The loss causation requirement for rule 10b-5 causes of action: The implications of Dura Pharmaceuticals, Inc. v. Broudo

Business Lawyer

Volumn 63, Issue 1, 2007, Pages 163-186

  Ferrell, Allen ^a   Saha, Atanu ^b  

^a HARVARD LAW SCHOOL   (United States)

^b Alix Partners   (United States)

Author keywords

[No Author keywords available]

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EID: 38849187878     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (87)

1. See Pasley v. Freeman, (1789) 100 Eng. Rep. 450, 457 (K.B.) (finding that if "no injury is occasioned by the lie, it is not actionable");
2. see also Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 344 (2005) (discussing how "loss causation" is a requirement in common law deceit and misrepresentation actions).
3. 507 E2d 374, 380-82 (1974), cert denied, 421 U.S. 976 (1975).
4. See Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, § 101(b), 109 Stat. 737, 747 (codified at 15 U.S.C. § 78u-4(b)(4) (2000))
5. [hereinafter "PSLRA"];
6. see also PSLRA, § 105, 109 Stat. at 757 (codified at 15 U.S.C. § 771(b) (2000)) (stating that loss causation means the "depreciation in value of the subject security" caused by the misrepresentation);
7. PSLRA, § 101(b). 109 Stat. at 748-49 (codified at 15 U.S.C. § 78u-4(e) (2000)) (limiting Rule 10b-5 recovery based on stock price movements following disclosure of "the misstatement or omission that is the basis for the action").
8. 544 U.S. 336.
9. 487 E3d 261 (5th Cir. 2007).
10. id. at 268-69.
11. See Respondents' Brief at la, Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) (No. 03-932).
12. Id. at 4.
13. See id. at la.
14. Dura Pharms., Inc., 544 U.S. at 339.
15. See Respondents' Brief at la, Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) (No. 03-932).
16. Dura Pharms., Inc., 544 U.S. at 342-46.
17. See id. at 342-47.
18. Id. at 342-46.
19. Id. at 343.
20. See, e.g., Jonathan R. Macey, Geoffrey R Miller, Mark L. Mitchell St Jeffrey M, Netter, Lessons from Financial Economics: Materiality, Reliance, and Extending the Reach of Basic v. Levinson, 77 VA. L. REV, 1017, 1028-42 (1991).
21. See generally JOHN Y. CAMPBELL, ANDREW W LO St A. CRAIG MACKINLAY, THE ECONOMETRICS OF FINANCIAL MARKETS 149-80 (1997).
22. Macey et al., supra note 16, at 1032, 1036-37.
23. See, e.g., Nihat Aktas, Eric de Bodt, Jean-Gabriel Cousin, Event Studies with a Contaminated Estimation Period, 13 J. CORP. FIN. 129-45 (2007).
24. t using all of the observations except the k-dummied days and the forecast for these k days.
25. See CAMPBELL ET AL., supra note 17, at 166.
26. See generally, i.e., Georgina Benou St Nivine Richie, The Reversal of Large Stock Price Declines: The Case of Large Firms, 27 J. ECON. St FIN. 19 (2003);
27. Navin Chopra, Josef Lakonishok St Jay R. Ritter, Measuring Abnormal Performance: Do Stocks Overreact?, 31 J. FIN. ECON. 235 (1992);
28. Marc Bremer Sr Richard J. Sweeney, The Reversal of Large Stock-Price Decreases, 46 J. FIN. 747 (1991).
29. See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 347 (2005).
30. See id.
31. See id. at 342.
32. Id. at 343.
33. See, e.g., Glaser v. Enzo Biochem, Inc., 464 E3d 474, 479 (4th Cir. 2006) ("It is only after the fraudulent conduct is disclosed to the investing public, followed by a drop in the value of the stock, that the hypothetical investor has suffered a "loss" that is actionable after the Supreme Court's decision in Dura.").
34. See, e.g., Madge S. Thorsen, Richard A. Kaplan St Scott Hakala, Recovering the Economics of Loss Causation, 6 J. BUS. & SEC L. 93, 105-06 (2006) (finding that the theory is "rooted in thirty-year old legal precedent [and] sound economic theory" but recognizing that "it is controversial after Dura"). The several district courts that have considered whether in-and-out traders can show loss causation have been divided on the issue.
35. Compare In re Bally Total Fitness Sec. Litig., No. 04C3530, 2005 WL 627960, at *5-6 (N.D. 111. Mar. 15, 2005) (refusing to appoint as lead plaintiff an in-and-out trader who would need "to use considerable resources to establish" loss causation);
36. Arduini/Messini Pship v. Nat. Med. Fin. Servs. Corp., 74 E Supp. 2d 353, 360-61 (S.D.N.Y. 1999) (holding that in-and-out traders cannot establish loss causation),
37. with Montoya v. Mamma.com Inc., No. 05 Civ. 2313(HB), 2005 WL 1278097, at *2-3 (S.D.N.Y. May 31, 2005) (appointing a group that included in-and-out traders as lead plaintiff);
38. In re Bearingpoint, Inc. Sec. Litig., 232 F.R.D. 534, 544 (E.D. Va. 2006) ("Moreover, it is also conceivable that the inflationary effect of a misrepresentation might well diminish over time, even without a corrective disclosure, and thus in-and-out traders in this circumstance would be able to prove loss causation.").
