In Dura Pharmaceuticals, Inc. Broudo, 544 U.S. 336 (2005), the Supreme Court reversed a decision upholding the adequacy of a securities class action complaint. The Court held that the complaint did not adequately plead loss causation, that is, the economic link between the claimed fraud and injury. The decision resolved a conflict among the circuits. In Dura, however, the Court did not actually specify what constitutes loss causation. Rather, it stated what is not loss causation – only pleading price inflation. Since the decision in Dura, the courts have struggled to define what does and does not constitute loss causation.

In New York City Employees Retirement System v. Jobs, Case No. 5:06-CV-05208 (9th Cir. Decided Jan. 28, 2009), the circuit court eliminated another claimed theory of loss causation – dilution. The class action complaint against Apple, Inc. and fourteen of its directors and officers, alleged violations of Exchange Act Sections 14(a) and 20(a) for a misleading 2005 proxy solicitation. The complaint, grounded in option backdating claims, alleges that from 1996 through 2005 Apple shareholders unwittingly approved the issuance of 205 million shares based on a series of false statements. This resulted in a 20% dilution. The complaint sought rescission of the votes, compensatory damages for the share dilution, an accounting, and attorney’s fees and costs.

The district court dismissed the Section 14(a) claims without leave to amend, although the court did permit amendment of other derivative claims. In dismissing the Section 14(a) claims the court held, in part, that plaintiffs had failed to adequately plead loss causation.

The Ninth Circuit affirmed as to the pleading of loss causation, but remanded to permit plaintiffs to amend. To establish a claim under Section 14(a) the court held, a securities law plaintiff must plead loss causation. Under SOX, a plaintiff must show that the defendant “caused the loss for which the plaintiff seeks to recover damages.” Dura requires a plaintiff to prove economic loss. Accordingly, in the complaint, a securities law plaintiff must give notice of “what the relevant economic loss might be or of what the causal connection might be between that loss and the misrepresentation.”

Plaintiffs in this case tried to side step Dura, arguing that their claim is really grounded in rescission. SOX however does not differentiate between legal and equitable remedies according to the court. Therefore, plaintiffs must plead economic loss.

Furthermore, while it is correct that Dura does not specify the manner in which that loss must be established, as plaintiffs contend, the complaint must provide notice of that loss the court stressed. Here, the only claim is that ownership was diluted by 20%. As the district court concluded, economic loss does not necessarily accompany dilution. Accordingly, a claim of dilution, standing alone, is not sufficient to plead loss causation under SOX and Dura.