Pleading Loss Causation

The U.S. Court of Appeals for the Fifth Circuit has offered some guidance on how to analyze allegations of loss causation. In Lormand v. US Unwired, Inc., 2009 WL 941505 (5th Cir. April 9, 2009), the plaintiffs alleged that the truth about the fraud “leaked” to the market in a series of partial disclosures and led to stock price declines

The Fifth Circuit made two holdings of note.

(1) In contrast to some other courts (including a recent Ninth Circuit decision), the court found that under Supreme Court precedent loss causation is only subject to a notice pleading requirement. In the court’s lengthy formulation, a plaintiff must allege either a “facially ‘plausible’ causal relationship between the fraudulent statements or omissions and plaintiff’s economic loss, including allegations of a material misrepresentation or omission, followed by the leaking out of relevant or related truth about the fraud that caused a significant part of the depreciations of the stock and plaintiff’s loss” (citing Dura) or “enough facts to give rise to a reasonable hope or expectation that discovery will reveal evidence of the foregoing elements of loss causation” (citing Twombley).

(2) The disclosures that constitute the leaking out of the truth about the fraud may come from third parties.

Applying these legal standards, the Fifth Circuit held the plaintiffs had alleged, at least as to some of their claims, both a “plausible nexus” between the fraud and the cited disclosures and enough factual allegations to raise a reasonable expectation that discovery would reveal evidence of loss causation.

Holding: Affirmed in part, reversed in part, and remanded.

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