As The 10b-5 Daily has frequently discussed (indeed, this is the third post in a row on the topic), there is a circuit split over what is necessary to adequately plead loss causation in a securities fraud case. A majority of the courts hold that a plaintiff must demonstrate a causal connection between the alleged misrepresentations and a subsequent decline in the stock price to adequately plead loss causation, while a minority of courts hold that a plaintiff merely needs to demonstrate that the alleged misrepresentations artificially inflated the stock price.
In Broudo v. Dura Pharmaceuticals, Inc., 339 F.3d 933 (9th Cir. 2003), the Ninth Circuit came down firmly in the minority camp. The court found that loss causation “merely requires pleading that the price at the time of purchase was overstated and sufficient identification of the cause.” Based on this holding, the court reversed the lower court’s dismissal and remanded the case for further proceedings. (See this postdiscussing the opinion.) The defendants petitioned for a writ of certiorari to the Supreme Court.
On Friday, the U.S. (the SEC and the Solicitor General) filed an amicus brief in support of the defendants’ petition. In the brief, the U.S. argues that there is “an acknowledged circuit conflict regarding the nature and scope of the plaintiff’s burden to plead and prove loss causation in a fraud-on-the-market case under Rule 10b-5; the court of appeals decided that question incorrectly; the question is one of recurring importance; and this case is a suitable vehicle for resolving it.”
Specifically on the issue of whether the case was incorrectly decided, the U.S. makes two main arguments. First, the U.S. argues that measuring the loss in these types of cases “as of the time of the purchase, and not requiring any allegations of a subsequent loss of value attributable to the fraud, would grant a windfall to investors who sold before the reduction or elimination of the artificial inflation, because they would recover the portion of the purchase price attributable to the fraud on resale, and then would be entitled to recover that same amount again in damages.” Second, the U.S. argues that the decision improperly conflated the separate elements of transaction causation (i.e., the alleged misconduct induced the plaintiff to engage in the transaction in question) and loss causation (i.e., the alleged misconduct caused the plaintiff’s economic loss).
The Supreme Court rarely takes on securities litigation issues. But the combination of a clear circuit split, the U.S.’s encouragement, and yet another opportunity to overturn the Ninth Circuit, may well prove irresistible.