Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), discussed here, requiring that a securities law plaintiff plead and prove facts establishing loss causation continues to have a significant impact on securities litigation. The High Court’s recent constriction of the Rule 8 pleading standards, first discussed in Dura and later honed in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), is beginning to have significant impact. These decisions were brought together by the Eight Circuit to affirm the dismissal of a securities fraud damage action in McAdams v. McCord, Case No. 09-1303 (Filed Oct. 20, 2009).

McAdams is a securities fraud suit brought by three investors and their related entities against UCAP, Inc., several of its executives and the outside auditors, Moore Stephens Frost, PLC. Plaintiffs invested $10 million in UCAP, a multi-state provider of mortgage lending and brokerage services. Subsequently, in April 2004 the company announced that it would need to restate its financial statements for the periods ended September 30, 2002, December 30, 2002, and March 31, 2003. Six months later UCAP’s principal operating subsidiary filed for Chapter 11. In 2005 its shares were delisted.

Plaintiffs filed suit claiming that they purchased their shares at artificially inflated prices. The complaint alleged a series of misstatements by the company and its executives. The auditors also made false statements, issuing reports on the financial statements of the company for 2001 and 2002. Those unqualified opinions were false, the complaint asserts, because the underlying financial statements were not prepared in accord with GAAP and the auditors, plaintiffs claimed, knew that the financial condition of the company was far weaker than reflected in the financial statements. The truth emerged, the complaint claims, on April 23, 2004 when UCAP announced the need for a restatement.

The district court dismissed the second amended complaint. That court concluded that plaintiffs failed to meet the heightened pleading requirements of Federal Civil Rule 9 and the Private Securities Litigation Reform Act or PSLRA.

The Eighth Circuit affirmed, but on different grounds. While the complaint alleges a series of misstatements, after the Supreme Court’s decision in Central Bank of Denver, discussed here, there is no liability for aiding and abetting. Accordingly, the auditors can only be held liable, if at all, for misstatements or omissions they made. Here, that is only the two audit opinions.

The court put aside the question of whether fraud as to those statements was pleaded with particularity, focusing instead on Dura. Under that decision, plaintiff is required to plead facts demonstrating “’that the loss was foreseeable and that the loss was caused by the materialization of the concealed risk,’” quoting Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir. 2008). The claims that the shares were purchased at an inflated price are clearly insufficient under Dura, the court held. While the complaint does claim the truth emerged with the announcement of a restatement, it fails to state the value of UCAP’s stock when the investors made their investment or the value before or after the need for the restatement was announced. Without these facts, the complaint fails to demonstrate that the investor’s losses were caused by the auditor’s misstatements.

The omission of these key facts is revealing the court noted, because in November 2003, months before the need for a restatement was announced, the company disclosed in an 8-K filing that its principal operating subsidiary was in danger of losing its only line of credit. The filing also stated that UCAP sold a controlling interest in the subsidiary to avoid its bankruptcy. Bringing together the requirements of Dura and Iqual, the court went on to conclude that lack of specificity about the value of UCAP stock “defeats the plausibility of the investors’ claim that MSF’s audit opinions … caused their losses.”