Cause for concern: causation and federal securities fraud

Iowa Law Review

Volumn 94, Issue 3, 2009, Pages 811-872

  Fisch, Jill E ^a  

^a UNIVERSITY OF PENNSYLVANIA   (United States)

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EID: 67650106993     PISSN: 00210552     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (366)

1. Dura Pharms., Inc. v. Broudo, 544 U. S. 336 (2005).
2. Id. at 346.
3. Id. at 343. Detailed causation analysis in common law fraud cases is quite limited. Complex questions of causation are more commonly found in negligence law. For example, Dura cites comment b to section 548A of the Restatement (Second) of Torts, see id. at 344, which contains a brief discussion of legal causation in cases of fraudulent misrepresentation and notes the existence of conflicting authority as to the scope of the defendant's responsibility. See RESTATEMENT (SECOND) of Torts § 548Acmt. b (1977)
4. id. § 548A reporter's note (1981).
5. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 769 (2008) ("Petitioner... cannot show reliance upon any of respondents' actions except in an indirect chain that we find too remote for liability.").
6. Id. at 771.
7. Congress codified the loss causation requirement as part of the Private Securities Litigation Reform Act of 1995 without defining loss causation or evidencing any intention to depart from the existing judge-made definition. See Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, sec. 101 (b), § 21D
8. (b) (4), 109 Stat. 737, 747 (codified at 15 U. S. C. §78u-4
9. (b) (4) (2000)).
10. Basic Inc. v. Levinson, 485 U. S. 224 (1988).
11. See Louis Loss, Commentary, The Assault on Securities Act Section 12 (2), 105 HARV. L. REV. 908, 910-11 (1992) (explaining how courts have "develop [ed] a new federal tort from section 10 (b) and rule 10b-5,... [and] invok[ed]/Erie-resistant federal common law in order to invent appropriate qualifications of the new tort").
12. Securities Exchange Act of 1934, ch. 404, § 10
13. (b), 48 Stat. 881, 891 (codified as amended at 15 U. S. C. § 78j (b) (2000)).
14. C. F. R. § 240.10b-5 (2008).
15. See supra note 8 and accompanying text.
16. See supra note 6.
17. Dura Pharms., Inc. v. Broudo, 544 U. S. 336 (2005).
18. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008).
19. Schlickv. Penn-Dixie Cement Corp., 507F.2d 374 (2d Cir. 1974).
20. See, e.g., Weisberg v. Coastal States Gas Corp., 609 F.2d 650, 654 n. 2 (2d Cir. 1979) ("The term 'transaction causation' was apparently first used in this court by Judge Oakes in Schlick. ...")
21. David S. Escoffery, Note, A Winning Approach to Loss Causation Under Rule 10b-5 in Light of the Private Securities Litigation Reform Act of 1995 ("PSLRA "), 68 FORDHAM L. REV. 1781, 1793 (2000) (" Schlick v. Penn-Dixie Cement Corp. was the first case to ever make a distinction between transaction causation and loss causation. " (footnote omitted)).
22. See, e.g., List v. Fashion Park, Inc., 340 F.2d 457, 463 (2d Cir. 1965) ("Our examination of the authorities satisfies us that [the common law reliance] requirement also is carried over into civil suits under Rule 10b-5.").
23. Id. at 462 (quoting RESTATEMENT OF TORTS * 546 (1938))
24. see also infra notes 148-49 and accompanying text (discussing the substantial-factor test).
25. See Escoffery, supra note 16, at 1793 (attributing this terminology to the court in Schlick).
26. Schlick, 507 F.2d at 380.
27. Id.
28. Id. Significantly, Judge Frankel wrote separately to question the majority's decision to employ these terms, observing that although they had "some scholarly currency, " their use was unnecessary and the implications of employing them were "still uncertain. " Id. at 384 (Frankel, J., concurring).
29. See, e.g., Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 222 (3d Cir. 2006) (stating that loss causation is "[sjimilar to the concept of proximate cause in the tort context")
30. AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 228-29 (2d Cir. 2000) (Winter, C. J., dissenting) (describing transaction causation as "whedier the fraud here was a but-for cause of appellants' losses"). It is not clear that this formulation is consistent with the original tort law conception. See infra Part III (discussing causation under tort law)
31. see also W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS § 42, at 273 (5th ed. 1984) (arguing that proximate cause deals with the question of legal responsibility and, as such, is "not a question of causation, or even a question of fact").
32. See Schlick, 507 F.2d at 376 (noting that the appeal was from a complaint dismissal).
33. Id. at 380.
34. Id.
35. Id. at 383 (internal quotation marks omitted).
36. See Theresa A. Gabaldon, Unclean Hands and Self-inflicted Wounds: The Significance of Plaintiff Conduct in Actions for Misrepresentation Under Rule 10b-5, 71 MINN. L. REV. 317, 320-21 (1986) (describing the actual-reliance requirement).
37. Affiliated Ute Citizens v. United States, 406 U. S. 128, 153-54 (1972).
38. Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 239-40 (2d Cir. 1974).
39. Id. at 240.
40. See, e.g., Panzirer v. Wolf, 663 F.2d 365, 366-67 (2d Cir. 1981) (describing claims by an investor who did not read the fraudulent annual report but instead based her investment decision on a Wall Street Journal column's report of analyst opinions).
41. Basic Inc. v. Levinson, 485 U. S. 224 (1988).
42. Id. at 247.
43. Id. at 243-44 (quoting In re LTV Sec. Litig., 88 F. R. D. 134, 143 (N. D. Tex. 1980)).
44. See id. at 245-47.
45. See, e.g., A. C. Pritchard, Markets as Monitors: A Proposal to Replace Class Actions with Exchanges as Securities Fraud Enforcers, 85 VA. L. REV. 925, 948 (1999) ("[T]he presumption in fact produced an enormous increase in liability exposure for corporate issuers.... Under the fraud on the market presumption, typical damages exposure will be in the tens or hundreds of millions of dollars.").
46. See generally John C. Coffee, Jr., The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. CHI. L. REV. 877 (1987) (describing the role of entrepreneurial plaintiffs' lawyers).
47. See Joel Seligman, Commentary, The Merits Do Matter: A Comment on Professor Grundfest's Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority, " 108 HARV. L. REV. 438, 442-45 (1994) (describing congressional testimony about securities fraud litigation premised on a drop in stock price).
48. See, e.g., Bastian v. Petren Res. Corp., 892 F.2d 680, 685 (7th Cir. 1990) (Posner, J.) (describing "loss causation" as "an exotic name-perhaps an unhappy one")
49. LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928, 931 (7th Cir. 1988) (Easterbrook, J.) (describing the terms "loss causation" and "transaction causation" as "ungainly" and "confusing").
50. See, e.g.. In re Wash. Pub. Power Supply Sys. Sec. Litig., 650 F. Supp. 1346, 1353-54 (W. D. Wash. 1986).
51. Huddleston v. Herman & MacLean, 640 F.2d 534, 549 n. 25 (5th Cir. Unit A Mar. 1981), affd inpart, rev'd inpart, 459 U. S. 375 (1983).
52. Id. at 549.
53. See id. (citing Marbury Mgmt., Inc. v. Kohn, 629 F.2d 705, 718 (2d Cir. 1980) (Meskill, J., dissenting)).
54. Marbury Mgmt., 629 F.2d at 718-19 (Meskill, J., dissenting).
55. Id. at 710 n. 3 (majority opinion).
56. See, e.g., Currie v. Cayman Res. Corp., 835 F.2d 780, 785 (11th Cir. 1988) (citing Huddleston and Judge Meskill's dissent in Marbury Management in explaining the loss causation requirement).
57. Although some commentators have characterized these formulations as distinct tests, such a characterization may be misleading in that courts have frequently shifted from one formulation to another within the contours of the same opinion.
58. Robbins v. Roger Props., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997) (quoting Huddleston, 640 F.2d at 549).
59. Suez Equity Investors, L. P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001).
60. Id. at 98 n. l. (describing this approach-which is employed by the Seventh Circuit-as "both principled and predictable, " but concluding that prior Second Circuit precedents barred its adoption).
61. Huddleston, 640 F.2d at 549.
62. See, e.g., Citibank, N. A. v. K.-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992) (stating that the plaintiffs economic harm must be "a foreseeable consequence of the misrepresentation").
63. Indeed, the Ninth Circuit took this approach in Dura. See Broudo v. Dura Pharms., Inc., 339 F.3d 933, 937-39 (9th Cir. 2003), rev'd, 544 U. S. 336 (2005).
64. See Jay W. Eisenhofer et al., Securities Fraud, Slock Price Valuation, and Loss Causation: Toward a Corporate Finance-Based Theory of Loss Causation, 59 BUS. LAW. 1419, 1434-37 (2004) (describing the calculation of damages based on artificial price inflation).
65. See, e.g., Robbins v. Roger Props., Inc., 116 F.3d 1441, 1448 (11th Cir. 1997) ("[A] showing of price inflation... does not satisfy the loss causation requirement.... Our decisions explicitly require proof of a causal connection between the misrepresentation and the investment's subsequent decline in value.")
66. Eisenhofer et al., supra note 55, at 1431-34 (describing calculation of damages based on the decline in stock price after disclosure of the fraud).
67. See, e.g., In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351, 364-65 (S. D. N. Y. 2003) (describing intervening factors that may constitute alternative causes of stock price decline, such as recession, industry decline, and other marketwide phenomena), affd sub nom. Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005)
68. see also Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 189 (2d Cir. 2001) ("'[W]hen factors other than the defendant's fraud are an intervening direct cause of a plaintiffs injury, that same injury cannot be said to have occurred by reason of the defendant's actions.'" (quoting First Nationwide Bank v. Gelt Funding Corp., 27 F. Sd 763, 769 (2d Cir. 1994))).
