LIABILITY IN SECURITIES FRAUD ACTIONS: Part XVII: The Decision in Dura
The themes of Dura Pharmaceuticals, Inc., v. Broude, 544 U.S. 356 (2005), like those in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007) discussed earlier (here, here, here and here), will resonate in the arguments before the Supreme Court next month in Stoneridge Inv. Partners, LLC. v. Scientific-Atlanta, Inc. and Motorola, Inc., No. 06-43. Dura held that a securities law plaintiff in a private damage action must plead and prove loss causation. The decision has had a significant impact on private securities fraud suits.
Loss and transaction causation evolved as key elements of a Section 10(b) claim from the common law fraud roots of the implied cause of action. Transaction causation, essentially the reason a person invested, is sometimes called reliance or “but for” causation. Loss causation, which links the claimed fraud to the loss suffered by the investor, is sometimes referred to as “proximate cause.” The PSLRA codified loss causation as an element of a securities fraud damage action without defining the concept.
Prior to Dura, the circuit courts split over what was required to establish loss causation. The Second, Third and Eleventh Circuits held that the concept requires more than price inflation to establish a link between the misrepresentation/omission and the claimed injury. See, e.g., Emergent Capital Inv. v. Stonepath Group, 343 F.3d 189 (2nd Cir 2003). In contrast, the Eighth and Ninth Circuits held that, in view of the fraud on the market theory, when stock prices are inflated it makes sense that plaintiffs were harmed by paying too much. See, e.g., Gebhardt v. ConAgra Foods, 335 F.3d 824 (8th Cir. 2003).
The decision in Dura is based on a securities fraud complaint for damages that alleged two key claims. The first claim was that the defendant made false profitability statements. The second claim alleged that the company made false statements regarding FDA approval for a device.
The District Court dismissed the first claim for failing to plead scienter. The second claim was dismissed for failing to plead loss causation. The Ninth Circuit however, reversed, holding that in view of the fraud on the market theory allegations of price inflation constituted a sufficient link between the alleged fraud and the claimed damages.
Next, the opinion in Dura.