The Supreme Court reversed and remanded the case to the lower court.  Dura Pharmaceuticals, Inc., v. Broude, 544 U.S. 356 (2005).  In a straightforward opinion the Court held that in order to bring and prove a cause of action for fraud, a securities law plaintiff must establish loss causation – there must be a causal link between the claimed fraud and the damages sought. 

The Court’s opinion is built on five key points.  First, as a matter of logic, the Court noted there must be something more than an inflated price as the circuit court held.  While an artificially inflated price “might” suggest a loss later, it might not.  The longer the time lag between the purchase and the sale, the more likely it is that other factors may have caused or contributed to the loss. 

Second, the PSLRA requires that loss causation be established.  While the statute does not define the concept, the fact that an inflated price might “touch” upon a loss is not enough under the statute.  This is clear from the fact that the purpose of the Reform Act is to give investors confidence in the integrity of the market, but not provide them with an insurance policy against loss.  Allowing investors to recover without establishing loss causation would effectively insure against loss and would thus be contrary to the PSLRA.

Third, the implied cause of action under Section 10(b) is rooted in common law fraud and tort principles.  Under those principles, it is well established that a plaintiff must prove causation or proximate cause to recover.  The decision of the Ninth Circuit failed to conform to precedent.

Fourth, under Rule 8, all that is required is a short plain statement to give fair notice.  “It should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff had in mind.” 

Finally, absent loss causation, baseless claims could go forward.  This is a policy point that flows through a number of the Court’s securities law opinions. 

On remand, the District Court permitted the plaintiffs to amend their complaint.  In the amended complaint, plaintiffs alleged that the misrepresentations inflated the price.  In addition, they alleged that the stock price dropped following corrective disclosures made on three different dates.  The court held that loss causation had been adequately pled noting that plaintiffs “have explained how the misrepresentations … caused economic loss.” 

Next:  The impact of Dura