With broad ramifications for companies and investors across the country, the United States Supreme Court decided unanimously in favor of Paul Hastings' client, Dura Pharmaceuticals.

The Scope

Broudo v. Dura Pharmaceuticals is one of the most significant securities cases the Supreme Court has addressed in a decade. In early 1999, Dura shareholders filed class action suits to claim damages for a loss in stock value that preceded an announcement regarding an asthma drug delivery system that failed to win FDA approval. Investors argued that they bought the Dura stock on misleading information from the company, and that the stock was inflated by the time it took its precipitous plunge. The problem was that there was no clear link between the alleged fraud and the loss that came later.

The Job

Representing Dura, Paul Hastings challenged the ruling by the U.S. Court of Appeals for the Ninth Circuit, which allowed the lawsuit to proceed under the corporate fraud notion of "loss causation." Led by Partners William Sullivan and Chris McGrath, Paul Hastings appealed to the Supreme Court, which agreed to hear the case. Paul Hastings distinguished between loss causation and transaction causation, and argued that both needed to be established for a plaintiff to be successful in a securities class action of this type.

The Stakes

In January 2005, the Supreme Court heard arguments from both sides. If the Supreme Court agreed with the Ninth Circuit ruling, companies facing fraud-on-the-market suits would have a much smaller window of opportunity to be granted dismissal before expensive discovery and trial phases begin. For the business community at large, the potential for companies to be inundated by a wave of fraud claims from investors who simply made poor investment choices was a major concern.

The Result

During the hearing more than one justice raised questions favorable to the Paul Hastings case. Speaking to the plaintiffs, Justice Ruth Bader Ginsburg asked, "How could you possibly hook up your loss to the news that comes out later?" In the final opinion, released April 19, the Court supported Paul Hastings' argument and ruled in favor of Dura, finding that securities fraud statutes are in place "not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause." With this final judgment, Paul Hastings has helped to clarify the proper standard for proving securities fraud. As William Sullivan noted, "Everyone now understands what the law is. We have a controlling decision and we won't have a split among the [lower] courts." Read more about our Securities Litigation Practice Group. Or go to the press release.