Upside Surprises

Judge Scheindlin (S.D.N.Y.) has issued two loss causation decisions in an offshoot of the IPO allocation cases.

In the case in question, the plaintiffs alleged a scheme by an investment bank and several issuers to systematically set the issuers’ announced earnings forecasts below internal forecasts. When earnings consistently beat the announced forecasts, the resulting excitement in the market allegedly drove the issuers’ stock prices up. According to the complaint, the scheme was ultimately revealed to the market through a series of announcements disclosing that earnings were below expectations or warning that future earnings would not meet expectations. These announcements allegedly ended “the fraudulently induced expectation of continuing upside surprises.”

In re Initial Public Offering Sec. Litig., No. MDL 1554 (SAS), 2005 WL 1162445 (S.D.N.Y. May 13, 2005), the court responded to a motion for reconsideration of an earlier dismissal of the claims by rejecting the plaintiffs’ reliance on the announcements because they were not “corrective disclosures.” The court explained that “[t]o allege loss causation, plaintiffs must allege that, at some point, the concealed scheme was disclosed to the market.” None of the disclosures relied on by the plaintiffs, however, implied that there had been a fraudulent scheme.

In response to a second motion for reconsideration, Judge Scheindlin issued another decision. In In re Initial Public Offering Sec. Litig., 2005 WL 1529659 (S.D.N.Y. June 28, 2005), the court noted that the Supreme Court’s Dura opinion “did not disturb Second Circuit precedent regarding loss causation.” After a lengthy discussion of how to reconcile this sometimes contradictory Second Circuit precedent, the court again found that loss causation had not been adequately plead.

The June 28 decision is the subject of a New York Law Journal article (via – free regist. req’d).

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