Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
April 04, 2005 01:00 AM

Dura suit a crucible for future fraud rulings

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    By C. Oliver Burt III

    A securities case now before the Supreme Court could have major implications for investors trying to recover money they lost in a stock fraud. A ruling in favor of the petitioners in Dura Pharmaceuticals Inc. v. Broudo could dampen shareholders' ability to successfully sue corporate wrongdoers and open a new escape route for bad business behavior. At issue is the theory of loss causation — in plain English, how strictly courts interpret what constitutes a financial loss due to fraudulent behavior.

    Loss causation is a critical element of securities litigation, as shown by the heavy hitters who filed friend-of-the-court briefs in the case.

    Filing amicus briefs in favor of the investors were some of the largest public pension funds in the country. Four funds joined to file one brief: the California Public Employees' Retirement System; the California State Teachers' Retirement System; the Los Angeles County Employees Retirement Association; and Alan G. Hevesi, New York state comptroller, on behalf of the New York State Common Retirement Fund. The New Jersey Division of Investment and the University of California Regents filed separate briefs.

    Siding with the company were pro-business groups such as the U.S. Chamber of Commerce and, surprisingly, federal regulators.

    Michael Broudo and a group of investors purchased Dura Pharmaceuticals stock following positive statements from the company about its Albuterol Spiros inhaler. Dura later revealed, however, that the Food and Drug Administration was not going to approve the device. The plaintiffs alleged that the company's top officers had misled investors, trumpeting the product when they knew it had reliability problems.

    The district court dismissed the complaint brought under Section 10(b) of the Securities and Exchange Act, citing a failure to properly plead loss causation between the alleged fraud and the eventual stock drop.

    At the heart of the case is the question of whether plaintiffs needed to show that the stock fell on the heels of a "corrective disclosure." The district court noted that while the stock price dropped following a disclosure made by Dura, the disclosure did not specifically refer to the FDA's refusal to approve the inhaler.

    But the 9th Circuit Court of Appeals reversed the decision. 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."

    The appeals court, in other words, said it was enough for the investors' case to proceed if they showed they lost money in Dura stock after buying shares at prices inflated by the company's misleading statements.

    Dura has petitioned the Supreme Court to overturn the appeals court's decision in favor of the more stringent pleading requirement for loss causation applied by the district court. The justices heard arguments on Jan. 12 and are expected to rule by summer.

    A more stringent pleading requirement would create a Catch-22 for investors and, in particular, for the public pension funds at the forefront of securities litigation. Thanks to the Private Securities Litigation Reform Act of 1995, plaintiffs in securities fraud cases already must meet stricter pleading requirements than those undertaking other litigation. Plaintiffs are also barred from gathering evidence from defendants — discovery, in civil court parlance — until the court has denied all motions to dismiss.

    Requiring even stricter pleading standards for loss causation would be a radical departure from federal pleading rules, which merely require putting the defendants on notice about what the plaintiffs claim they did wrong. It would also force plaintiffs to articulate a damage theory at the time of pleading — before any discovery of company information that ordinarily has a bearing on how damages are computed.

    Practically speaking, if the Supreme Court adopts the position advocated by Dura, its decision could make a significant number of securities fraud cases under Section 10(b) of the securities laws obsolete. Quite often, the price of an artificially inflated company stock declines prior to the formal corporate disclosure of fraud. In such instances, there is a causal connection between the fraud and the price drop, but the decline doesn't necessarily occur immediately after the disclosure.

    In fact, some of the most notorious securities fraud cases of recent years — including Enron Corp., WorldCom Inc. and Sunbeam Corp. — arguably fall into that category. In each of these, the stock declined due to partial corrective disclosures that did not reveal the nature or extent of the fraud. By the time the full truth came out, the stocks' price already had declined substantially.

    Very seldom do companies come completely clean when they reveal accounting flaws or other problems. They try to cover things up. Under the strict interpretation sought by petitioners in Dura, investors who can't prove a causal connection between the fraud and the stock drop caused by a corrective disclosure will be flat out of luck.

    Let's think of it as the chicken-and-egg theory. It doesn't really matter which came first, the price drop or the corrective disclosure. As far as investors are concerned, the two are inextricably linked, and companies should be held liable for shareholder losses when fraud is ultimately to blame.

    Investors have already lost billions of dollars thanks to the shenanigans of corporate wrongdoers. If the Supreme Court reverses the appeals court and adopts the stricter pleading standard in Dura, investors will lose yet again.

    C. Oliver Burt III is a partner in the West Palm Beach, Fla., office of Berman DeValerio Pease Tabacco Burt & Pucillo, which represents public pension funds and other investors in securities litigation.
    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Emerging Markets: A Selective Approach
    Sponsored Content: Emerging Markets: A Selective Approach

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit