With all of the talk about the U.S. Supreme Court’s most recent securities litigation issues (scienter and scheme liability), it is important to remember that the full impact of the court’s last big decision – the Dura opinion on loss causation issued in 2005 – is still playing out in the lower courts. This year has seen a number of interesting decisions.
(1) In In re Motorola Sec. Litig., 2007 WL 487738 (N.D. Ill. Feb. 8, 2007), the court undertook a comprehensive examination of loss causation in the context of a summary judgment motion. Notably, the court rejected defendants’ argument that under Dura “a securities fraud plaintiff bears the burden, even as a nonmoving party on summary judgment, of proving that its loss was caused by the claimed fraud, and not by the ‘tangle of other factors’ affecting share price.” Instead, the court found that it is the defendant’s burden to show that the decline in share price did not result from the disclosure of information related to the claimed fraud. (The parties settled the case shortly after this decision.)
(2) In Ray v. Citigroup Global Markets, Inc., 2007 WL 1080426 (7th Cir. April 12, 2007), the court addressed an appeal from a grant of summary judgment in a collective action against an investment advisor. The court identified three possible ways “a plaintiff might go about proving loss causation.” First, a plaintiff could demonstrate the “materialization of a risk” – i.e., that it was the facts about which the defendant lied that caused the plaintiff’s injury. Second, a plaintiff could rely on the “fraud-on-the-market scenario” discussed in Dura and show both that the misrepresentations artificially inflated the price of the stock and that the value of the stock declined once the market learned of the deception. Finally, a plaintiff could show that its broker falsely assured the plaintiff that a particular investment was “risk-free.” The court found that the plaintiffs in the instant case had failed to introduce evidence sufficient to go ahead with their suit under any of these approaches.
(3) In Oscar Private Equity Investments v. Allegiance Telecom, Inc., 2007 WL 1430225 (5th Cir. May 16, 2007), the court vacated a class certification order “for wont of any showing that the market reacted to the corrective disclosure.” The court held that the plaintiffs had failed to provide sufficient empirical evidence of loss causation and, therefore, could not take advantage of the “fraud-on-the-market” presumption of reliance.
Quote of note (Oscar Private Equity): “The plaintiffs’ expert does detail event studies supporting a finding that [the company’s] stock reacted to the entire bundle of negative information contained in the 4Q01 announcement, but this reaction suggests only market efficiency, not loss causation, for there is no evidence linking the culpable disclosure to the stock-price movement. When multiple negative items are announced contemporaneously, mere proximity between the announcement and the stock loss is insufficient to establish loss causation.”