Copyright (c) 2005 by the New York University Journal of Law & Business
NYU Journal of Law & Business
ARTICLE: AT A LOSS: CONGRESS, THE SUPREME COURT AND CAUSATION UNDER THE FEDERAL SECURITIES LAWS
2 N.Y.U. J.L. & Bus. 1
Michael J. Kaufman*
In its eagerly awaited opinion in Dura Pharmaceuticals, Inc. v. Broudo, 1 the United States Supreme Court purports to clarify the critical concept of "loss causation" in private securities fraud litigation. Unfortunately, as this article shows, the Court's decision is inconsistent with the federal securities laws, incoherent in its reliance upon an amoebic notion of "economic loss," incomplete in its failure to address pressing causation questions and, ultimately, inconsequential.
Congress' Private Securities Litigation Reform Act of 1995 ("PSLRA") 2 includes a provision titled "Loss Causation" which requires plaintiffs in private securities fraud actions brought under the Section 10(b) of Securities and Exchange Act of 1934 ("the 1934 Act") 3 to prove that the "act or omission of the defendant ... caused the loss for which the plaintiff seeks to recover damages." 4 This provision created some confusion and conflict among the lower federal courts over whether plaintiffs must plead and prove that defendants' fraud caused a post-transaction decline in the value of the plaintiffs' securities or whether plaintiffs can satisfy the loss causation requirement of the PSLRA by showing that the price was inflated at the time of purchase. 5
In Broudo v. Dura Pharmaceuticals, Inc., 6 the Ninth Circuit held that the element of "loss causation" in a private securities action could be satisfied by allegations that defendants' misrepresentations or omissions caused the investor to purchase securities at an artificial price. 7 The Court recognized that its understanding of loss causation may ...
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