One decision: on securities law
on Apr 19, 2005 at 10:00 am
The Supreme Court, in the only decision announced Tuesday, clarified the proof that a securities investor must offer to plead a fraud-on-the-market theory. No other decisions are expected this week.
Overturning the Ninth Circuit, the Court ruled that proof of an inflated purchase price on the day a stock is bought is not alone sufficient to show there has been a loss as a result of misrepresentation. The ruling came in the case of Dura Pharmaceuticals v. Broudo, et al., 03-932. Justice Stephen Breyer wrote for the Court.
Investors in Dura’s stock contended that the company made false statements about its drug profits and about the prospect for federal approval of a new spray device for asthma patients. After the company announced that its earnings would be lower than expected, its shares lost almost half their value in the market. Later, the Food and Drug Administration refused to approve the spray device, causing a further — but only temporary — loss in value.
The investors’ securities fraud lawsuit claimed that they had relied upon the integrity of the market to protect their investment, and as a result paid inflated prices when they purchased their Dura shares. That was the source of their claim that they had suffered a loss.
Breyer’s opinion Tuesday said that proof of an inflated price on the day of purchase is not sufficient because, at that point, no loss had been suffered, and none would result if the investor sold the shares quickly before the misrepresentation was known publicly. Even a later sale might produce a loss, but that is not inevitable, the opinion said.
The securities fraud law, Breyer wrote, is designed to protect investors against economic losses that are actually caused by misrepresentations about a publicly held company’s fortunes. So, the opinion concluded, investors claiming fraud must show an actual loss, and must also show that the misrepresentation caused that loss.
The Court went on to rule that the investors in this case failed in their complaint to assert adequately that they had suffered a loss caused by Dura’s statements. The lengthy complaint, Breyer said, “contains only one statement that we can fairly read as describing the loss caused by the…’spray device’ misrepresentations.” It goes on to say that they paid inflated prices, Breyer noted. An inflated price is not itself “a relevant economic loss,” the Court concluded. The complaint also failed to allege a connection between the spray device misrepresentation and any loss.
