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18.7 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 causation, 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 of 1995 ("PSLRA") 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 Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005). In Dura, 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. at 346. 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. 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 the defendant corporation’s share price fell significantly after the truth became 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.

The Ninth Circuit has recently stated that "[t]ypically, ‘to satisfy the loss causation requirement, the plaintiff must show that the revelation of that misrepresentation or omission was a substantial factor in causing a decline in the security’s price, thus creating an actual economic loss for the plaintiff.’" Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1119 (9th Cir.2013) (quoting McCabe v. Ernst & Young, LLP, 494 F.3d 418, 425-26 (3d Cir. 2007)). While "an outright admission of fraud" is not required, "a mere ‘risk’ or ‘potential’ for fraud is insufficient to establish loss causation." Loos v. Immersion Corp., 762 F.3d 880, 888-89 (9th Cir.2014) (quoting Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 (9th Cir.2008) (holding that revelation of investigation, on its own, amounts only to notice of potential disclosure of fraudulent conduct and thus does not satisfy causation element of § 10(b) and Rule 10b-5 claims). However, "[d]isclosure of the fraud is not a sine qua non of loss causation, which may be shown even where the alleged fraud is not necessarily revealed prior to the economic loss." Nuveen, 730 F.3d at 1120. Accordingly, "a plaintiff can satisfy loss causation by showing that ‘the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff’s economic loss." Id. (quoting McCabe, 494 F.3d at 425). For example, in Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 949 (9th Cir.2005), the Ninth Circuit held that loss causation was sufficiently alleged when the plaintiff alleged that the very facts concealed by the defendants — facts concerning the company’s dire financial situation — resulted in its going bankrupt, which caused the plaintiff to lose the entire value of its investment in the company. See also id. at 949 n.2 (concluding that Dura did not require plaintiff to allege corrective disclosure because plaintiff alleged "private sale of privately traded stock and . . . not only asserted that it purchased the security at issue at an artificially inflated price, but pled that the [d]efendants’ misrepresentation was causally related to the loss it sustained")