Today the U.S. Supreme Court issued its long-awaited opinion in Dura Pharmaceuticals v. Broudo, unanimously reversing the Ninth Circuit in a way that is favorable to defendants in securities class actions. Click here, for a  copy of the opinion (which is unusually brief).

In Broudo, the Ninth Circuit had decided that to plead and prove damages in a 10b-5 case, the plaintiff only had to show that the defendant's misrepresentation "touched upon" alleged inflation in the price of the security. This standard was quite lenient and at odds with the stricter requirements of several other circuits.

The plaintiff in Broudo bought stock in a biotech company at a time when the company was saying it expected FDA approval of an asthmatic spray device. Following the purchase, the stock declined for unrelated reasons. Some months later, the company announced that the FDA would not approve the device. The stock dropped further the next day, but quickly recovered most of that loss. The plaintiff contended that he bought stock that was "artificially inflated" and "was damaged thereby," but did not specifically claim that the device approval statement caused his damages or that there was any specific price drop attributable to the later statement that the FDA would not approve the device. The district court dismissed the complaint but the Ninth Circuit reversed, stating that the plaintiff’s damages allegations were sufficient because it was enough that on the day of purchase, the stock was artificially inflated because of the misrepresentation.

The Supreme Court unanimously reversed. To plead and prove a 10b-5 case, the plaintiff must show both "transaction causation" -- that he would not have bought the stock but for the false representation, and "loss causation" -- that his specific loss was caused by that which made the original statement false. Although the Court did not specifically say so, loss causation is typically pleaded by reference to a stock drop immediately following a "corrective" press release. If there is no corrective release, or if there is one and the stock doesn’t react, it would seem to be difficult to show loss causation.

While this decision will not affect all 10b-5 cases, it is important because it reinstates an important check in the system -- the requirement that at a minimum, the plaintiff be able to show that he or she was actually damaged by the alleged false representation.

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