The 10b-5 Daily

In the first circuit court decision to apply the Supreme Court’s holding in the Dura case, the Sixth Circuit has affirmed the dismissal of a securities class action based on the plaintiffs’ failure to adequately plead loss causation. The case was brought against several former Kmart executives and PricewaterhouseCoopers. The plaintiffs alleged that the defendants misled Kmart’s investors in 2000 and 2001 prior to the company’s bankruptcy.

In D.E. & J. Limited Partnership v. Conaway, 2005 WL 1386448 (6th Cir. June 10, 2005) (unpublished), the Sixth Circuit found that the plaintiffs “did not plead that the alleged fraud became known to the market on any particular day, did not estimate the damages that the alleged fraud caused, and did not connect the alleged fraud with the ultimate disclosure or loss.” In the end, the plaintiffs relied entirely on allegations that they had paid artificially inflated prices for their Kmart stock and that Kmart’s stock price declined after the company announced its bankruptcy. The Sixth Circuit held that price inflation had been expressly rejected by the Supreme Court as an adequate basis for pleading loss causation. As for the bankruptcy filing, the plaintiffs “never alleged that Kmart’s bankruptcy announcement disclosed any prior misrepresentations to the market.”

Holding: Dismissal affirmed.

The National Law Journal has a review (via law.com – free regist. req’d) of the Second Circuit’s major securities law cases over the past year. Click on the case name for The 10b-5 Daily’s take on the featured decisions – Dabit, Rombach, and Enterprise Mortgage.

The Sarbanes-Oxley Act of 2002 (“SOX”) extends the statute of limitations for federal securities fraud to the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. Although the legislation clearly provides that it “shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act [July 30, 2002],” left unresolved is whether Congress intended to revive claims that had already expired under the earlier one year/three years statute of limitations.

Two circuit courts (the 2nd and 7th) have declined to apply the new statute of limitations to revive time-barred claims. In the past week, the Eleventh and Eighth Circuits have also issued opinions addressing the question.

In its long-awaited decision in Tello v. Dean Witter Reynolds, Inc., 2005 WL 1279130 (11th Cir. June 1, 2005), the Eleventh Circuit held that it could not decide “the statutory-interpretation issue of whether previously time-barred claims are revived by the [SOX] statute of limitations” until the district court determined if the plaintiffs were on inquiry notice of their claims prior to the passage of the legislation.

In contrast, the Eight Circuit’s opinion in In re ADC Telecommunications, Inc. Sec. Litig., 2005 WL 1322576 (8th Cir. June 6, 2005) simply follows the earlier appellate holdings in finding that SOX did not revive time-barred claims. The opinion (in a footnote) and concurrence clarify that the issue of the retroactivity of the new statute of limitations (i.e., its application to “causes of action that had already accrued at the time of the change in law”) is separate from the issue of whether Congress intended to revive time-barred claims.