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18.6 Securities—Causation

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The plaintiff must prove by a preponderance of the evidence that the alleged material misrepresentations or omissions were the cause of [his] [her] [its] economic injury. To establish cause, the plaintiff must prove that the alleged misrepresentation[s] or omission[s] played a substantial part in causing the injury or loss the plaintiff suffered. The plaintiff need not prove that the alleged misrepresentation[s] or omission[s] [was] [were] the sole cause of the economic injuries.


The Private Securities Litigation Reform Act ("PSLRA") of 1995 imposed the requirement that a private plaintiff prove that the defendant’s fraud caused an economic loss. 15 U.S.C. § 78u-4(b)(4). This element of causation has been referred to as "‘loss causation,’ i.e. a causal connection between the material misrepresentation and the loss . . .." Dura Pharmaceuticals, Inc. v. Broudo, 544U.S. 336, 341 (2005). In Dura Pharmaceuticals, the Supreme Court held that the PSLRA "makes clear Congress’ intent to permit private securities fraud actions for recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss." Id. at346. The Supreme Court reversed the Court of Appeals’ ruling that a plaintiff may establish loss causation if the plaintiff merely shows that the price paid on the date of purchase was inflated because of the defendant’s misrepresentation. In doing so, the court rejected the view that a plaintiff’s injury necessarily will have occurred at the time of the transaction. The Supreme Court held that a plaintiff’s mere purchase of stock at an inflated price is not sufficient to establish loss causation for a number of reasons, such as that at the moment of purchase the plaintiff has suffered no loss because the inflated price paid is offset by the value of the shares he or she acquired, which at that instant possess equivalent market value. Also, the purchaser could later sell those shares at a profit. Conversely, if the price drops, the cause of the decline could be attributable to a host of factors other than that the stock price previously had been inflated as a result of the defendant’s misrepresentation or omission. The Court found that under the plaintiff’s theory of liability, the complaint failed adequately to allege causation because it did not allege that Dura’s share price fell significantly after the truth become known; did not specify the relevant economic loss; and did not describe the causal connection between that loss and the misrepresentation. Id. at 346–48.