69. See supra note 6.
70. The statute had its origins in the Republican Contract with America, which targeted excesses in litigation. See CONTRACT WITH AMERICA: THE BOLD PLAN BY REP. NEWT GINGRICH, REP. DICK ARMEY, AND THE HOUSE REPUBLICANS to CHANGE THE NATION 143-55 (Ed Gillespie & Bob Schellhas eds., 1994) (describing problems caused by attorney control of litigation process). For a brief summary of the history and scope of the PSLRA, see Jill E. Fisch, Class Action Reform: Lessons from Securities Litigation, 39 ARIZ. L. REV. 533, 534-37 (1997)
71. Escoffery, supra note 16, at 1810-12.
72. See Jill E. Fisch, The Scope of Private Securities Litigation: In Search of Liability Standards for Secondary Defendants, 99 COLUM. L. REV. 1293, 1304 (1999) (describing provisions of the PSLRA).
73. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, sec. 101
74. (b), § 21D (b) (4), 109 Stat. 737, 747 (codified at 15 U. S. C. § 78u-4 (b) (4) (2000)).
75. U. S. C. §78u-4 (b) (4).
76. Indeed, the ambiguous legislative history of the PSLRA led to considerable confusion, reflected most prominently in cases dealing with the heightened pleading requirement. See, e.g., Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2509 (2007) (noting divergence among lower courts regarding the meaning of the PSLRA's term "strong inference")
77. E. Powell Miller, The Supreme Court's Decision in Tellabs: The Death Knell for Securities Fraud Class Actions? Not So Fast, MICH. B. J., Oct. 2007, at 40, 40-42 (describing approaches of the different circuits to the heightened pleading standard and Telkibs's, resolution of the issue).
78. Congress independently determined that a plaintiffs recoverable loss was limited to the amount of his or her "actual damages." See 15 U. S. C. § 78bb (a) ("[N]o person ⋯ shall recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual damages on account of the act complained of.").
79. Id. § 78u-4 (b) (4) ("[T]he plaintiff shall have the burden of proving floss causation]."). In contrast, the new causation provision under section 12 of the 1933 Act simply enables defendants to prove that their violations did not cause the plaintiffs' damages. See id. § 77/(b) (allowing a defendant to prove "that any portion or all of the amount recoverable... represents other than the depreciation in value of the subject security resulting from [the fraud]").
80. The description of the loss causation requirement in the legislative history was consistent with the most liberal Ninth Circuit approach, which found it sufficient for the plaintiff to allege and prove merely that the defendant's fraud artificially inflated the price of the securities. In describing the loss causation requirement, the Senate Report stated: [T]he plaintiff would have to prove that the price at which the plaintiff bought the stock was artificially inflated as the result of the misstatement or omission. The defendant would then have the opportunity to prove any mitigating circumstances, or that factors unrelated to the fraud contributed to the loss. S. REP. NO. 104-98, at 15 (1995)
81. reprinted in 1995 U. S. C. C. A. N. 679, 694. The House Conference Report contained the first sentence of this description, but not the second. H. R. REP. No. 104-369, at 41 (1995) (Conf. Rep.), reprinted in 1995 U. S. C. C. A. N. 730, 740.
82. Dura Pharms., Inc. v. Broudo, 544 U. S. 336 (2005).
83. Broudo v. Dura Pharms., Inc., 339 F.3d 933, 935 (9th Cir. 2003), rev'd, 544 U. S. 336 (2005).
84. Id. at 935-36.
85. Id. at 935.
86. Id.
87. Id. at 936.
88. Broudo, 339 F.3d at 936.
89. Id.
90. See Patrick J. Coughlin et al., What's Brewing in Dura v. Broudo? The Plaintiffs' Attorneys Review the Supreme Court's Opinion and Its Import for Securities-Fraud Litigation, 37 LOY. U. CHI. L. J. 1, 13 (2005) ("Dura's stock price dropped 47% in a day, from a high of $39-1/8 on February 24 to a low of $20-3/4 on February 25, on an unprecedented 32-million share trading volume. The stock tumbled another 40% in the ensuing months." (footnote omitted)).
91. Id.
92. Id. at 10.
93. Brief for Petitioners at i, Dura Pharms., Inc. v. Broudo, 544 U. S. 336 (2005) (No. 03-932), available at http://supreme.1p. findlaw.com/supreme- court/briefs/03-932/0S-932.mer. pet.pdf.
94. Dura, 544 U. S. at 342.
95. Id. at 347.
96. Id, at 342.
97. Id.
98. Id. at 342-43.
99. Dura, 544 U. S. at 343.
100. See, e.g., Merritt B. Fox, After Dura. Causation in Fraudron-the-Market Actions, 31 J. CORP. L. 829, 846-62 (2006) (questioning the scope of Dura and identifying unresolved issues).
101. See, e.g., Nursing Home Pension Fund v. Oracle Corp., No. C01-00988 MJJ, 2006 U. S. Dist. LEXIS 94470, at *35 (N. D. Cal. Dec. 20, 2006) ("[S]everal courts have recognized that Dura does not require a 10 (b) plaintiff to identify a corrective disclosure in order to properly plead or prove loss causation. ").
102. See, e.g., In re Williams Sec. Litig., 496 F. Supp. 2d 1195, 1266 (N. D. Okla. 2007) (rejecting proffered expert testimony for failure "to differentiate between losses rooted in causes cognizable under loss causation doctrine, on one hand, and, on the other hand, losses attributable to industry-specific stresses, the meltdown in the telecommunications sector, and other negative developments unrelated to the alleged fraud"), affd sub nom. In re Williams Sec. Litig.-WCG Subclass, No. 07-5119, 2009 WL 388048 (10th Cir. Feb. 18, 2009).
103. Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007).
104. Id.
105. Id. at 265. Oscar was not the first decision to reinvigorate the reliance requirement. In Hevesi v. Citigroup Inc., 366 F.3d 70 (2d Cir. 2004), the Second Circuit implied, albeit in dicta, that Basic's presumption of reliance should be read narrowly. Hevesi involved a suit against research analysts, predicated on information uncovered by Eliot Spitzer's high-profile investigation. The Hevesi court stated that the extension of the Basic presumption from statements of fact by issuers to statements of opinion by research analysts was a "novel" and "significant" issue that was "'of fundamental importance to the development of the law of class actions.'" Id. at 80 (quoting In re Sumitomo Copper Litig., 262 F.3d 134, 140 (2d Cir. 2001)).
106. Oscar, 487 F.3d at 267.
107. Id. at 269 n. 41.
108. Id. at 270 (quoting Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 666 (5th Cir. 2004))
109. see also In re Williams Sec. Litig.-WCG Subclass, No. 07-5119, 2009 WL 388048, at *5 (10th Cir. Feb. 18, 2009) ("The plaintiff bears the burden of showing that his losses were attributable to the revelation of the fraud and not the myriad other factors that affect a company's stock price."). Similarly, although at the summary judgment stage, the court in In re Omnicom Group, Inc. Securities Litigation granted the defendants' motion for summary judgment on the basis that the plaintiffs' expert had disaggregated only some but not all of the allegedly confounding factors. In re Omnicom Group, Inc. Sec. Litig., 541 F. Supp. 2d 546, 554 (S. D. N. Y. 2008).
110. See, e.g., In re Nature's Sunshine Prods. Inc. Sec. Litig., 251 F. R. D. 656, 665 (D. Utah 2008) ("Other courts have refused to follow Oscar. ...")
111. Darquea v. Jarden Corp., No. 06 Civ. 722 (CLB), 2008 WL 622811, at *4 (S. D. N. Y. Mar. 6, 2008) (explaining that Oscar's standard "is limited to the Fifth Circuit")
112. Wagner v. Barrick Gold Corp., 251 F. R. D. 112, 118 (S. D. N. Y. 2008) (explaining disagreement among lower courts on "'the issue of whether loss causation must be established to trigger the fraud on the market presumption'" (quoting the defendants' memorandum)).
113. In re Micron Techs., Inc. Sec. Litig., 247 F. R. D. 627, 634 (D. Idaho 2007) ("[Oscars] reading of Basic ignores a crucial footnote.").
114. Id. at 634-35;
115. see also Freeland v. Iridium World Commc'ns, Ltd., 545 F. Supp. 2d 59, 80 (D. D. C. 2008) ("Loss causation is an affirmative defense and the risk of nonpersuasion is on [the defendant], not Plaintiffs.").
116. See, e.g., Freeland, 545 F. Supp. 2d at 80 (holding that, where factual issues remained, loss causation determination was properly left for the jury)
117. see also Exxon Co., U. S. A. v. Sofec, Inc., 517 U. S. 830, 840-41 (1996) (stating that proximate and superseding cause are usually issues for the jury)
118. EP Medsystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 884 (3d Cir. 2000) (stating that loss causation is a fact-intensive inquiry best resolved by the trier of fact).
119. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008).
120. See id. at 770-72 (addressing the plaintiffs' "scheme liability" argument).
121. Cent. Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164, 177 (1994).
122. The actual question presented in Stoneridge was : Whether this Court's decision in Central Bank forecloses claims under § 10 (b) of the Securities Exchange Act of 1934 and Rule 10b-5 (a) and (c) where Respondents engaged in their own deceptive conduct in transactions with a public corporation for the purpose and effect of creating a false appearance of material fact that enabled the publication of artificially inflated financial statements by the public corporation, but where Respondents themselves made no public statements concerning those transactions. Brief for Petitioner at i, Stoneridge, 128 S. Ct. 761 (No. 06-43) (citations omitted), available at http://www.oyez.org/cases/2000-2009/2007/200706-43/briefs/petitioner/ Brief%20for% 20Petitioner%20Stoneridge%20Investment%20Partners, %20LLC.pdf.
123. See Stoneridge Inv. Partners, LLS v. Scientific-Atlanta, Inc. (In re Charter Commc'ns, Inc., Sec. Litig.), 443 F.3d 987, 992 (8th Cir. 2006), affd sub nam. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008).
