Client Alert

Supreme Court to Review Controversial Case Involving Loss Causation Issue in Securities Class Actions

September 03, 2004

William F. Sullivan, Christopher H. McGrath, Tracey L. DeLange and Meghan J. Atwood

Paul Hastings’ attorneys have successfully petitioned the United States Supreme Court to review a controversial Ninth Circuit Court of Appeals decision that could negatively impact defendants in securities class actions based on the fraud-on-the-market theory. In the decision at issue, Broudo v. Dura Pharmaceuticals, Inc., 339 F.3d 933, the Ninth Circuit held that the investor plaintiffs could satisfy the “loss causation” requirement, a required element of a Rule 10b-5 claim, by simply alleging that they overpaid for a company’s stock due to alleged misrepresentations and without showing that the investors actually lost value because of the alleged misrepresentations. This decision is at odds with the Private Securities Litigation Reform Act of 1995 and with the consistent holdings of other federal circuit courts of appeal that have addressed this same issue. The Ninth Circuit’s holding has taken the “loss” out of “loss causation” and has opened a Pandora’s Box where plaintiffs may pursue claims against companies alleging only that share prices are artificially inflated, without any corresponding decline whereby investors might have suffered actual harm. The Office of the Solicitor General, the Securities and Exchange Commission and the Securities Industry Association also have pushed for the review and reversal of the Dura decision.

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