In the aftermath of the Dura decision, loss causation can be a contentious issue at every stage of a securities class action. Two recent decisions provide some insight on how courts are addressing the plaintiff’s burden of proof on this element.

(1) In Ryan v. Flowserve Corp., 245 F.R.D. 560 (N.D. Tex. 2007), the court rejected the use of the “true financial condition” theory to establish loss causation. When Flowserve announced a financial restatement in 2004, the stock price only declined a few cents. According to the plaintiffs’ expert, however, Flowserve’s 2002 announcements of an earnings miss and a reduction in guidance were a “revelation of the Company’s true financial condition” and served as corrective disclosures. As a result, the stock price declines associated with the 2002 announcements were losses related to the alleged fraud. The court disagreed and held that there needed to be a stronger relationship between the supposed corrective disclosures and the alleged fraud.

Held: Class certification denied.

Quote of note: “Plaintiffs’ expert leads the court to a dangerous precipice. . . . [A] plaintiff, like here, with debatable evidence of fraud, can pick the largest stock price drop irrespective of the actual reason and still relate the fraud because the stock drop is nevertheless a revelation of the company’s true financial health. The ‘true financial condition’ theory, if accepted, threatens to undermine the objective of securities laws and disregards precedent.”

(2) In In re Omnicom Group, Inc. Sec. Litig., 2008 WL 243788 (S.D.N.Y. Jan. 29, 2008), the company had announced in 2001 that it was placing certain investments into a separate holding company. There was no statistically significant movement in the company’s stock price following the disclosure. In June 2002, however, there was a flurry of negative news reports about Omnicom and the transaction, leading to a stock price decline. On summary judgment, the court held that (a) the news reports generally did not contain any new facts about the transaction or the company’s accounting, and (b) to the extent any new facts were disclosed, they could not have qualified as corrective. (The court relied heavily on the Hunter decision from the Fourth Circuit.) Moreover, the court found that the event study done by the plaintiffs’ expert failed to “isolate [any corrective disclosures’] effect on Omnicom’s stock price from that of the negative reporting, which dwarfed any shreds of new information disclosed in June 2002.”

Held: Summary judgment granted in favor of defendants.

Quote of note: “Because the law requires the disaggregation of confounding factors, disaggregating only some of them cannot suffice to establish that the alleged misrepresentations actually caused Plaintiffs’ loss.”

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