124. See Brief for the United States as Amicus Curiae Supporting Affirmance at 18-25, Stoneridge, 128 S. Ct. 761 (No. 06-43) (arguing that there was an absence of reliance because the defendants' conduct, although deceptive, only misled the issuer's accountant and not the investing public). Interestingly, the government's position on the Stoneridge case was the subject of an intense political battle. Originally, the SEC had asked the Solicitor General to file an amicus brief on behalf of the plaintiffs, defending scheme liability. The White House intervened and objected, directing the Solicitor General instead to file a brief on behalf of the defendants, which he did. See Press Release, Senator Chris Dodd, Chairman Dodd Expresses Disappointment with Administration Decision to Reject SEC Position in Stoneridge Case (Aug. 16, 2007), available a (http://dodd.senate. gov/index.php?q=node/4011 (describing the political battle).
125. Brief for Respondents at 17-21, Stoneridge, 128 S. Ct. 761 (No. 06-43), available at http://www.oyez.org/cases/2000-2009/2007/2007-06-43/ briefs/respondent/Brief%20for% 20Respondents%20Scienufic-Atlanta, %20Inc.%20and%20Motorola, %20Inc..pdf.
126. See Stoneridge, 128 S. Ct. at 776 (Stevens, J., dissenting).
127. The text of section 10 (b) expressly imposes liability on those who "directly or indirectly" engage in fraudulent or deceptive practices. 15 U. S. C. § 78j (b) (2000).
128. Stoneridge, 128 S. Ct. at 771 ("Section 10 (b) does not incorporate common-law fraud into federal law.").
129. Concededly, as Justice Stevens observed, it would have been more difficult for the Court to justify its decision in light of authority suggesting that the plaintiff s reliance allegations satisfied the common law standard. Justice Stevens explained: The Restatement (Second) of Torts § 533 provides that "[t]he maker of a fraudulent misrepresentation is subject to liability... if the misrepresentation, although not made directly to the other, is made to a third person and the maker intends or has reason to expect that its terms will be repeated or its substance communicated to the other." Id. at 777 (Stevens, J., dissenting) (alterations in original) (internal citation omitted) (quoting RESTATEMENT (SECOND) of TORTS § 533 (1977)).
130. Id. at 770 (majority opinion). To the extent reliance is analogous to but-for causation, it is worth noting that the requirement that the defendants' acts be immediate to the injury is not based upon common law tort principles. See infra Part III.
131. See, e.g., HERBERT A. SIMON, MODELS OF MAN 11 (1957) (describing "the generally unsavory epistemological status of the notion of causality")
132. Christopher Bernert, The Career of Causal Analysis in American Sociology, 34 BRIT. J. Soc. 230, 230 (1983) ("Few terms have suffered either the infamy or the taken-for-grantedness of 'cause.'")
133. John DiNardo, Interesting Questions in Freakonomics, 45 J. ECON. LITERATURE 973, 978 (2007) ("[EJxcept for the very simplest phenomenon, it is rarely clear what constitutes a good answer to ⋯ a [causation] question. ").
134. See, e.g., Allen v. Wright, 468 U. S. 737, 753 n. 19 (1984) (identifying causation as a required component of Article HI standing analysis)
135. Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U. S. 519, 535-37 (1983) (analyzing proximate cause under the Clayton Act)
136. Mt. Healthy City Sch. Dist. Bd. of Educ. v. Doyle, 429 U. S. 274, 285-87 (1977) (recognizing a but-for-causation requirement in a constitutional-tort case)
137. Arthur Leavens, A Causation Approach to Criminal Omissions, 76 CAL. L. REV. 547, 562-72 (1988) (discussing the roles of but-for and proximate causation in criminal law).
138. Cf. RESTATEMENT (THIRD) of TORTS: LIAB. FOR PHYSICAL HARM § 33 (b) (Proposed Final Draft No. 1, 2005) ("An actor who intentionally or recklessly causes physical harm is subject to liability for a broader range of harms than... if [he had] only act[ed] negligently.")
139. Tony Honoré, Necessary and Sufficient Conditions in Tort Law, in PHILOSOPHICAL FOUNDATIONS OF TORT LAW 363, 370 (David G. Owen ed., 1995) ("[I]n cases of strict liability, where the wrongfulness of the defendant's conduct is not in issue, there is no occasion to trace a causal path from wrongfulness to the plaintiffs harm."). But see RESTATEMENT (SECOND) OF TORTS § 431 cmt. e (1965) (stating that the description of what constitutes legal cause in negligence cases is equally applicable in cases of intentional torts and strict liability)
140. cf. RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 33
141. (c) (Proposed Final Draft No. 1, 2005) ("[A]n actor who intentionally or recklessly causes physical harm is not subject to liability for harm the risk of which was not increased by the actor's intentional or reckless conduct.").
142. The requirement that the defendant's wrongful actions produce harm is fundamental to tort law. As the Seventh Circuit has explained, "punishing a person for an act that does no harm is not needed to deter harmful acts." United States v. Johnson, 380 F.3d 1013, 1016 (7th Cir. 2004). More precisely, the injury requirement serves to distinguish tort law from criminal law. John C. P. Goldberg & Benjamin C. Zipursky, Unrealized Torts, 88 V., A. L. REV. 1625, 1646 (2002).
143. See Guido Calabresi, Concerning Cause and the Law of Torts: An Essay for Harry Kalven. Jr., 43 U. CHI. L. REV. 69, 71 (1975) (describing the concept of a "causal link").
144. See RESTATEMENT (THIRD) of TORTS: LIAB. FOR PHYSICAL HARM § 26 reporters' note, cmt. a (Proposed Final Draft No. 1, 2005).
145. KEETON ET AL., supra note 23, § 41, at 266.
146. For an explanation of the use of counterfactuals in analyzing factual causation, see Robert N. Strassfeld, If... : Counterfactuals in the Law, 60 GEO. WASH. L. REV. 339, 345-46 (1992).
147. RESTATEMENT (THIRD) of TORTS: LIAB. FOR PHYSICAL HARM § 26 (Proposed Final Draft No. 1, 2005)
148. see also H. L. A. HART & TONY HONORE, CAUSATION IN THE LAW 109-29 (2d ed. 1985) (formulating a description of but-for cause in terms of a "condition sine qua non ").
149. Many commentators therefore argue that proximate cause is not about causation at all but rather involves an analysis of the policy considerations affecting the scope of the defendant's legal responsibility for the plaintiffs injury. See Anna Burdeshaw Fretwell, Note, Clearing the Air: An Argument for a Federal Cause of Action to Provide an Adequate Remedy for Smokers Injured by Tobacco Companies, 31 GA. L. REV. 929, 943 n. 72 (1997). These policy considerations may make the proximate cause inquiry appear unprincipled. Prosser and Keeton observe that: "Proximate cause, " in short, has been an extraordinarily changeable concept. "Having no integrated meaning of its own, its chameleon quality permits it to be substituted for any one of the elements of a negligence case when decision on that element becomes difficult.... No other formula... so nearly does the work of Aladdin's lamp. " KEETON ET AL., supra note 23, § 42, at 276 (alterations in original) (quoting Leon Green, Proximate Cause in Texas Negligence Law, 28 TEX. L. REV. 471, 471-72 (1950)).
150. RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 29 cmt. b (Proposed Final Draft No. 1, 2005).
151. See id. § 29. This concept is consistent with Prosser and Keeton's description of proximate cause. oSee KEETON ET AL., supra note 23, § 42, at 272-73 ("Once it is established that the defendant's conduct has in fact been one of the causes of the plaintiffs injury, there remains the question whether the defendant should be legally responsible for the injury." (footnote omitted)).
152. Honore, supra note 112, at 368.
153. RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 29 (Proposed Final Draft No. 1, 2005).
154. Id. § 29 cmt. d.
155. Id. § 29 cmt. d, illus. 3.
156. See id. § 29 cmt. h (explaining that section 29 reverses the position taken by section 281 of the Second Restatement, which made a person "who threatened harm to a legally cognizable interest of another liable for all harm to the other, regardless of whether the harm was different from the harms whose risk made the actor's conduct tortious").
157. Arguably, the causation requirement is further minimized in the criminal context. For example, Michael Moore notes that accomplice liability extends well beyond cases in which the accomplice can be said to have caused the harm, and explains the resulting scope of liability largely in terms of moral blameworthiness. See generally Michael S. Moore, Causing, Aiding, and the Superfluity of Accomplice Liability, 156 U. PA. L. REV. 395 (2007). Significantly, although a complete analysis of causation in criminal cases is beyond the scope of this Article, it is noteworthy that lower courts have cited Dura in requiring proof of loss causation for purposes of the damage calculation required by the criminal-sentencing guidelines. See, e.g., United States v. Olis, 429 F.3d 540, 546 (5th Cir. 2005) (applying methods of measuring civil damages as a "backdrop" to determining criminal responsibility). To the extent that causation analysis is different under the criminal law, this approach may be problematic. See Samuel W. Buell, Reforming Punishment of Financial Reporting Fraud, 28 CARDOZO L. REV. 1611, 1628-38 (2007) (discussing the application of criminal-sentencing guidelines to cases involving accounting fraud at large publicly traded companies).
158. See, e.g., Seidel v. Greenberg, 260 A.2d 863, 873 (N. J. Super. Ct. Law Div. 1969) ("[M]any of the limitations upon liability that are subsumed under the doctrine of 'proximate cause' ⋯ do not apply to intentional torts." (quoting Tate v. Canonica, 5 Cal. Rptr. 28, 33 (Dist. Ct. App. I960)) (internal quotation marks omitted)).
159. David W. Robertson, The Common Sense of Cause in Fact, 75 TEX. L. REV. 1765, 1773 n. 30 (1997).
160. See RESTATEMENT (THIRD) OF TORTS: LlAB. FOR PHYSICAL HARM § 33 (a) (Proposed Final Draft No. 1, 2005) ("An actor who intentionally causes physical harm is subject to liability for that harm even if it was unlikely to occur.")
