The content of the disclosure that led to a stock price decline is an important part of post-Dura loss causation analyses. One particular fact pattern that has proven difficult for defendants is when a company announces a SEC investigation without specifying exactly what conduct is under investigation.
In In re Bradley Pharmaceuticals, Inc. Sec. Litig., 2006 WL 740793 (D.N.J. March 23, 2006), the company disclosed that the SEC was conducting an informal inquiry and had asked for information “with respect to revenue recognition and capitalization of certain payments.” The stock price fell 26%. A subsequent announcement by the company revealed that it would have to restate its financial results for an earlier quarter due to improper revenue recognition on a particular transaction. The stock price went up slightly.
In their motion to dismiss, the defendants argued that the plaintiffs had failed to allege a loss following a “corrective disclosure” because the original press release was “simply a disclosure of a non-specific SEC inquiry” and did not say anything about the particular transaction at issue. The court disagreed, finding that the revelation of the truth “occurred through a series of disclosing events” and that by the time the company announced its restatement “the market had already incorporated that the previously released financial statements could not be relied upon.”
Holding: Motion to dismiss denied.
Addition: For a similar holding, see Brumbaugh v. Wave Systems Corp., 2006 WL 52751 (D. Mass. 2006).