleading will be affected by [the] circumstances” in each case. Id. at 174. While the 2d Circuit acknowledged that its members have not agreed on “whether certain losses were attributable to a concealed risk,” they all have concluded that “loss causation has to do with the relationship between the plaintiff’s investment loss and the information misstated or concealed by the defendant.” Id. No claim that defendants hid price-volatility risk In determining whether the plaintiffs in Lentell sufficiently pleaded loss causation, the 2d Circuit closely examined the allegations contained in the complaint. The court concluded that the plaintiffs’ losses were the result of extreme volatility in the stock market. Therefore, to successfully plead loss causation, the plaintiffs would have to adduce facts sufficient to establish that the defendants’ “misstatements and omissions concealed the price-volatility risk (or some other risk) that materialized and played some part in diminishing the market value” of the companies’ stock. Id. at 177. The Lentell plaintiffs did not make such allegations. The plaintiffs alleged only that the defendants’ research reports were false and misleading because they recommended that investors buy the stocks at issue and “failed to disclose conflicts of interest, salary arrangements, and collusive agreements among analysts, bankers” and the issuers of the stock. Id. at 177. The plaintiffs did not claim “that [the defendant] ‘doctored’ or hid or omitted . . . information” about the potential volatility of the stock price. Id. In fact, the research reports were “full of (unchallenged) analysis . . . suggesting [that the stocks at issue] were volatile investments, and therefore subject to sudden and substantial devaluation risk.” Id. at 176. Therefore, the plaintiffs did not adequately plead loss causation. The 2d Circuit cautioned that it was not suggesting “that plaintiffs were required to allege the precise loss attributable to [the defendant's] fraud, or that ‘systematically overly optimistic’ ratings of the type published . . . are categorically beyond the reach of the securities laws. Id. However, when a “substantial indicia of the risk that materialized are unambiguously apparent on the face of the disclosures alleged to conceal the very same risk,” a plaintiff must adduce “facts to support an inference that it was defendant’s fraud” that proximately caused his losses or “facts sufficient to apportion losses between the disclosed and concealed portion of the risk” that ruined the investment. Id. Since the plaintiffs failed to allege their securities fraud claim, they could not prevail.

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