161. RESTATEMENT (SECOND) OF TORTS § 435A (1965) ("A person who commits a tort against another for the purpose of causing a particular harm⋯ is liable for such harm if it results, whether or not it is expectable....").
162. RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 33 cmt. f (Proposed Final Draft No. 1, 2005).
163. See id. §33 reporters' note, cmt. f.
164. See, e.g., Russell D. Covey, The Unbearable Lightness of Batson: Mixed Motives and Discrimination injury Selection, 66 Md. L. REV. 279, 335-36 (2007) ("In intentional tort cases, the injury combined with the intent to cause it establish a sufficient equitable basis for liability as long as the actor's conduct might be said to have contributed to the risk.")
165. Meredith J. Duncan, CRIMINAL MALPRACTICE: A LAWYER'S HOLIDAY, 37 GA. L. REV. 1251, 1279 n. 133 (2003) ("Because of the state of mind required to prove that a defendant is liable for an intentional tort, any intervening event, such as another person's negligence, typically does not break the chain of causation between the defendant's intentional act and any resulting harm....").
166. There is an extensive literature on the role of causation in tort law and, in particular, on cases involving multiple and overdetermined causation. The textual discussion in this Section cannot hope to consider all the nuances of that literature. For a sample, see generally HART & HONORE, supra note 118
167. Goldberg & Zipursky, supra note 113
168. Michael D. Green, The Intersection of Factual Causation and Damages, 55 DEPAUL L. REV. 671 (2006)
169. Symposium on Causation in the Law of Torts, 63 CHI.-KENT L. REV. 397 (1987)
170. Richard W. Wright, Causation in Tort Law, 73 GAL. L. REV. 1735 (1985).
171. RESTATEMENT (THIRD) OF TORTS: LLAB. FOR PHYSICAL HARM & 34 cmt. a (Proposed Final Draft No. 1, 2005).
172. Id.
173. Id.
174. The commonly cited "two fires" cases are Kingston v. Chicago & Northwestern Railway Co., 211 N. W. 913 (Wis. 1927), Anderson v. Minneapolis, St. Paul & Sault Ste. Marie Railway Co., 179 N. W. 45 (Minn. 1920), and Cook v. Minneapolis, St. Paul & Sault Ste. Marie Railway Co., 74 N. W. 561 (Wis. 1898).
175. For some reason, courts did not appear to have difficulty finding but-for causation when the two fires were both of negligent origin. See, e.g., Seckerson v. Sinclair, 140 N. W. 239, 244 (N. D. 1913) ("[W]hen the wrong of two persons jointly contributes to the injury, both of such persons are liable."). There was greater disagreement in the old cases about both the appropriate approach and the correct result when one fire was of non-negligent origin. Compare Anderson, 179 N. W. at 49 (applying the substantial-factor test to impose liability despite the absence of but-for causation), with Cook, 74 N. W. at 566 ("[W]here a cause set in motion by negligence, reaches to the result complained of in a line of responsible causation, and another cause, having no responsible origin, reaches it at the same time, so that what then takes place would happen as the effect of either cause, entirely regardless of the other, then the consequence cannot be said, with any degree of certainty, to relate to negligence as its antecedent; requisite intelligent causation necessary to legal liability is wanting, leaving no ground, in reason or in law, for it to rest upon. ").
176. See, e.g., Robert J. Peaslee, Multiple Causation and Damage, 47 HARV. L. REV. 1127, 1130 (1934). Peaslee notes: [W]here one of the causes is innocent and the other culpable in origin, as of the two fires uniting before reaching and burning the plaintiffs house, must the negligent actor pay the whole loss, or is he responsible for none of it? On the one hand is sufficient wrongful causation of a physical result, and on the other, inevitable loss not increased by the defendant's wrong. Recovery would make the plaintiff better off than he would have been if the defendant had done no wrong. Id.
177. See Gerald W. Boston, A Mass-Exposure Model of Toxic Causation: The Content of Scientific Proof and the Regulatory Experience, 18 COLUM. J. ENVTL. L. 181, 299-301 (1993) (describing the challenge presented by combined asbestos exposure and cigarette smoking).
178. See, e.g., Brian M. DiMasi, Comment, The Threshold Level of Proof of Asbestos Causation: The "Frequency, Regularity and Proximity Test" and a Modified Summers v. Tice Theory of Burden-Shifting, 24 CAP. U. L. REV. 735, 739 (1995) (explaining that many asbestos victims who smoke "are unable to prove the prima facie element of legal causation and are defeated by defendants' motions for summary judgment").
179. Deirdre A. McDonnell, Comment, Increased Risk of Disease Damages: Proportional Recovery as an Alternative to the All or Nothing System Exemplified by Asbestos Cases, 24 B. C. ENVTL. AFF. L. REV. 623, 639 (1997) ("[T]he combination of asbestos exposure and cigarette smoking produces a synergistic effect that creates an extremely high chance of lung cancer.").
180. Summers v. Tice, 199 P.2d 1 (Cal. 1948).
181. See id. at 1-3.
182. Sindell v. Abbott Labs., 607 P.2d 924 (Cal. 1980).
183. Id. at 936. Similarly, in Borelv. Fibreboard Paper Products Corp., the plaintiff was exposed, over a period of time, to asbestos manufactured by several defendants. Borel v. Fibreboard Paper Prods. Corp., 493 F.2d 1076, 1094 (5th Cir. 1973). Because the effects of asbestos exposure are cumulative and take years to develop, the court found that "it is impossible, as a practical matter, to determine with absolute certainty which particular exposure to asbestos dust resulted in injury to Borel." Id. Unlike Summers and Sindell, it was possible that, as a factual matter, all of the asbestos exposures had contributed to Borel's injury, but like those cases, it was impossible for the court to determine factual causation with certainty.
184. RESTATEMENT (SECOND) of TORTS § 431 (1965)
185. see also id. § 433 (setting forth factors to consider in determining whether the defendant's conduct was a substantial factor in bringing about the plaintiff's harm).
186. Id. §432 (2).
187. See RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 26 reporters' note, cmt. c (Proposed Final Draft No. 1, 2005). This note states: [C]ommon understanding and usage often look for a single "responsible cause" and attribute an event to that unusual or extraordinary action or conduct.... This common usage may lead juries, lawyers, and courts astray in a case where two or more relevant events may have been actual causes of plaintiff s harm.
188. Id. §26.
189. Id. § 27. This approach borrows heavily from the Necessary Element of a Sufficient Set ("NESS") test advocated by Richard Wright. The NESS test "states that a particular condition was a cause of a specific consequence if and only if it was a necessary element of a set of antecedent actual conditions that was sufficient for the occurrence of the consequence." Wright, supra note 134, at 1774. Wright grounded his test in a normative conception of the defendant's responsibility. See id. at 1827 (describing the connection between the defendant's legal responsibility and principles of corrective justice). The NESS test is particularly useful in solving the counterfactual problem posed by but-for causation-that is, teasing out the consequences that would have occurred in the absence of the defendant's wrongful conduct.
190. RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 27 reporters' note, cmt. a (Proposed Final Draft No. 1, 2005).
191. United States í. Johnson, 380 F.3d 1013, 1016 (7th Cir. 2004).
192. The Second Restatement provides: § 433A. Apportionment of Harm to Causes (1) Damages for harm are to be apportioned among two or more causes where (a) there are distinct harms, or (b) there is a reasonable basis for determining the contribution of each cause to a single harm. (2) Damages for any other harm cannot be apportioned among two or more causes. RESTATEMENT (SECOND) of TORTS § 433A (1965). Allocation of damages among multiple tortfeasors is more complex under the Third Restatement. See RESTATEMENT (THIRD) OF TORTS: APPORTIONMENT OF LIAB. § 8 (2000) (allocating responsibility according to the "nature of [each] person's risk-creating conduct" and "the strength of the causal connection between [such] conduct and the harm").
193. See, e.g., Martin v. Owens-Corning Fiberglas Corp., 528 A.2d 947, 950 (Pa. 1987) (citing expert testimony explaining that it was impossible to separate out the effects of asbestos exposure and smoking on the plaintiff's pulmonary disability).
194. See, e.g., Sindeli í. Abbott Labs., 607 P.2d 924, 937-38 (Cal. 1980) (imposing liability based on market share).
195. See, e.g., Brisboy v. Fibreboard Corp., 418 N. W.2d 650, 654-57 (Mich. 1988) (holding that an asbestos manufacturer's liability for the plaintiff's lung cancer should be reduced to reflect the plaintiff's comparative fault for smoking cigarettes).
196. See RESTATEMENT (THIRD) OF TORTS: APPORTIONMENT OF LIAB. § C18 (2000) ("If the independent tortious conduct of two or more persons is a legal cause of an indivisible injury, each person is jointly and severally liable for the recoverable damages caused by the tortious conduct, subject to the reallocation provision of § C21."). As stated by Dean Prosser and Dean Keeton: Certain results, by their very nature, are obviously incapable of any reasonable or practical division.... No ingenuity can suggest anything more than a purely arbitrary apportionment of such harm. Where two or more causes combine to produce such a single result, incapable of any reasonable division, each may be a substantial factor in bringing about the loss, and if so, each is charged with all of it. KEETON ET AL., supra note 23, § 52, at 347.
197. See Michael S. Moore, The Metaphysics of Causal Intervention, 88 CAL. L. REY. 827, 875 (2000) ("[C]ausation peters out over time, much as the ripples from a stone dropped in a pond diminish as they travel outward.").
198. * 9 (Minn. Ct. App. July 26, 2004).
199. Canada ex rel. Landy v. McCarthy, 567 N. W.2d 496, 507 (Minn. 1997).
200. See, e.g., Richard W. Wright, Once More into the Bramble Bush: Duty, Causal Contribution, and the Extent of Legal Responsibility, 54 VAND. L. REV. 1071, 1112-14 (2001) (describing some variations of the poisoned-tea example to distinguish duplicative from preemptive causation).
