Case Study - Crazy Eddy

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)

125 S.Ct. 1627, Blue Sky L. Rep. P 74,529, 161 L.Ed.2d 577, 73 USLW 4283...

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

 Declined to Extend by United States v. Rand, 4th Cir.(N.C.), August 26,

2016

125 S.Ct. 1627 Supreme Court of the United States

DURA PHARMACEUTICALS, INC., et al., Petitioners,

v. Michael BROUDO et al.

No. 03–932. |

Argued Jan. 12, 2005. |

Decided April 19, 2005.

Synopsis Background: Purchasers of stock in pharmaceutical company brought securities fraud action against company and certain managers and directors, alleging that defendants' false statements regarding expected future Food and Drug Administration (FDA) approval of a new asthmatic spray device artificially inflated price of stock. The United States District Court for the Southern District of California, 2000 WL 33176043, M. James Lorenz, J., dismissed without prejudice, and following filing of amended complaint dismissed with prejudice. Purchaser appealed. The Court of Appeals, 339 F.3d 933, reversed and remanded. Certiorari was granted.

Holdings: The Supreme Court, Justice Breyer, held that:

[1] an investor may not establish loss causation by alleging that security price was inflated because of misrepresentation, and

[2] investors' allegations were insufficient to state fraud claim.

Reversed and remanded.

West Headnotes (2)

[1] Securities Regulation Causation; existence of injury

349B Securities Regulation 349BI Federal Regulation 349BI(C) Trading and Markets 349BI(C)7 Fraud and Manipulation 349Bk60.43 Grounds of and Defenses to Liability 349Bk60.47 Causation; existence of injury

An investor claiming securities fraud under the Securities Exchange Act cannot satisfy the requirement of proving that the fraud caused an economic loss simply by alleging in the complaint, and subsequently establishing, that the price of the security on the date of purchase was inflated because of the misrepresentation. Securities Exchange Act of 1934, § 21D(b)(4), as amended, 15 U.S.C.A. § 78u–4(b)(4).

2211 Cases that cite this headnote

[2] Securities Regulation Misrepresentation

349B Securities Regulation 349BI Federal Regulation 349BI(C) Trading and Markets 349BI(C)7 Fraud and Manipulation 349Bk60.50 Pleading 349Bk60.53 Misrepresentation

Investors' allegations that they paid artificially inflated prices for securities of pharmaceutical company, due to false statements regarding expected future Food and Drug Administration (FDA) approval of a new asthmatic spray device, and suffered damages, implying that the investors' loss consisted of the artificially inflated purchase price, were insufficient to state securities fraud claim under Securities Exchange Act; investors failed to claim that share price fell significantly after truth became known. Securities Exchange Act of 1934, § 21D(b)(4), as amended, 15 U.S.C.A. § 78u–4(b)(4).

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)

125 S.Ct. 1627, Blue Sky L. Rep. P 74,529, 161 L.Ed.2d 577, 73 USLW 4283...

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

1925 Cases that cite this headnote

**1628 *336 Syllabus *

Respondents filed a securities fraud class action, alleging that petitioners, Dura Pharmaceuticals, Inc., and some of its managers and directors (hereinafter Dura), made, inter alia, misrepresentations about future Food and Drug Administration approval of a new asthmatic spray device, leading respondents to purchase Dura securities at an artificially inflated price. In dismissing, the District Court found that the complaint failed adequately to allege “loss causation”—i.e., a causal connection between the spray device misrepresentation and the economic loss, 15 U.S.C. § 78u–4(b)(4). The Ninth Circuit reversed, finding that a plaintiff can satisfy the loss causation requirement simply by alleging that a security's price at the time of purchase was inflated because of the misrepresentation.

Held:

1. An inflated purchase price will not by itself constitute or proximately cause the relevant economic loss needed to allege and prove “loss causation.” The basic elements of a private securities fraud action—which resembles a common-law tort action for deceit and misrepresentation —include, as relevant here, economic loss and “loss causation.” The Ninth Circuit erred in following an inflated purchase price approach to showing causation and loss. First, as a matter of pure logic, the moment the transaction takes place, the plaintiff has suffered no loss because the inflated purchase price is offset by ownership of a share that possesses equivalent value at that instant. And the logical link between the inflated purchase price and any later economic loss is not invariably strong, since other factors may affect the price. Thus, the most logic alone permits this Court to say is that the inflated purchase price suggests that misrepresentation “touches upon” a later economic loss, as the Ninth Circuit found. However, to touch upon a loss is not to cause a loss, as 15 U.S.C. § 78u–4(b)(4) requires. The Ninth Circuit's holding also is not supported by precedent. The common-law deceit and misrepresentation actions that private securities fraud actions resemble require a plaintiff to show not only that had he known the truth he would not have acted, but also that he suffered actual economic loss. Nor can the holding

below be reconciled with the views of other Courts *337 of Appeals, which have rejected the inflated purchase price approach to showing loss causation. Finally, the Ninth Circuit's approach is inconsistent with an important securities law objective. The securities laws make clear Congress' intent to permit private securities fraud actions only where plaintiffs adequately allege and prove the **1629 traditional elements of cause and loss, but the

Ninth Circuit's approach would allow recovery where a misrepresentation leads to an inflated purchase price, but does not proximately cause any economic loss. Pp. 1630– 1634.

2. Respondents' complaint was legally insufficient in respect to its allegation of “loss causation.” While Federal Rule of Civil Procedure 8(a)(2) requires only a “short and plain statement of the claim showing that the pleader is entitled to relief,” and while the Court assumes that neither the Rules nor the securities statutes place any further requirement in respect to the pleading, the “short and plain statement” must give the defendant “fair notice of what the plaintiff's claim is and the grounds upon which it rests,” Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80. The complaint here contains only respondents' allegation that their loss consisted of artificially inflated purchase prices. However, as this Court has concluded here, such a price is not itself a relevant economic loss. And the complaint nowhere else provides Dura with notice of what the relevant loss might be or of what the causal connection might be between that loss and the misrepresentation. Ordinary pleading rules are not meant to impose a great burden on a plaintiff, but it should not prove burdensome for a plaintiff suffering economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind. Allowing a plaintiff to forgo giving any indication of the economic loss and proximate cause would bring about the very sort of harm the securities statutes seek to avoid, namely, the abusive practice of filing lawsuits with only a faint hope that discovery might lead to some plausible cause of action. Pp. 1634–1635.

339 F.3d 933, reversed and remanded.

BREYER, J., delivered the opinion for a unanimous Court.

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)

125 S.Ct. 1627, Blue Sky L. Rep. P 74,529, 161 L.Ed.2d 577, 73 USLW 4283...

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

All Citations

544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577, Blue Sky L. Rep. P 74,529, 73 USLW 4283, Fed. Sec. L. Rep. P 93,218,

05 Cal. Daily Op. Serv. 3273, 2005 Daily Journal D.A.R. 4419, 18 Fla. L. Weekly Fed. S 233

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.