The U.S. Supreme Court ruling in the Dura Pharmaceuticals Inc. vs. Broudo case will undercut the ability of pension funds and other investors to sue corporations for wrongdoing, said Michael Lange, partner, Berman DeValerio Pease Tabacco Burt & Pucillo, Boston.
The unanimous decision, issued April 19, will impose tougher standards for investors to bring suits, he said. His firm represents investors in class action suits involving allegations of corporate fraud and other improper activity.
The California Public Employees' Retirement System, the California State Teachers' Retirement System, the Los Angeles County Employees' Retirement Association, and New York State Comptroller Alan G. Hevesi, on behalf of the New York State Common Retirement Fund, had filed a joint amicus brief in favor of the investors. The New Jersey Division of Investment and the University of California regents had filed separate briefs.
Michael Broudo and a group of other investors alleged Dura's top officers "made 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," according to the Supreme Court decision.
The court ruled that plaintiffs' alleging wrongdoing must "show a direct link between fraud and the stock price drop," said Mr. Lange.
"But it's not that clean in practice," he added. Companies will often issue restatements and other announcements, designed to boost stock prices and dilute the impact of fraud allegations, he said.
Also, news about wrongdoing often unfolds over time, making it difficult to pinpoint the precise development that caused a stock price drop, he said. "It's not like you wake up one day and the whole fraud is exposed."
The case was appealed to the Supreme Court after a U.S. Court of Appeals ruled in favor of plaintiffs and reversed a decision by a U.S. District Court that had dismissed the complaint, citing a failure by plaintiffs to show cause of the loss between the alleged fraud and the eventual stock drop.
The ruling "will result in more cases getting dismissed," Mr. Lange said. "So it has bad implications for shareholders."