201. See id.
202. See RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 26 cmt. k (Proposed Final Draft No. 1, 2005) ("An act or omission cannot be a factual cause of an outcome that has already occurred.").
203. See Alan Schwartz, Causation in Private Tort Law: A Comment on Kelman, 63 CHI.-KENT L. REV. 639, 646 n. 20 (1987) (describing the result as "[un]acceptable to most observers because consequentialist reasons exist-to deter harm-that justify sanctioning both defendants").
204. Dillon v. Twin State Gas&Elec. Co., 163 A. 111 (N. H. 1932).
205. Id. at 112.
206. Id. at 114.
207. See id. at 115 ("If it were found that he would have thus fallen with death probably resulting, the defendant would not be liable, unless for conscious suffering found to have been sustained from the shock.").
208. See RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL HARM § 27 reporters' note, cmt. h (Proposed Final Draft No. 1, 2005) (observing that the operation of the rules creates an anomaly in which happenstance timing determines whether an additional cause will constitute a multiple cause that has no legal effect or a preempting cause that relieves the defendant of liability).
209. See RESTATEMENT (THIRD) OF TORTS: APPORTIONMENT OF LLAB. § 8 (2000) (apportioning responsibility according to the "nature of [each] person's risk-creating conduct" and "the strength of the causal connection between [such] conduct and the harm")
210. see also Green, supra note 134, at 708-09 (arguing that courts often improperly consider "duplicating 'causeis]'" that never took place or caused any harm and that these factors should instead be viewed as "a matter of harm identification" and reflected in the calculation of damages).
211. The rules include limitations on the scope of actionable harm-such as the preclusion, in some cases, of recovery for emotional distress and economic damage-as well as extensions of the initial tortfeasor's liability to foreseeable wrongful actions by others-such as liability for malpractice committed in treating the original injury.
212. See, e.g., Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 222 (3d Cir. 2006) ("Causation in the securities context is strikingly similar to the familiar standard in the torts context, but with different labels. In the securities realm, 'but for' causation is referred to as 'reliance, or transaction causation, and 'proximate cause' is known as 'loss causation. '").
213. See supra note 23.
214. See Andrew L. Merritt, A Consistent Model of Loss Cotisation in Securities Fraud Litigation: Suiting the Remedy to the Wrong, 66 TEX. L. REV. 469, 501-06 (1988) (describing various common law cases in which courts have used expansive measures of damages inconsistent with a strict causation requirement).
215. See Dura Pharms., Inc. v. Broudo, 544 U. S. 336, 343 (2005) ("Judicially implied private securities fraud actions resemble...Common-law deceit and misrepresentation actions.").
216. Cf. Lenteli v. Merrill Lynch&Co., 396 F.3d 161, 173 (2d Cir. 2005) (describing loss causation as requiring "both that the loss be foreseeable and that the loss be caused by the materialization of the concealed risk" (emphasis omitted)).
217. The conceptualization of plaintiff s harm is considered in more detail in Part IV, infra.
218. The calculation of damages in securities fraud cases has received relatively little attention and is considered in more detail in Part IV, infra.
219. See, e.g., DeMarco v. Robertson Stephens Inc., 318 F. Supp. 2d 110, 122 (S. D. N. Y. 2004) ("If the loss was caused by an intervening event not related to the fraud, then the § 10 (b) claim must fail.").
220. In re Merrill Lynch&Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351, 362 (S. D. N. Y. 2003), aff d sub nom. Lenteli, 396 F.3d at 161.
221. D. E. & J Ltd. P'ship v. Conaway, 284 F. Supp. 2d 719, 749 n. 26 (E. D. Mich. 2003).
222. Canada ex rel. Landy v. McCarthy, 567 N. W.2d 496, 507 (Minn. 1997)
223. see supra note 162 and accompanying text.
224. The analysis in this Part focuses on the injury suffered by a particular investor who purchases securities at a time when defendants have injected misinformation into the market. This Part does not consider whether investors are systematically injured by the presence of fraudulent information or the potential social costs associated with securities fraud. See, e.g., Fox, supra note 85, at 871-72 (identifying possible differences between private costs and social costs, and explaining potential efficiency justifications for imposing liability).
225. Dura cites the Second Restatement of Torts, not the Third. See Dura Pharms., Inc. v. Broudo, 544 U. S. 336, 343-44 (2005).
226. RESTATEMENT (SECOND) OFTORTS § 549 (1977).
227. Analogous reasoning applies in the case of a defrauded seller. Although such cases exist, see, e.g., Basic Inc. v. Levinson, 485 U. S. 224, 228 (1988)
228. Mitchell v. Tex. Gulf Sulphur Co., 446 F.2d 90, 95-96 (10th Cir. 1971), they are comparatively rare and present fewer concerns about market integrity and moral hazard. For simplicity, this Article focuses on the case of the defrauded purchaser.
229. See Dura, 544 U. S. at 342. As discussed below, the shift from an ex ante to an ex post perspective has important implications for the causation analysis.
230. See Claire Finkelstein, Is Risk a Harm?, 151 U. PA. L. REV. 963, 966 (2003) (using the term "outcome harm" to describe tangible injuries and to distinguish harm from risk of harm).
231. See Estate Counseling Serv., Inc. v. Merrill Lynch, Pierce, Fenner&Smith, Inc., 303 F.2d 527, 533 (10th Cir. 1962) (explaining that the measure of damages is the plaintiffs "'out of pocket'" loss, which is "not what the plaintiff might have gained, but what he has lost by being deceived into the purchase"). The extent to which an award of expectation-based damages would be consistent with the limiting language of the PSLRA is unclear.
232. Sigafus v. Porter, 179 U. S. 116, 124 (1900) (emphasis added) (quoting High v. Berret, 23 A. 1004, 1004 (Pa. 1892)).
233. Randall v. Loftsgaarden, 478 U. S. 647, 661-62 (1986) (alteration in original) (quoting Affiliated Ute Citizens v. United States, 406 U. S. 128, 155 (1972)).
234. See, e.g., David Tabak&Chudozie Okongwu, Inflation Methodologies in Securities Fraud Cases: Theory and Practice (July 2002) (unpublished manuscript), available at http://ssrn.com/abstract=315919 (describing common approaches to measuring artificial price inflation)
235. see also David Tabak, Inflation and Damages in a Post-Dura World 3, 6-12 (Sept. 25, 2007) (unpublished manuscript), available at http://ssrn.com/abstract = 1017334 (stating that re-Dura, a plaintiff's losses were typically asserted to be the amount of artificial price inflation, and describing the effect of Dura on damages methodology).
236. Dura Pharms., Inc. v. Broudo, 544 U. S. 336, 342 (2005).
237. In addition, although most commentators agree that the securities markets are efficient in the sense that information is incorporated into stock price, there is far less consensus that the resulting market prices represent the "true value" of the securities in question. See Baruch Lev&Meiring de Villiers, Stock Price Crashes and 10b-5 Damages: A Legal, Economic, and Policy Analysis, 47 STAN. L. REV. 7, 20 (1994) ("[O]verwhelming empirical evidence suggests that capital markets are not fundamentally efficient.")
238. Jill E. Fisch, Picking a Winner, 20 J. CORP. L. 451, 463-64 (1995) (book review) (explaining the difference between informational efficiency and fundamental-value efficiency)
239. see also Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad Economics: An Analysis of the Fraud-on-the-Market Theory, 42 STAN. L. REV. 1059, 1077-79 (1990) (questioning whether the Basic Court's conception of market efficiency supports its adoption of fraud on the market).
240. Madge S. Thorsen et al., Rediscovering the Economics of Loss Causation, 6 J. BL'S. & SEC. L. 93, 95 (2006).
241. As later discussion explains, the task of separating the price effect associated with the corrective disclosure from that due to unrelated causes is, in fact, considerably more challenging than it may initially appear.
242. See Transcript of Oral Argument at 9, Dura, 544 U. S. 336 (No. 03-932), available at http://www.supremecourtus.gov/oral-arguments/ argument-transcripts/03-932.pdf (recording the petitioners' argument that actual marketplace decline in value is a better indicator than speculation as to what the price would have been at the time of purchase).
243. See, e.g., Scott D. Hakala, Current Economic and Expert Issues in Securities Litigation 18-23 (Feb. 1, 2006) (unpublished manuscript, on file with the Iowa Law Review), available at https://plusweb.org/files/Events/all. star7Econ. %20Issues%20-%20Securities%20Lit.pdf (describing other methods of establishing price inflation).
244. Dura, 544 U. S. at 342.
245. Madge Thorsen and others have attempted to address the Dura language by characterizing the plaintiff's loss as artificial price inflation that the plaintiff cannot recoup. See Thorsen et al., supra note 197, at 98. The authors argue that, like the price of the stock, the inflationary component of that price can fluctuate and that the plaintiffs loss is measured by the difference between the amount of inflation at the time of his or her purchase and the inflation at the time of the subsequent sale. Id. Of course, if the Dura Court's concern is that measuring artificial price inflation is speculative, this alternative characterization of the loss is more problematic because the court must determine both the original amount of price inflation and the extent to which subsequent developments have affected the inflationary component, as opposed to the stock's true value. Thorsen and her co-authors advocate the use of expert testimony to solve this problem. See id. at 109-13 (discussing event studies and other valuation techniques).
246. Argent Classic Convertible Arbitrage Fund L. P. v. Rite Aid Corp., 315 F. Supp. 2d 666, 679 (E. D. Pa. 2004)
247. see also Semerenko v. Cendant Corp., 223 F.3d 165, 185 (3d Cir. 2000) ("Where the value of the security does not actually decline as a result of an alleged misrepresentation, it cannot be said that there is in fact an economic loss attributable to that misrepresentation. ").
248. See In re CIGNA Corp. Sec. Litig., 459 F. Supp. 2d 338, 343 n. 5 (E. D. Pa. 2006) (discussing the testimony of the plaintiff's expert, who distinguished between an "investment loss"-i.e., where the stock is sold at less than the purchase price-and an "economic/inflationary loss"-i.e., where stock is purchased at an inflated price and then sold (or held until the end of the class period) at a less inflated price).
