Landmark Ruling Limits Plaintiffs in Securities Lawsuit
Palo Alto, Calif. — May 11, 2006 — A federal court last week issued a significant securities ruling that appears to be the first of its kind. The court applied the landmark 2005 Supreme Court decision Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627 to eliminate from a proposed class all shareholders who sold their stock prior to the first corrective disclosure because they could not, by definition, demonstrate a loss causally related to defendants' alleged misrepresentations.
The ruling, in CornerStone Propane Partners L.P. Securities Litigation, eliminated every shareholder who sold his or her stock during the first three years of a four and one-half year class period. The court relied upon Dura Pharmaceuticals, which requires that plaintiffs, when filing a complaint, allege a causal connection between the alleged misrepresentation and the decline in the value of the stock for which plaintiff seek to recover. Cooley Godward Palo Alto-based litigation partner Grant Fondo argued the motion on behalf of the defendants.
“This is a landmark ruling for securities cases and sends a clear signal that shareholder classes need to be narrowly tailored,” said Fondo. “The days of broadly defining a class and lumping together all shareholders are over. If adopted by other courts, this holding will likely preclude most future securities class actions from including as class members shareholders who sold their stock prior to the first corrective disclosure.”
The case is pending in the Northern District of California before Chief Judge Marilyn Hall Patel. The plaintiffs in the case moved for certification of a class defined in the complaint as "all persons and entities who purchased or otherwise acquired CornerStone common units between July 29, 1998 and February 11, 2003..."
The defendants challenged class certification, in part, on the grounds that the definition of the class improperly included shareholders who sold their shares prior to an alleged corrective disclosure. These shareholders, Fondo argued, could not have been injured because they sold their stock before the market was informed of the alleged misrepresentation and subsequent stock drop and, therefore, could not have been injured by the alleged misrepresentation.
The Court agreed: "Defendants are correct in their assertion that plaintiffs who sold their stock before July 27, 2001, when the first corrective disclosure occurred, did not suffer any loss causally related to defendants' alleged misrepresentations." Therefore, the Court excluded from the class all shareholders who sold their stock during the three-year period prior to the first alleged corrective disclosure, which the court found to be July 27, 2001.
“Based on this ruling, I would assume that in nearly every securities case defendants will, as a matter of course, seek to exclude from the proposed class all shareholders who sold their stock prior to the first alleged corrective disclosure,” Fondo said.
“We are very pleased with the judge’s ruling in our case and the positive impact it will have on securities cases moving forward,” said John Dwyer, co-lead on the matter with Fondo, and head of Cooley’s Business Litigation Department.
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