(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Supreme Court Decides Loss Causation Case

The U.S. Supreme Court held that a fraud complaint against a pharmaceutical company failed to show loss causation. A Ninth Circuit panel had previously held (2003 CCH Dec. ¶92,474) that "it is necessary in the pleading to allege 1) that the stock’s price at the time of purchase was overstated and 2) sufficient identification of the cause for this overvaluation." The appellate court added that "for a cause of action to accrue, it is not necessary that a disclosure and subsequent drop in the market price of the stock have actually occurred, because the injury occurs at the time of the transaction." 

The Supreme Court rejected this approach, however, as it found that the claim of an inflated stock price at the time of purchase was insufficient without more to show loss causation. Associate Justice Breyer delivered the opinion for a unanimous court.

According to Justice Breyer, "as a matter of pure logic, at the moment the transaction takes place, the plaintiff has suffered no loss [as] the inflated purchase payment is offset by ownership of a share that at that instant possesses equivalent value." He explained that if the purchaser sold the shares "quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss," and when "the purchaser subsequently resells such shares, even at a lower price, that lower price may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price." 

The Supreme Court concluded that the policy reasons underlying private actions for Section 10(b) violations did not support the Ninth Circuit view. The securities statutes seek to maintain public confidence in the marketplace, stated Justice Breyer, and they do so by deterring fraud, in part, through the availability of private securities fraud actions. Such a broad reading of the loss causation element would effectively turn the antifraud provisions into "broad insurance against market losses," concluded the high court.

Dura Pharmaceuticals, Inc. v. Broudo is reported at Fed Sec L Rep ¶93,218.