(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.)

Investment Analyst Suit Fails to Plead Loss Causation

The second amended complaint of a securities fraud suit against a broker-dealer based on analyst reports was dismissed with leave to amend. The suit involved claims that the analysts' coverage of a medical equipment company was undeservedly positive because the company was also a client of the firm's investment banking division.

The amended complaint was dismissed because it failed to contain allegations of a causal connection between the misrepresentations and the subsequent economic harm suffered. The court reasoned that in order to allege loss causation, "it is not adequate for a plaintiff merely to allege that the price paid for an equity security was inflated as a result of a defendant's misrepresentations."

Although the complaint was dismissed with leave to amend, the remaining elements of securities fraud were sufficiently pleaded. The complaint provided detailed allegations that the firm had a practice of giving unduly positive reports to its investment banking clients, certain reports about the company in question contained statements that were misleading and analysts were in possession of specific information that irreconcilably contradicted those statements.

In addition, the court found the suit was not barred by the statute of limitations. Until the settlement charges brought by regulatory authorities against the firm, the shareholders had no knowledge of the alleged practice of giving unduly positive invest reports to the firm's investment banking clients, regardless of generalized claims concerning conflicts of interest at the firm reported in the financial press. The shareholders could not have pleaded that the analyst reports were part of a fraudulent scheme to met the scienter requirement until the regulatory settlement was publicized.