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Law School Case Brief

Dura Pharm., Inc. v. Broudo - 544 U.S. 336, 125 S. Ct. 1627 (2005)


In cases involving publicly traded securities and purchases or sales in public securities markets, the basic elements of a private federal securities fraud action include: (1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as transaction causation; (5) economic loss, 15 U.S.C.S. § 78u-4(b)(4); and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss.


Purchasers of stock in a corporation sued petitioners, the corporation and corporate officials, in an action for damages based on securities fraud, alleging that petitioners falsely stated that the corporation's pharmaceutical spray device would receive federal approval. As a result of this misrepresentation, the purchasers alleged that they suffered damages based on the artificially inflated price of the corporation's stock which resulted from the misrepresentation. The district court, in dismissing the complaint with prejudice, expressed the view, with respect to the spray-device claim, that the complaint had failed adequately to allege loss causation. On appeal, the United States Court of Appeals for the Ninth Circuit held that the purchasers sufficiently pleaded loss causation as required by 15 U.S.C.S. § 78u-4(b)(4).


Did the purchasers sufficiently plead loss causation?




The U.S. Supreme Court held that the purchasers' allegation that the price of the stock on the date of purchase was inflated because of the misrepresentation was insufficient by itself to establish the loss causation required by § 78u-4(b)(4). At the time of purchase, the purchasers suffered no loss since at that instant the stock price was in fact the value of the stock, and it was not necessarily true that any subsequent decline in the value of the stock was caused by the artificially inflated price rather than other factors. Further, the purchasers' complaint nowhere provided petitioners with notice of what the relevant economic loss might have been or of what the causal connection was between that loss and the misrepresentation concerning the spray device. Thus, the circuit court’s judgment was reversed and the case was remanded for further proceedings.

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