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Supreme Court Hears Arguments in Loss Causation Case

The U.S. Supreme Court heard oral arguments in Dura Pharmaceuticals, Inc. v. Broudo (2003 CCH Dec. ¶92,474) to consider whether a securities fraud plaintiff relying on the fraud-on-the-market theory must show loss causation by pleading and proving the connection between the alleged fraud and the subsequent decline in the investment price. The SEC assisted the solicitor general in drafting its amicus brief in May 2004 urging the court to grant certiorari, arguing that the 9th Circuit incorrectly decided the matter. The question of what a plaintiff must plead and prove to establish loss causation in a fraud-on-the-market case is recurring and many of these cases are filed in the 9th Circuit, according to the amicus brief. 

The 9th Circuit concluded that a plaintiff can establish loss causation by showing that the price of the securities on the date of purchase was inflated because of a misrepresentation. The court acknowledged that the 3rd and 11th Circuits apply a different standard of loss causation requiring a demonstration of a corrective disclosure followed by a drop in the stock price.

Deputy Solicitor General Thomas Hungar, in presenting the government's view, said that a plaintiff who purchases securities at an inflated price suffers no loss. In a fraud-on-the-market case, the inflation has to be removed from the price of the stock through some corrective action. The truth adjusts the price, he explained.

Patrick Coughlin, a partner with Lerach, Coughlin, Stoia, Geller, Rudman & Robbins LLP, arguing on behalf of the respondents, said there does not have to be a corrective disclosure. On the date you overpay, you're out that money, he explained. He agreed that an investor could not recover damages if the shares are also sold at the inflated price, but said that if you paid $100 for stock that was inflated and worth only $50, you've lost $50. The inflation can be reduced in ways other than through a corrective disclosure, he added.

The government argued in its amicus brief that by measuring a loss at the time of purchase without requiring any allegation of a subsequent loss attributable to the fraud would grant a windfall to investors who sold before the reduction or the elimination of the artificial inflation. They would be able to recover the portion of the purchase price attributable to the fraud on resale and then would be entitled to recover the same amount in damages, according to the brief.

Chief Justice William Rehnquist was absent from the court, but reserves the right to participate in the case based on the transcript of the oral argument and the briefs that have been submitted.