Loss Causation And Stock Price Declines

As the U.S. Supreme Court prepares to take on the issue of loss causation in securities fraud cases, the lower court split continues. In Swack v. Credit Suisse First Boston, 2004 WL 2203482 (D. Mass. Sept. 21, 2004), a case alleging that the defendants committed fraud by disseminating research reports that they knew to be overly optimistic, the court held that loss causation could be adequately plead even though the corrective disclosure did not lead to a stock price decline.

The court noted that “stock prices sometimes self-correct in advance of the final overt disclosure.” In the case of a misleading analyst report, data that is inconsistent with the rating may lead the market to devalue the rating to the point that the corrective disclosure fails to move the stock price. As a result, the court found that it could not resolve the issue of loss causation on a motion to dismiss. (Note that the court’s decision is similar to the Fogarazzo opinion from earlier this year.)

Holding: Motion to dismiss denied.

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