Sixth Circuit Applies Dura

In the first circuit court decision to apply the Supreme Court’s holding in the Dura case, the Sixth Circuit has affirmed the dismissal of a securities class action based on the plaintiffs’ failure to adequately plead loss causation. The case was brought against several former Kmart executives and PricewaterhouseCoopers. The plaintiffs alleged that the defendants misled Kmart’s investors in 2000 and 2001 prior to the company’s bankruptcy.

In D.E. & J. Limited Partnership v. Conaway, 2005 WL 1386448 (6th Cir. June 10, 2005) (unpublished), the Sixth Circuit found that the plaintiffs “did not plead that the alleged fraud became known to the market on any particular day, did not estimate the damages that the alleged fraud caused, and did not connect the alleged fraud with the ultimate disclosure or loss.” In the end, the plaintiffs relied entirely on allegations that they had paid artificially inflated prices for their Kmart stock and that Kmart’s stock price declined after the company announced its bankruptcy. The Sixth Circuit held that price inflation had been expressly rejected by the Supreme Court as an adequate basis for pleading loss causation. As for the bankruptcy filing, the plaintiffs “never alleged that Kmart’s bankruptcy announcement disclosed any prior misrepresentations to the market.”

Holding: Dismissal affirmed.

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