The Content Of The Disclosure

Following the Dura decision by the Supreme Court, lower courts continue to grapple with what constitutes a sufficient pleading of loss causation. In In re Cree, Inc. Sec. Litig., 2005 WL 1847004 (M.D.N.C. Aug. 2, 2005), Cree’s stock price dropped after its former CEO filed an individual lawsuit generally alleging that the company had engaged in securities fraud. The court found: (a) the individual lawsuit “did not disclose anything about transactions with five of the six companies Plaintiffs now claim were the subject of numerous misstatements and omissions;” and (b) as to the one transaction it did address, the complaint “merely attribute[d] an improper purpose to the previously disclosed facts.” In the absence of the disclosure of new facts, the court found that the transaction could not be the “proximate cause of the complained-of loss.”

Holding: Dismissed with prejudice. (The court also adopted the rigorous First Circuit standard for evaluating confidential witness statements and held that the plaintiffs failed to plead falsity with sufficient particularity.)

Quote of note: “It is doubtful that a general averment of fraud with no specific factual allegations could be deemed a ‘disclosure’ for purposes of determining whether some act or omission, previously concealed by a false representation, caused, upon revelation, a shareholder’s loss. While it is clear that a disclosure need not conform to any prescribed format, in must nevertheless satisfy at least a minimum standard of content. A disclosure must reveal new facts; a bald assertion of fraud is not sufficient.”

Disclosure: The author of The 10b-5 Daily represents the defendants in the Cree securities litigation.

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