Part X: Securities Class Actions: Current And Emerging Trends
One theory of Dura loss causation is the fraud on the market theory. Under this theory, the specific fraud must be revealed. This is the basic theory in Dura. The court applied this theory in Tricontinental Ind. v. PWC, 475 F.3d 824 (7th Cir. 2007). There, the complaint alleged that plaintiff sold assets to defendant for stock in reliance on the 1997 financial statements. In 2000, the defendant announced an investigation of possible accounting irregularities for the period 1998-1999. Following the announcement, the stock price dropped. The Seventh Circuit agreed with the district court that these allegations were inadequate: Dura “stresses that the complaint must ‘specify’ each misleading statement … and that there must be a causal connection … .” A general acknowledgement of “accounting irregularities” is not sufficient. See also In re Bristol-Myers Squibb Sec. Litig., 2005 WL 2007004 (S.D.N.Y. Aug. 17, 2005) (holding that it is the actual facts which are disclosed that is key, not the perception of the market).
It is critical to this theory that the truth be disclosed prior to the drop in the stop price. Conversely, it is not sufficient to plead facts demonstrating that the truth emerged after the share price drops. In Schleider v. Wendt, 2005 WL 1656871 (S.D. Ind. Jul 14, 2005), the complaint claimed that false statements were made about the operations during the class period. During the period the share price declined. After the class period, the company filed for bankruptcy and later still the truth emerged. The court held that there was a failure to plead loss causation: “The stock had long since hit bottom before these alleged misrepresentations became known.” See also In re Coca-Cola Enterprises, Inc., Sec. Litig., 2007 WL 472943 (N.D. Ga. Feb. 7, 2007) (same); Powell v. Ida Corp., Inc., 2007 WL 1498881 (D. Idaho May 21, 2007) (same).
Price inflation plus reliance on the integrity of the market also is not sufficient. Thus, the court in In re Business Objects, S.A., Sec. Litig., 2005 WL 1787806 (N.D. Cal Jul. 27, 2005) concluded that a complaint was insufficient because it alleged only that the class “suffered damages in reliance on the integrity of the market, [and that] they paid inflated prices for” the stock. See also Reding v. Goldman Sachs & Co., 382 F. Supp. 2d 1112 (E.D. Mo. 2005).
Likewise, a bankruptcy announcement has been held to be insufficient. In D.E. & J. Ltd. Partnership v. Conaway, 133 Fed. Appx. 994 (6th Cir. 2005), the stock price was alleged to have been inflated by concealing the true financial condition of the company. When the company filed for bankruptcy, the price dropped. The court rejected plaintiff’s claims that this was sufficient without more, concluding that an allegation that “a stock price dropped on a particular day, whether as a result of a bankruptcy or not, is not the same as an allegation that a defendant’s fraud caused the loss.” Indeed, under this theory, the complaint must specifically allege that the stock was sold at a loss. Knollenberg v. Harmonic, 152 Fed. Appx. 674 (9th Cir. 2005).
Next: Dura and the theory of materialization