Dura imposed significant pleading and proof requirements on plaintiffs seeking to bring a securities fraud action for damages. Under the Supreme Court’s decision, it is no longer sufficient for a securities law plaintiff to allege only price inflation. Now, there must be facts pleaded and proved which establish a firm causal link between the claimed fraud and the alleged injury.

In the aftermath of the Supreme Court’s ruling, many commentators argued that the decision left unresolved more questions than it answered. Some questioned the significance of the ruling. Since that time however, few can argue that the decision has not had a significant impact.

Over time, two primary theories have emerged. One is the fraud on the market theory, which is discussed in Dura, while the other is materialization. The former keys to the Supreme Court’s decision in Basic regarding the use of the fraud on the market theory. Under this approach, the securities law plaintiff must plead and establish facts demonstrating a causal link between the fraud and the alleged injury. Price inflation is not sufficient. Nor it is adequate if there is only what the Court called “touching.” Rather there must be a firm link and the fraud must be disclosed. See, e.g., Catogas v. Cyberonics, Inc., 292 Fed. Appx. 311 (5th Cir. 2008).

Under the latter approach, the actual concealed risk must materialize. While a corrective disclosure is not required under this approach as with the fraud on the market theory, if the fraud does not emerge the theory fails. See, e.g., Teamsters Local 445 v. Bombardier, No. 05-1898, 2005 WL 218919 (S.D.N.Y. Sept. 6, 2006).

A leading case on loss causation is the decision of the Tenth Circuit in In re Williams Sec. Litig. — WCG Subclass, 558 F.3d 1130 (10th Cir. 2009). There, the court affirmed a district court ruling rejecting two theories of loss causation offered by plaintiffs’ expert. One was a so-called “leakage,” premised on the theory that the fraud dribbled out over time, while the other was based on a series of disclosures, but failed to demonstrate that any new facts emerged.

Dura is being felt beyond simply pleading loss causation. Now, the decision is having an impact on class certification. See, e.g., Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007). Recently the case was applied by the Tenth Circuit in reversing the sentence for criminal insider trading of former Quest Communications CEO, Joseph Nacchio. U.S. v. Nacchio, Case No. 07-1311 (10th Cir. July 31, 2009). There, the teachings of Dura were applied in the context of determining trading profits for sentencing on insider trading convictions.

Ultimately however the Supreme Court may have to revisit its decision in Dura. A split among the circuits is emerging over pleading standards. Many thought that the Supreme Court had resolved the question of whether the loss causation element had to be pleaded with particularity under Rule 9(b) or more generally under 8(a). A closer examination of the Court’s opinion demonstrates however, that it did not.

Now, both the fourth and the seventh circuits are requiring that loss causation be plead in accord with the fraud particularity standards of Rule 9(b). In contrast other circuits such as the second are following the dictates of Rule 8(a).

The ninth circuit however may be crafting a third approach. In Gilead Sciences, the circuit appeared to be shifting the focus of the question from the motion to dismiss stage of the case to later in the litigation process. This approach appears to be inconsistent with the gatekeeper role of the district court in securities damage actions under the PSLRA, as well as under Dura. At the same time, the “not implausible” standard used by the court, coupled with the extended time over which the facts relating to plaintiff’s loss causation theory were scattered appears to be inconsistent with Dura as well as Twombly and Iqbal. While the Supreme Court declined to hear Gilead Sciences, if the ninth circuit continues to develop these principles, or if they are adopted by other circuits, the High Court may be required to again consider the question of loss causation.