NERA Economic Consulting has published an interesting working paper entitled “Loss Causation and Damages in Shareholder Class Actions: When It Takes Two Steps To Tango.” The author, Dr. David Tabak, discusses the circuit court split between courts that believe plaintiffs must demonstrate a causal connection between the alleged misrepresentations and a subsequent decline in the stock price to adequately plead loss causation (e.g., Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003)) and courts that believe plaintiffs merely need to demonstrate that the alleged misrepresentations artificially inflated the stock price (e.g., Broudo v. Dura Pharmaceuticals, Inc., 339 F.3d 933 (9th Cir. 2003)).
Dr. Tabak finds that “if plaintiffs have to plead either only a purchase inflation or only a later price decline, some investors will ‘successfully’ plead loss causation without having suffered a loss.” Accordingly, there is a logical argument that plaintiffs should have to plead both a purchase inflation and a later price decline related to the fraud to survive a motion to dismiss. The article also discusses how the different loss causation pleading requirements impact the calculation of damages.