249. For example, under the Internal Revenue Code, an investor generally does not realize a loss until he or she sells the stock. Michelle Amopol Cecil, Bankruptcy Reform: What's Tax Got to Do with It?, 71 MO. L. REV. 879, 886 (2006) ("Under the Tax Code, gain [or loss] inherent in property is not recognized... until there is a realization event, which is loosely defined as a sale or other disposition of the property." (citing I. R. C. § 1001 (a), (c) (2000))).
250. U. S. C. § 78u-4 (e) (l) (2000). If the plaintiff sells the securities prior to the expiration of the ninety-day period, the sale cuts off the period of time for calculating the mean trading price. Id. § 78u-4 (e) (2).
251. See Transcript of Oral Argument, supra note 199, at 7-10 (questioning whether a plaintiff would have a loss if he purchased stock based on misrepresentations that the company had gold, when the company never had gold but subsequently found platinum, causing the stock price to rise).
252. *31 (S. D. N. Y. Nov. 7, 2007).
253. AUSA Life Ins. Co. v. Ernst&Young, 206 F.3d 202, 235 (2d Cir. 2000) (Winter, C. J., dissenting)
254. cf. In re Merrill Lynch&Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351, 364 (S. D. N. Y. 2003) (dismissing a complaint because "plaintiffs have not alleged that there was any link between the allegedly overly optimistic ratings and the financial troubles of 24/7 or Interliant that led to their financial demise in the wake of the bursting [Internet] bubble"), off d sub nom. Lenteli í. Merrill Lynch&Co., 396 F.3d 161 (2d Cir. 2005).
255. Jonathan Macey and Geoffrey Miller make this point with respect to the Basic case, observing that a stock price reaction to the announcement of the merger might not mean that the market was misled by Basic's denial of merger negotiations, but might instead mean that "the market does not value a merger negotiation as highly as a merger agreement." Macey & Miller, supra note 196, at 1088.
256. One reason why the stock price drop may be greater is that investors may anticipate the costs of subsequent litigation over the fraud.
257. James D. Cox&Randall S. Thomas, Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements, 58 STAN. L. REV. 411, 429 (2005).
258. The Dura Court acknowledged as much. See Dura Pharms., Inc. v. Broudo, 544 U. S. 336, 343 (2005) ("Other things being equal, the longer the time between purchase and sale,... the more likely that other factors caused the loss.").
259. KEETON ET AL., supra note 23, § 42, at 272-73 (footnote omitted).
260. See RESTATEMENT (THIRD) OF TORTS: LLAB. FOR PHYSICAL HARM § 34 cmt. a (Proposed Final Draft No. 1, 2005) (noting the shift away from "legal scientism" in determining proximate cause).
261. Milwaukee & Saint Paul Ry. Co. v. Kellogg, 94 U. S. 469, 474 (1876).
262. See, e.g., In re Executive Telecard, Ltd. Sec. Litig., 979 F. Supp. 1021, 1025 (S. D. N. Y. 1997) (stating that damage calculation "require[s] elimination of that portion of the price decline that is the result of forces unrelated to the wrong")
263. In re Oracle Sec. Litig., 829 F. Supp. 1176, 1181 (N. D. Cal. 1993) (explaining the need "to distinguish between the fraud-related and non-fraud related influences on the stock's price behavior").
264. Executive Telecard, 979 F. Supp. at 1027 (explaining that the expert's "failure to conduct a thorough 'event study' would be reason enough to exclude his proposed testimony").
265. See, e.g., In re CIGNA Corp. Sec. Litig., 459 F. Supp. 2d 338, 349 (E. D. Pa. 2006) (describing case law concerning economic loss). Damages are also limited by the ninety-day look-back provision.
266. Indeed, under tort law, an initial tortfeasor is liable for any additional harm caused by the malpractice of a treating doctor; this malpractice does not constitute a superseding cause. RESTATEMENT (SECOND) OF TORTS § 457 (1965).
267. This concern is heightened to the extent that plaintiffs bear the burden of establishing this allocation to a degree of scientific certainty. See, e.g., In re Omnicom Group, Inc. Sec. Litig., 541 F. Supp. 2d 546, 554 (S. D. N. Y. 2008) (rejecting an event study that disaggregated only some but not all of the potentially confounding factors as insufficient "to establish that the alleged misrepresentations actually caused Plaintiffs' loss").
268. For example, some commentators have observed that increased industry regulation, although costly, may be advantageous for large or established companies because they are able to bear the costs and the regulation may reduce competition. See, e.g., Jill E. Fisch, How Do Corporations Play Politics?: The FedEx Story, 58 VAND. L. REV. 1495, 1551-52 (2005) (describing how congressional adoption of new noise regulations benefitted FedEx at the expense of its small competitors).
269. Indeed, the interaction of the fraud and other market developments arguably resembles the increased sensitivity of some tort victims to physical injury, as reflected in the thin-skull rule. See RESTATEMENT (SECOND) OF TORTS § 461 (1965) (subjecting a defendant "to liability for harm to another although a physical condition of the other... makes the injury greater than that which the actor as a reasonable man should have foreseen as a probable result of his conduct"). Similarly, it is plausible that companies involved in fraud are especially susceptible to ruinous harm upon the occurrence of adverse economic events. Indeed, many of the companies that collapsed due to the bursting of the dot-com bubble-as opposed to weathering it-were those engaged in financial accounting manipulations and similar practices.
270. See, e.g., Coughlin et al., supra note 75, at 26 ("[S]ecurities-fraud perpetrators could just as easily 'walk down' the stock price by the selective disclosure of seemingly unrelated 'bad' news concerning the company and thereby avoid a sudden stock-price reaction, and insulate themselves from liability.")
271. Ann Morales Olazábal, Loss Causation in Fraud-on-the-Market Cases Post -Dura Pharmaceuticals, 3 BERKELEY BUS. L. J. 337, 370 (2006) (criticizing the Eleventh Circuit's decision in Robbins v. Koger Props., Inc., 116 F.3d 1441 (11th Cir. 1997), for allowing issuers to "'walk' the stock price down with other bad news").
272. See, e.g., James C. Spindler, Why Shareholders Want Their CEOs to Lie More After Dura Pharmaceuticals, 95 GEO. L. J. 653, 674-80 (2007) (describing how bundling can enable firms to mask fraud-related losses).
273. Dura Pharms., Inc. í. Broudo, 544 U. S. 336, 343 (2005).
274. See, e.g., Pasley v. Freeman, (1789) 100 Eng. Rep. 450, 457 (K. B.) (stating that in a case of fraud or deceit, if "no injury is occasioned by the lie, it is not actionable [,] but if it be attended with a damage, it then becomes the subject of an action")
275. see also Goldberg & Zipursky, supra note 113, at 1636-41 (describing the injury requirement in tort law).
276. Consider recent decisions addressing this question: Paz v. Brush Engineered Materials, Inc., 949 So. 2d 1, 9 (Miss. 2007) ("This Court has continuously rejected the proposition that within tort law there exists a cause of action or a general category of injury consisting solely of potential future injury.")
277. Lowe v. Philip Morris USA, Inc., 142 P.3d 1079, 1086-91 (Or. Ct. App. 2006) (rejecting a claim that increased risk of harm constitutes cognizable injury). But see Jean Macchiaroli Eggen, Toxic Reproductive and Genetic Hazards in the Workplace: Challenging the Myths of the Tort and Workers' Compensation Systems, 60 FORDHAM L. REV. 843, 888-93 (1992) (describing the imposition of liability for the creation of risk in limited situations)
278. Finkelstein, supra note 190, at 967-86 (recognizing that very few tort cases award compensation for risk alone, but nevertheless describing risk as a distinct injury from outcome harm and identifying case law supporting this conception).
279. See Matthew D. Adler, Risk, Death and Harm: The Normative Foundations of Risk Regulation, 87 MINN. L. REV. 1293, 1341-42 (2003).
280. Stephen Perry's analysis is similar. See Stephen R. Perry, Risk, Harm, and Responsibility, in PHILOSOPHICAL FOUNDATIONS OF TORT LAW, supra note 112, at 321, 330-39.
281. See Goldberg&Zipursky, supra note 113, at 1636 ("Criminal law sometimes prohibits and punishes genuinely inchoate wrongs-uncompleted wrongful acts. Tort law does not.").
282. See Michael D. Lieder, Constructing a New Action for Negligent Infliction of Economic Loss: Building on Cardozo and Coase, 66 WASH. L. REV. 937, 944-46 (1991) (describing the economicloss doctrine and tracing its history).
283. In cases involving fraudulent misrepresentations, the majority of jurisdictions allow plaintiffs to recover expectancy-type, benefit-of-the- bargain damages, rather than merely out-ofpocket damages. See DAN B. DOBBS, LAW OF REMEDIES: DAMAGES-EQUITV-RESTITUTION § 9.2 (1), at 695 (abr. 2d ed. 1993) (explaining that benefit-of-the-bargain damages in misrepresentation claims are like expectancy damages in contract claims).
284. Justice Kennedy posed the question at the oral argument of Dura. See Transcript of Oral Argument, supra note 199, at 12-13 ("[I]n your view, is the plaintiff entitled to an expectancy measure of damage, or is it more the traditional tort measure which is out-of-pocket losses?").
285. When an investor purchases a security, part of the value of that security reflects the possibility that the value of the security will increase in the future due to uncertain developments. The contingent value of the security associated with these uncertainties is option value. RICHARD a. BREALEY ET AL., PRINCIPLES OF CORPORATE FINANCE 597-616 (8th ed. 2006) (describing this option value, embedded in an asset, as a "real option").
286. One of the oldest-known cases to apply the lost-chance doctrine was a 1911 English case in which the court awarded the plaintiff damages for the lost chance to win a beauty contest. Chaplin v. Hicks, [1911] 2 KB. 786 (C. A.). The defendant failed to notify the plaintiff, a finalist, that she had qualified for an interview. Id. at 787-88.
