The constant percentage method of calculating damages in a securities class action assumes that the fraud caused the stock to be valued at “x” percent more than it was really worth throughout the class period (with “x” percent equaling the percentage decline in the stock price after the fraud was revealed), even if the stock price varied widely during that time.
The New York Law Journal has an interesting column (Jan. 21 – subscrip. req’d) on whether the constant percentage method remains a valid method of calculating damages. The authors argue that the method has been called into question because of the requirement in Dura (the Supreme Court decision on loss causation) that the revelation of the “relevant truth” be the cause of any loss. Only one court, however, has specifically rejected the use of the constant percentage method.
Quote of note: “In excluding the damages and loss causation report of plaintiffs’ expert, the [In re Williams Securities Litigation – N.D. Ok.] court found that the constant percentage method was in direct conflict with Dura Pharmaceuticals Inc. v. Broudo, the controlling Supreme Court precedent on loss causation. Securities litigators and their experts should pay heed to Williams. To the extent that this well-reasoned decision starts a trend in the case law, use of the constant percentage method in securities fraud cases may become a thing of the past.”