The Dura decision has had a significant impact on securities damage actions beginning with what is required to plead a cause of action.  Following the decision, one question which emerges is the pleading standards.  Some courts adopted the language in the opinion discussing the notice pleading requirements of Rule 8, while others have required more.  For example, in In re OmniVision Technologies, 2005 WL 1867717 (N.D. Ca. July 29, 2005), the court held that an allegation sufficient which states only that “Plaintiffs purchased OmniVision securities at artificially inflated prices and suffered damages when revelation of the true facts causes a decline in the value of their shares.”  Other courts have suggested however, that at least “some minimal details” be pled, without specifying just how much more.  See, e.g., In re UnumProvident Corp. Sec. Litig., 2005 WL 2206727 (E.D. Tenn. Sept. 12, 2005).  Some courts have required plaintiffs to plead with “specificity.”  For example in Teachers’ Retirement System of LA v. Hunter, 477 F.3d 162 (4th Cir. 2007), the court held that while Rule 9(b) “particularity” was not required, there should be something more than the minimal requirements of Rule 8(a).  Noting that loss causation as required by the PSLRA is an “averment of fraud,” the court stated that a strong argument can be made that it must be pled with particularity.  The court went on to note that “we conclude that a plaintiff purporting to allege a securities fraud claim must not only prove loss causation … but he must also plead it with sufficient specificity to enable the court to evaluate whether the necessary causal link exists.” 

A second question concerned whether Dura represented the only way in which loss causation could be established.  Some court have held that Dura only established what is not sufficient, not what standard must be met.  See, e.g., In re Initial Pub. Offering Sec. Litig., 2005 WL 1529569 (S.D. N.Y. June 28, 2005); In re The Warnaco Group, Inc. Sec. Litig., 388 F. Supp. 2d 37 (S.D.N.Y. 2005);  In re Coca-Cola Enterprises, Inc., Sec. Litig., 207 WL 472943 (N.D.Ga. Feb. 7 2007); Marsden v. Select Medical Corp., 2007 WL 1725204 (E.D. Pa. June 12, 2007).  Others have held that there are theories beyond DuraSee, e.g., Ray v. Citigroup Global Markets, Inc., 482 F.3d 991 (7th Cir. 2007).  Indeed, the Ray court concluded that there are three ways to establish loss causation. 

(1)  Fraud on the market.  This is the standard used in Dura.  It requires proof of an artificial price and a decline in value when the truth is revealed. 

2)  Materialization of risk.  This standard requires plaintiff to prove that “it was the very facts about which the defendant lied which caused its injuries.”  

3)  Representation that the investment is risk free.  This theory requires an explicit representation that the investment is risk free.  

See also Glover v. Deluca, 2006 WL 2850448 (W.D. Pa. Sept. 29, 2006) (noting that there are two methods of establishing loss causation). 

Next:  The application of specific theories.

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