In 2005, the United States Supreme Court issued Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627 (2005), an important decision in the field of “fraud on the market” securities litigation, but also one with potential ramifications for the Massachusetts common law of deceit and misrepresentation. In setting the parameters for proximate causation in federal securities cases, the unanimous decision rejected a standard previously followed in the Ninth Circuit. The rejected standard, however, is similar to the one still followed today in Massachusetts common law cases. With the Ninth Circuit decision reversed, Massachusetts appellate courts may take the opportunity to reexamine precedent and determine whether Massachusetts should join the national consensus.
Dura Pharmaceuticals, Inc. v. Broudo
In Dura, the Supreme Court addressed the definition of proximate causation in private federal securities fraud cases. More particularly, the Court examined the question of what investors must allege and prove to establish that the defendants proximately caused their economic losses. In the securities fraud context, this element is known as “loss causation.”
In the typical securities fraud case, individual investors, or more often classes of investors, allege that they purchased stock in a company at market prices that had been artificially inflated due to fraudulent misstatements or omissions made by the company regarding its business or financial condition. For example, investors may claim that the company misled the market by misrepresenting its business prospects or by engaging in “accounting shenanigans” with the effect of making the company appear more successful, hence inflating the share price. Suit is generally brought by the class of investors that purchased shares during the time the stock was overvalued and its trading price inflated by the fraud. Suit is invariably filed only after the stock price drops noticeably. The question in Dura was whether it is sufficient for the plaintiff to plead and prove that the company issued fraudulent misstatements that inflated the price the plaintiff paid for the stock, or whether instead the plaintiff must show that the subsequent stock price drop was causally connected to the fraud, and not just attributable to other factors such as general market decline.