In its 2005 decision in Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005), the Supreme Court held that allegation and proof of an inflated stock price at the time of the stock purchase are insufficient to plead and prove loss causation in a securities fraud action. Rather, plaintiffs must allege and show that they suffered an actual loss and that the defendant’s misrepresentations caused that loss. Although “ordinary pleading rules are not meant to impose a great burden upon a plaintiff,” a complaint must “provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind.” Despite this 2005 precedent, the Ninth Circuit adopted a much more lenient standard in Gilead Sciences, Inc. v. St. Clare, requiring only that the plaintiff state facts that make a theory of loss causation not “per se implausible.”
On 3/17/09, the NAM joined in an amicus brief urging the Supreme Court to overturn the Ninth Circuit’s ruling because it conflicts with the loss causation requirement that was clearly articulated in the Court’s 2005 decision. The Ninth Circuit’s decision is too lenient, and allows cases to proceed with factual allegations that do not raise the claim above the speculative level. Our brief also pointed out that amid the current economic crisis, where falling stock prices are commonplace, the standard for pleading loss causation takes on particular importance.
The Supreme Court declined to hear this appeal on April 20, 2009. Until this issue is revisited in another case, opportunistic shareholders will be permitted to simply state various conclusions without offering any corroborating details in securities class action lawsuits, thereby leaving publicly traded companies much more susceptible to strike suits.