287. The court determined that the plaintiffs lost chance to win, although only 25%, was sufficient to permit recovery. See id. at 790-93.
288. The issue in these cases is not the probabilistic nature of the plaintiff's evidence of causation, but the failure of such evidence to satisfy the "more likely than not" causation standard. This challenge is analogous, in some ways, to the determination of causation in cancer torts. Sec Donald T. Ramsey, The Trigger of Coverage for Cancer: When Does Genetic Mutation Become "Bodily Injury, Sickness, or Disease"?, 41 SANTA CLARA L. REV. 293, 309-10 (2001) (describing casual factors that may lead to the development of cancer)
289. Barton C. Legum, Note, Increased Risk of Cancer as an Actionable Injury, 18 GA. L. REV. 563, 579-80&n. 68 (1984) (describing cancer torts as presenting the problem of multiple causation). Commentators have suggested alternative methodologies for addressing causation problems in this context. See, e.g., Glen O. Robinson, Multiple Causation in Tort Law: Reflections on the DES Cases, 68 VA. L. REV. 713, 755 (1982) (proposing a risk-contribution approach).
290. See, e.g., Stephen A. Bullington, Arizona's Loss of a Chance Doctrine: Not a Cause of Action, but More than an Evidentiary Rule, ARIZ. ÁTT'Õ, Jan. 1997, at 28, 33 (describing Arizona's lostchance doctrine as "a powerful evidentiary rule").
291. See, e.g., Roberts v. Ohio Permanente Med. Group, Inc., 668 N. E.2d 480, 483-84 (Ohio 1996) (recognizing a cause of action for lost chance of recovery)
292. George J. Zilich, Note, Cutting Through the Confusion of the Loss-of-Chance Doctrine Under Ohio Law: A New Cause of Action or a New Standard of Causation?
293. CLEV. ST. L. REV. 673, 682-85 (2002-2003) (describing the distinction between lost chance as a distinct cause of action and a new standard of causation).
294. See, e.g., Simmons v. W. Covina Med. Clinic, 260 Cal. Rptr. 772, 776 (Ct. App. 1989) ("A less than 50-50 possibility that defendants' omission caused the harm does not meet the requisite reasonable medical probability test of proximate cause.")
295. Cooper v. Sisters of Charity of Cincinnati, Inc., 272 N. E.2d 97, 103 (Ohio 1971) ("We consider the better rule to be that in order to comport with the standard of proof of proximate cause, plaintiff in a malpractice case must prove that defendant's negligence, in probability, proximately caused the death."), overruled by Roberts, 668 N. E.2d at 483-84 (recognizing the lost-chance doctrine).
296. See, e.g., DeBurkarte v. Louvar, 393 N. W.2d 131, 137 (Iowa 1986) ("We believe the better approach is to allow recovery, but only for the lost chance of survival.").
297. See, e.g., Nancy Levit, Ethereal Torts, 61 GEO. WASH. L. REV. 136, 155-56 (1992) ("Courts and commentators explicidy acknowledge that the compensable injury is the lost chance itself.").
298. See Herskovits v. Group Health Coop, of Puget Sound, 664 P.2d 474, 479 (Wash. 1983) ("Causing reduction of the opportunity to recover (loss of chance)... does not necessitate a total recovery against the negligent party for all damages caused by the victim's death. Damages should be awarded to the injured party or his family based only on damages caused directly by premature death....").
299. But see Miller v. Allstate Ins. Co., 573 So. 2d 24, 29 (Fla. Dist. Ct. App. 1990) ("It is now an accepted principle of contract law... that recovery will be allowed where a plaintiff has been deprived of an opportunity or chance to gain an award or profit even where damages are uncertain. ").
300. A natural extension of this inquiry would require the court to consider whether a plaintiff's net economic position has been affected by hedging, options positions, derivatives trading, etc.
301. Netting raises additional issues such as the method for determining the cost basis of the securities in question and whether holdings in separate accounts or funds should be aggregated. See In re CIGNA Corp. Sec. Litig., 459 F. Supp. 2d 338, 343-44 (E. D. Pa. 2006) (considering whether an institutional investor's purchases of CIGNA stock in separate accounts managed by separate managers should be aggregated for the purpose of calculating the investor's loss).
302. See, e.g., In re Comdisco Sec. Litig., 150 F. Supp. 2d 943, 945 (N. D. 111. 2001) (describing the plaintiffs transaction-based claim of losses as "a mirage")
303. see abo In re eSpeed, Inc. Sec. Litig., 232 F. R. D. 95, 101 (S. D. N. Y. 2005) (rejecting one lead plaintiff applicant in favor of another because the first applicant's losses "were actually somewhat cushioned by the sales made when [the defendant's] stock price was high").
304. See Randall v. Loftsgaarden, 478 U. S. 647, 662-63 (1986) (distinguishing the rescission remedy from the attempt to calculate the plaintiff's net economic harm).
305. Dura Pharms., Inc. v. Broudo, 544 U. S. 336, 342 (2005).
306. See Argent Classic Convertible Arbitrage Fund L. P. v. Rite Aid Corp., 315 F. Supp. 2d 666, 679-81 (E. D. Pa. 2004).
307. CIGNA, 459 F. Supp. 2d at 354.
308. One can imagine referring to the defendant's conduct in this case as an example of an efficient tort, in the sense that it produces a net benefit for the plaintiff.
309. See Leo Katz, What to Compensate? Some Surprisingly Unappreciated Reasons Why the Problem Is So Hard, 40 SAN DIEGO L. REV. 1345, 1347 (2003) (discussing counterfactual and causal approaches to the analysis)
310. Stephen Perry, Harm, History, and Counterfactuals, 40 SAN DIEGO L. REV. 1283, 1312-13 (2003) (opining, based on the equities of the scenario, that there should be no offset, but admitting that "respectable argument[s]" support the opposite conclusion).
311. See Perry, supra note 252, at 1313 ("The [airplane hypothetical] is reminiscent... of the coincidence cases that arise under the rubric of proximate cause.... The coincidence rules out liability in such... case [s], and my sense is that it should similarly rule out offset in the case of the doomed airplane.").
312. See id. (reaching this conclusion). Similarly, if the delay occasioned by the defendant's conduct caused the plaintiff to take a later, crashing flight after missing his original, noncrashing flight, courts would likely find that the plaintiff's death was not a foreseeable consequence of the wrongful conduct and, therefore, that proximate cause was lacking.
313. CIGNA, 459 F. Supp. 2d at 353 ("To date, no Court of Appeals has ruled on the impact of Dura Pharmaceuticals on the establishment of economic loss and damages for purposes of proof at trial.").
314. See, e.g., Edward A. Fallone, Section 10 (b) and the Vagaries of Federal Common Law: The Merits of Codifying the Private Cause of Action Under a Structuralist Approach, 1997 U. ILL. L. REV. 71, 95 (describing the private right of action for federal securities fraud as "largely the product of 'federal common law'").
315. See Erie R. R. Co. v. Tompkins, 304 U. S. 64, 78 (1938) (rejecting the existence of a general federal common law).
316. See In re Merrill Lynch&Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351, 363 (S. D. N. Y. 2003) (distinguishing causation analysis in FOTM cases from causation analysis in cases involving face-to-face transactions and actual reliance), aff'd sub nom. Lenteli í. Merrill Lynch&Co., 396 F.3d 161 (2d Cir. 2005).
317. See Donald C. Langevoort, Basic at Twenty: Rethinking Fraud-on-the-Marhet 7-10 (Georgetown Univ. Law Ctr., Law&Econ. Research Series Paper No. 1026316, 2007), available ar http://ssrn.com/abstract= 1026316 (offering various explanations of the connection between distortion of market price and investor reliance).
318. Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1343 n. 3 (9th Cir. 1976) (Sneed, J., concurring in part and concurring in the result in part).
319. See Basic Inc. v. Levinson, 485 U. S. 224, 254 n. 5 (1988) (White, J., concurring in part and dissenting in part) (criticizing the majority for declining to address the "difficult damages question" created by the Court's acceptance of FOTM theory).
320. An alternative justification for the outcome in Basic is to conclude that the plaintiffs' injury resulted from the fact that third parties-those who read the misrepresentations and relied upon them to affect market prices-were defrauded. But cf. Holmes v. Sec. Investor Prot. Corp., 503 U. S. 258, 268-69 (1992) (noting the historical rejection of this argument in analyzing proximate cause under the federal RICO statute). This justification may be consistent with market realities and, if extended, offers a basis for upholding liability in Stoneridge as well. It is not, however, consistent with either the language of the Basic decision or the scope of existing tort law.
321. As Judge Sneed explained, all that the plaintiffs were ever entitled to was "a price set by valid market forces unrelated to the misrepresentations." Green, 541 F.2d at 1343 n. 3 (Sneed, J., concurring in part and concurring in the result in part).
322. Cf. Kenneth S. Abraham&Kyle D. Logue, The Genie and the Bottle: Collateral Sources Under the September 11th Victim Compensation Fund, 53 DEPAUL L. REV. 591, 601-06 (2003) (describing various methods of preventing overcompensation of tort victims who have insurance coverage).
323. But see Moore v. PaineWebber, Inc., 189 F.3d 165, 176 (2d Cir. 1999) (Calabresi, J., concurring) (examining the causation requirement in RICO fraud by analogizing to the destruction of cabbages on the way to market).
324. See McCabe v. Ernst&Young, LLP, 494 F.3d 418, 425 (3d Cir. 2007) (describing reliance-based, non-FOTM cases as "non-typical § 10 (b) actions").
325. See id. at 433 (acknowledging that Dura is not controlling outside the FOTM context, but stating that "we believe the logic ïf Dura is persuasive").
326. See, e.g., Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 949 n. 2 (9th Cir. 2005) (stating that " Dura is not controlling" in non-FOTM, reliance-based cases).
327. Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 744-45 (1975).
328. See supra notes 15-22 and accompanying text (discussing Schlick).
329. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 383 (2d Cir. 1974). When appropriate, courts have recognized differences between the elements of federal securities fraud and those of the common law. The most commonly cited example is the elimination of the requirement of privity. See 4 ALAN R. BROMBERG & LEWIS D. LOWENFELS, BROMBERG AND LOWENFELS ON SECURITIESFRAUD&COMMODITIES FRAUD § 7:259, at 7-416 (2d ed. 2008) ("The common law requirement of privity has all but disappeared from 10b-5 proceedings." (citation omitted)).
330. As then-Professor, and now-Judge, Guido Calabresi observed some years ago, formulating the scope of causation analysis depends critically upon identification of the "goals or functions" of the law. Calabresi, supra note 114, at 73 (describing cause as a "functional concept"). This Part considers causation in securities litigation within a similar functional context.
331. See, e.g., John C. Coffee, Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 COLUM. L. REV. 1534, 1538 (2006) ("From a policy perspective, the securities class action has two potential rationales: compensation and deterrence.")
332. see also James D. Cox, Making Securities Fraud Class Actions Virtuous, 39 ARIZ. L. REV. 497, 509-15 (1997) (defending securities fraud litigation as furthering both objectives).
333. See, e.g., Coffee, supra note 273, at 1545-56 (identifying failures to achieve either compensation or deterrence objectives)
334. see also Jill E. Fisch, Class Action Reform, Qui Tam, and the Rok of the Plaintiff, LAW & CONTEMP. PROBS., Autumn 1997, at 167, 174-75 (describing the trend to characterize deterrence, rather than compensation, as the primary objective of securities fraud litigation)
335. Pritchard, supra note 37, at 945-47 (arguing that deterrence, rather than compensation, should be the primary goal of securities fraud litigation).
336. See, e.g., Coffee, supra note 273, at 1549-53 (describing who bears the costs of securities class actions).
337. See, e.g., Terrence G. Stolly, Comment, Scienter Under the Private Securities Litigation Reform Act of 1995: Unexpected Implications on Director and Officer Liability and D&O Insurance, 29 CAP. U. L. REV. 545, 584-86 (2001) (describing how the fraud exclusion in many D&O policies makes it difficult to recover against corporate officials for securities fraud).
338. See, e.g., A. C. Pritchard, Stoneridge Investment Partners v. Scientific-Atlanta: The Political Economy of Securities Class Action Reform, 2007-2008 CATO SUP. CT. REV. 217, 225 ("Courts and jurors, with hindsight, may have difficulty distinguishing false statements (which were known to be false at the time) from unfortunate business decisions.").
339. See, e.g., Janas í. McCracken (In re Silicon Graphics Inc. Sec. Litig.), 183 F.3d 970, 978 (9th Cir. 1999) (noting that Congress enacted the PSLRA in part to prevent abusive securities fraud class actions designed "'to impose costs so burdensome that it [was] often economical for the victimized party to settle'" (alteration in original) (quoting H. R. REP. No. 104-369, at 31 (1995) (Conf. Rep.), reprinted in 1995 U. S. C. C. A. N. 730, 730)). It is unclear whether this concern is warranted in light of the substantial barriers to litigation adopted by the PSLRA and decisions such as Tellabs, Inc. v. Makor Issues&Rights, Ltd., 127 S. Ct. 2499 (2007), Dura, and Stoneridge.
340. Compare Jonathan M. Karpoff et al., The. Consequences to Managers for Financial Misrepresentation, 88 J. FIN. ECON. 193, 194 (2008) (reporting that 93% of officers and directors responsible for securities fraud lost their jobs, and describing other penalties suffered by culpable managers, including fines and criminal prosecution), with Eric Heiland, Reputational Penalties and the Merits of Class-Action Securities Litigation, 49 J. L.&ECON. 365, 366 (2006) (finding little evidence that officers and directors suffer a reputational penalty from private litigation against their companies).
341. Courts have generally interpreted the scienter requirement to require some level of reckless conduct. See, e.g., Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338, 343 (4th Cir. 2003) ("[E]very circuit that has considered the issue has held that scienter may... be established by a showing of recklessness."). Congress imposed a heightened pleading standard in the PSLRA. See Tellabs, 127 S. Ct. at 2509 (interpreting the requirement that the plaintiff allege facts supporting a "strong inference" of scienter). The PSLRA did not, however, address the scienter requirement itself. See id. at 2507 n. 3 ("The question whether and when recklessness satisfies the scienter requirement is not presented in this case.").
342. See, e.g., TODD FOSTER ET AL., RECENT TRENDS IN SHAREHOLDER CLASS ACTION LDITIGATION: FILINGS STAY LOW AND AVERAGE SETTLEMENTS STAY HIGH-?U? ARE THESE TRENDS REVERSING? 12 (2007), available at http://www.nera.com/image/PUB-RecentTrends-Sep2007-2color- web-FINAL.pdf (reporting that from 2002 through 2007, the annual median ratio of settlement to investor losses ranged from 2.1% to 3.0%).
343. See Jill E. Fisch, Confronting the Circularity Problem in Private Securities Litigation, 2009 WIS. L. REV. (forthcoming 2009) (manuscript at 4, on file with the Iowa Law Review) (describing the "circularity problem").
344. Id.
345. Id.
346. Id.
347. See, e.g., Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 BERKELEY BUS. L. J. 1, 13 (2007) ("The law should presume that a reasonable investor is a diversified investor.").
348. See, e.g., Calabresi, supra note 114, at 73-74 (identifying cost-spreading as a goal of tort law but arguing that "causal linkage is irrelevant to the spreading function of tort law"). This observation may, in part, have motivated the Court's decision in Basic.
349. See, e.g., Basic Inc. v. Levinson, 485 U. S. 224, 252 (1988) (White, J., concurring in part and dissenting in part) (expressing concern that an irrebuttable presumption of reliance would "convert Rule 10b-5 into 'a scheme of investor's insurance'" (quoting Shores v. Sklar, 647 F.2d 462, 469 n. 5 (5th Cir. 1981)))
350. Julie A. Herzog, Fraud Created the Market: An Unwise and Unwarranted Extension of Section 10 (b) and Rule 10b-5, 63 GEO. WASH. L. REV. 359, 362 (1995) ("Proof of reliance is necessary to avoid turning the rule into a 'scheme of investor's insurance' or a mechanism for recovery of losses whenever an investment turns sour." (footnote omitted) (quoting List v. Fashion Park, Inc., 340 F.2d 457, 463 (2d Cir. 1965))).
351. See Marcel Kahan, Securities Laws and the Social Costs of "Inaccurate" Stock Prices, 41 DUKE L. J.977, 1021 (1992).
352. See id. at 1017-21 (categorizing different types of stock price inaccuracies and arguing that the extent of "loss of liquidity" costs depends on the type of inaccuracy involved).
353. See id. at 1018 (describing how uninformed investors are at a disadvantage relative to investors who possess undisclosed information).
354. See Daniel T. Ostas, When Fraud Pays: Executive Self-Dealing and the Failure of Self-Restraint, 44 AM. BUS. LJ. 571, 588-89 (2007) (describing allegations of a class action complaint that "twenty-nine Enron insiders consummated $1.1 billion in illegal trades... [by taking] advantage of artificially high stock prices caused, in part, by fraudulent financial reports" and that Ken Lay alone "cashed in for $101.3 million").
355. See, e.g., Stephen J. Choi&Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance, 61 VAND. L. REV. 315, 331 tbl.3 (2008) (reporting that 60% of public pension funds surveyed had opted out of representative securities litigation in favor of an individual action on at least one occasion)
356. Keith L. Johnson, Opting Out of Class Actions, SEC. CLASS ACTION SERVICES ALERT, Jan. 2007, available at http://www.reinhartinvestor.com/WebAdmin/Files/ optingoutofclassactions.pdf (describing the optout process).
357. See, e.g., Gilbert Chan, CalPERS' Time Strategy Pays Off: The State Pension Fund Gets $117.7 Million After Opting Out of Class-Action Suit Against Media Giant, SACRAMENTO BEE, Mar. 15, 2007, at D4 (reporting that by opting out, CalPERS received a recovery in Time Warner litigation that was seventeen times what it would have received by remaining as a member of the class action)
358. Neil L. Selinger, Why Funds Opt Out of Class Action, PENSIONS&INVESTMENTS, Feb. 20, 2006, at 12 (stating that opting out can lead to "substantial premiums over the class recovery" and "an expeditious payment")
359. Lorraine Woellert, Fractured Class Actions: "Opt-Outs" Are a Growing Headache for Companies, BUS. WK., Feb. 27, 2006, at 31 (noting recoveries by opt-out plaintiffs against Time Warner, WorldCom, and other big securities fraud defendants).
360. The provisions of the PSLRA apply to class actions. 15 U. S. C. § 78u-4 (a) (1) (2000).
361. For statistics concerning the lead plaintiff provision and the involvement of institutional investors, see generally Stephen J. Choi et al., Do Institutions Matter? The Impact of the Lead Plaintiff Provision of the Private Securities Litigation Reform Act, 83 WASH. U. L. Q. 869 (2005)
362. James D. Cox&Randall S. Thomas, Does the Plaintiff Matter? An Empirical Analysis of Lead Plaintiffs in Securities Class Actions, 106 COLUM. L. REV. 1587 (2006).
363. See Choi&Fisch, supra note 293, at 332-33 (describing the outsourcing of claims filing by public pension funds).
364. See, e.g., Fisch, supra note 282 (manuscript at 10-12) (arguing, in response to circularity arguments, that because reliance-based traders provide a positive governance externality, they should receive compensation for losses due to fraud).
365. See 15 U. S. C. § 78j (b) (2000) (prohibiting deception that occurs "in connection with the purchase or sale of any security")
366. Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 731-49 (1975) (recognizing this standing limitation).