The general public has barely noticed the United States Supreme Court case involving Dura Pharmaceuticals. They ought to pay closer attention. The court’s eventual ruling could have enormous implications for investors.
If the court sides with Dura, shareholders will have a much tougher time suing securities fraud violators and recovering meaningful settlements.
At issue is how losses are calculated after a company’s stock drops due to accounting or other shams. The question awaiting the justices in Dura Pharmaceuticals Inc. v. Broudo: must a securities fraud plaintiff plead that a stock price dropped after a “corrective disclosure” in order to show loss causation. Examples of corrective disclosures include earnings restatements, newspaper exposes and announcements of regulatory investigations.
By taking the case, the Supreme Court may be trying to clarify pleading requirements that have differed greatly from one federal circuit to the next. In the 8th and 9th Circuits, for example, plaintiffs can plead loss causation by alleging that a company’s share price was inflated at the time of purchase. Other circuit courts, including the 2nd, 3rd, 7th and 11th, have required that plaintiffs allege a corrective disclosure followed by a drop in stock price to properly allege loss causation.
In the Dura case, Broudo and a group of investors purchased Dura stock following positive statements from the company about its Albuterol Spiros inhaler. Dura later revealed, however, that the FDA was not going to approve the device. The plaintiffs argued that company officers had misled investors, trumpeting the product when they knew it had reliability problems.
The district court dismissed the complaint, citing a failure to properly plead loss causation between the alleged fraud and the eventual stock drop. But the 9th Circuit Court of Appeals reversed the decision, saying no such allegation was required. Loss causation, the appeals court said, “merely requires pleading that the price at the time of purchase was overstated and sufficient identification of the cause.”
Dura and other corporations hope the Supreme Court justices overturn that decision in favor of the more stringent loss causation pleading requirement.
“A Supreme Court ruling in favor of Dura will have a decidedly negative impact on securities cases,” said C. Oliver Burt, III, a partner in Berman DeValerio’s Florida office. “Such a decision would make it significantly harder for plaintiffs to recover their losses on investments in companies that violate the securities laws, giving corporate America yet another escape route for bad behavior.”
Public companies should be held liable for the full range of investor stock losses – not just for losses that follow negative public announcements, Burt said. Plaintiffs’ attorneys have seen countless examples of fraud cases in which a stock dropped only marginally following the announcement of accounting troubles. Yet in many of those cases, the price of the company’s stock had been artificially inflated for a substantial period of time long before the problems came to light.
“Investors have already lost billions of dollars thanks to the shenanigans of corporate wrongdoers,” Burt said. “If the Supreme Court adopts the stricter pleading standard at issue in Dura, investors will lose yet again.”
Underscoring the importance of the Dura case, a number of prominent public pension funds filed amicus curiae briefs in the case, arguing that adopting the narrow pleading standard rejected by the Ninth Circuit in Dura would unfairly limit shareholders’ abilities to sue fraudulent companies.
The Supreme Court heard arguments January 12. A ruling is expected by the summer.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.