Judge Pollack of the S.D.N.Y. has dismissed, with prejudice, an additional eight class actions against Merrill Lynch alleging the brokerage committed securities fraud by publishing overly optimistic research reports. The companies discussed in the relevant reports include eToys Inc., Homestore.com, and Pets.com Inc. The decision follows the reasoning laid down in Judge Pollack’s earlier ruling on two related cases a few months ago. The court focuses on the plaintiffs’ inability to adequately plead loss causation because of the absence of an alleged connection between the analyst reports and the companies’ financial troubles or the collapse of the overall market. As has become expected, Judge Pollack also manages to provide some colorful turns of phrase.
As of July, there were 27 similar consolidated class actions, each involving a different company’s stock, pending in the S.D.N.Y. It appears likely that none will survive the motion to dismiss stage. The Associated Press has a story on the new decision and the Securities Litigation Watch has this post.
Quote of note: Loss causation – “The burst of the bubble and the attendant market chaos are not chargeable to the defendants and represent intervening causes for which defendants are not responsible in the sequence of responsible causation.”
Quote of note II: Statute of limitations – On the issue of whether plaintiffs were on inquiry notice of their fraud claims, thus triggering the statute of limitations, the court concludes that “[t]he plethora of public information would have required even a blind, deaf, or indifferent investor to take notice of the purported alleged ‘fraud.'”
Quote of note III: Scienter – “Often lost in the enormous muddle of securities litigation is this most basic of facts: not every knowing misrepresentation creates a legal cause of action under the securities laws. The requisite state of mind, or scienter, in an action under Section 10(b) and Rule 10b-5, that the plaintiff must allege is a purpose to harm by intentionally deceiving, manipulating or defrauding.”