39. See, e.g., Wool v. Tandem Computers Inc., 818 E2d 1433, 1436-38 (9th Qr. 1986).
40. See Thorsen, Kaplan St Hakala, supra note 28, at 105-06.
41. See Respondents' Brief at la, Dura Pharms., Inc. v, Broudo, 544 U.S. 336 (2005) (No. 03-932).
42. See id.
43. 364 E3d 657 (5th Cir. 2004).
44. Id. at 668.
45. See Thorsen, Kaplan & Hakala, supra note 28, at 102-03.
46. See id.
47. In In re Daou Systems, Inc. Securities Litigation, 411 E3d 1006, 1025-26 (9th Cir. 2005),
48. cert. denied sub nom. Daou Systems, Inc. v. Sparling, 546 U.S. 1172 (2006), an analyst questioned the veracity of earlier statements by a firm, including its earlier financials, based on a quarterly earnings report that did not meet expectations.
49. As the district court explained in In re Motorola Securities Litigation,-F. Supp. 2d-, No. 03 C 287, 2007 WL 487738, at *34 (N.D. 111. Feb. 8, 2007), the standard for determining when a disclosure constitutes a corrective disclosure "cannot be so lax that every announcement of negative news becomes a potential 'corrective disclosure.'"
50. 396 E3d 161, 173 (2d Cir.) (emphasis in original),
51. cert. denied, 546 U.S. 935 (2005).
52. See, e.g., Consolidated Amended Securities Class Action Complaint at 2,
53. In re Royal Ahold N.V. Sec. & ERISA Litig., Civil No. 1:03-MD-01539 (D. Md. Feb. 18, 2004);
54. Amended Class Action Complaint at 23, Ohio Pub. Employees Ret. Sys. v. Freddie Mac, Civil No. C2-03-711 (S.D. Ohio Jan. 15, 2004).
55. See, e.g., id.
56. See, e.g., id.
57. See also infra Figure 3 for an illustration of Ahold share prices.
58. See Section 21D of the Securities Exchange Act of 1934, ch. 404, § 21D, 48 Stat. 881 (codified as amended at 15 U.S.C. § 78u-4(e) (2000)), as added by PSLRA,
59. supra note 3, § 101(b), 109 Stat. at 748-49.
60. Ahold is traded as an ADR in the U.S. equity market.
61. We believe that the large price impact reflects, in part, the markets "overreaction" to news about financial restatements in the post-Enron environment.
62. See Consolidated Amended Securities Class Action Complaint at 2,
63. In re Royal Ahold N.V Sec. St ERISA Litig., Civil No. 1:03-MD-01539 (D. Md. Feb. 18, 2004).
64. See id. at 113-57. The Ahold ADR price data used in Figure 3 is from Bloomberg LP.
65. See id.
66. Here, in the interest of simplicity, we are discussing the "raw" price difference without accounting for market or industry factors.
67. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345 (2005) (internal quotation marks omitted)
68. (quoting with approval Basic Inc v. Levinson, 485 U.S. 224, 252 (1988) (White, J., concurring) (internal quotation marks and citation omitted)).
69. See Maurice E. Stucke, Behavioral Economists at the Gate: Antitrust in the Twenry-First Century, 38 LOY. U. CHI. L.J. 513, 534(2007).
70. See Section 21D of the Securities Exchange Act of 1934, ch. 404, § 21D, 48 Stat. 881 (codified as amended at 15 U.S.C. § 78u-4(b)(4) (2000)), as added by PSLRA,
71. supra note 3, § 101(b), 109 Stat, at 747.
72. Caremark, Inc. v. Coram Healthcare Corp., 113 E3d 645, 648 (7th Cir. 1997).
73. 364 E3d 657, 665 (5th Cir. 2004).
74. 226 E3d 275, 282 (3d Cir. 2000).
75. Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988).
76. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346 (2005) (emphasis added).
77. Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 E3d 824, 843 (7th Cir. 2007) (internal quotation marks omitted), cert, denied,-S. Ct.-, No. 06-1670, 2007 WL 2819761 (U.S. Oct. 1, 2007).
78. 430 U.S. 462, 479 (1977) (internal quotation marks omitted)
79. (quoting with approval Superintendent of Ins. v. Bankers Life St Cas. Co., 404 U.S. 6, 12 (1971)).
80. 445 U.S. 222, 236 (1980).
81. See Amended Class Action Complaint at 23, 157, Ohio Pub. Employees Ret. Sys. v. Freddie Mac, Civil No. C2-03-711 (S.D. Ohio Jan. 15, 2004). The Freddie Mac stock price data used in Figure 4 is from Bloomberg LP.
82. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 343 (2005).
83. See John Finnerty St George Pushner, An Improved Two-Trader Model for Measuring Damages in Securities Fraud Class Actions, 8 STAN. J.L. BUS. St FIN. 213, 220 (2003) (discussing the "basic plaintiffstyle approach" before critiquing it).
84. See id.
85. See id.
86. Greenberg v. Crossroad Sys., Inc., 364 E3d 657, 665-66 (5th Cir. 2004).
87. While this estimation can be undertaken using only the 'clean' period (i.e., the period preceding the misstatement) as long as market believed in the stated earnings, there is no reason necessarily to exclude the class period from this estimation.