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• W3121783132 abstract "In the typical secondary market securities fraud class action, purchasers allege that the corporation and its managers intentionally disseminated misstatements into the marketplace that artificially inflated the corporation's stock price.1 The plaintiffs consist of those who purchased after the misstatement and before revelation of the truth2 who seek to recover the difference between the artificially inflated purchase price and the actual value of the stock had the truth been known at the time of the purchase (fraud inflation). An event study-an econometric tool that measures the effect of new information on the market price of publicly available securities3-is generally prepared to eliminate the impact on the stock price of events and information unrelated to the fraud, so as to determine the fraud inflation as measured by the stock price change caused by the revelation of the truth.4 When federal courts first implied the Rule 10b-5 remedy, of necessity they borrowed from common law to establish the elements of the claim, which include materiality, scienter, reliance (transaction causation), and causation (loss causation), and the measure of damages, generally out-of-pocket.5 With the Private Securities Litigation Reform Act of 1995 (PSLRA),6 Congress assumed leadership in fashioning the claim and the remedy. Since then, the Supreme Court has come to view its role largely as implementing congressional intent.7 In the PSLRA, Congress did not eliminate the fraud-on-the-market (FOTM) presumption of reliance created by the Supreme Court in Basic Inc. v. Levinson,8 as many had urged.9 If it had done so, Congress would have effectively ended the securities fraud class action because of individual issues of reliance. Instead, Congress sought to reform the securities fraud class action by weeding out claims of dubious merit. Accordingly, the PSLRA imposes a number of obstacles on plaintiffs. Among them, the statute (1) requires plaintiffs to plead with particularity facts giving rise to a strong inference that defendants acted with scienter10 and (2) explicitly states that plaintiffs have the burden of proving that the violation caused the loss for which they seek to recover damages.11 In addition, the PSLRA limits recoverable damages by capping the amount at the difference between the price paid and the mean trading price during a 90-day period beginning on the date of the corrective disclosure.12 In its 2005 opinion Dura Pharmaceuticals, Inc. v. Broudo,13 the Supreme Court addressed the loss causation requirement. Dura held, in the context of reviewing a district court's denial of a motion to dismiss, that the plaintiff does not adequately plead loss causation if he alleges only that he purchased stock at a price that was artificially inflated by defendant's fraud, because, according to the Court, the plaintiff has not yet suffered an economic loss.14 The Court's holding is very narrow: the plaintiff must plead a causal connection between the fraud and the loss.15 The Court, however, did not view this requirement as burdensome.16 The Court explained the significance of the loss causation requirement, which it equated with proximate cause. To allow plaintiffs to recover for losses that are not proximately caused by the fraud would convert the federal securities laws into an impermissible insurance policy against market risks.17 Beyond this, the Court did not provide much guidance on proving loss causation. Ominously, however, the opinion contains language portending a heavy burden on plaintiffs to establish both loss causation and damages. Specifically, the Court suggests that a corrective disclosure followed by a drop in stock price may not always be sufficient to recover damages: the lower price after corrective disclosure may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price. …" @default.
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• W3121783132 date "2009-10-01" @default.
• W3121783132 modified "2023-09-24" @default.
• W3121783132 title "Reputational Damages in Securities Litigation" @default.
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